西斯柯 (SYY) 2020 Q2 法說會逐字稿

Good morning, and welcome to Sysco Second Quarter Fiscal 2020 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions.

I would like to turn the call over to Neil Russell, Vice President of Corporate Affairs. Please go ahead.

Good morning, everyone, and welcome to Sysco's Second Quarter Fiscal 2020 Earnings Call. Joining me in Houston today are Ed Shirley, our Executive Chairman of the Board; Kevin Hourican, our President and Chief Executive Officer; and Joel Grade, 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 29, 2019, subsequent SEC filings and in the news release issued earlier this morning. A copy of those materials can be found in the Investors Section at sysco.com or via Sysco'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. (Operator Instructions)

At this time, I'd like to turn the call over to our Executive Chairman of the Board, Ed Shirley.

Good morning. Thank you, Neil, and thank you, everyone, for joining our second quarter fiscal 2020 earnings call. I'm proud to speak to you today as Sysco's new Executive Chairman.

On today's call, I'll provide some introductory remarks about the recent leadership change, and then you'll hear from our new President and CEO, Kevin Hourican. After that, Joel will walk you through our second quarter results, and then we'll take your questions.

As you know, we recently announced senior leadership changes to accelerate the next phase of our development. This leadership transition was part of a deliberate and thoughtful process to ensure that Sysco is best positioned to enhance long-term value for all our stakeholders.

While Sysco's performance has improved steadily over the last few years, we see a clear opportunity to accelerate growth. Kevin brings a demonstrated track record of delivering strong results and operational efficiencies within large and complex environments. He takes a strategic approach to winning in underdeveloped markets. We are highly confident he has the skill set and vision to capture the opportunities ahead.

As Executive Chairman, I'll work closely with Kevin to ensure a smooth transition and provide input on key strategic priorities. Our Board is excited about Sysco's future and is fully supportive of Kevin, the leadership team and all of Sysco's associates as they strive to continue to support our customers. I've had the opportunity to speak with many of you, and I look forward to continuing our dialogue as we move forward together.

I'm now pleased to introduce Kevin, who'll make brief remarks before handing the call over to Joel to discuss the quarter.

Thank you, Ed, and good morning, everyone. I'm excited to join you today for my first earnings call as Sysco's new President and CEO, and more importantly, I'm very excited to lead Sysco during this time in our company's history.

I'd like to say a few words about what attracted me to Sysco and the compelling opportunity that I see ahead. For decades, I have admired Sysco's reputation as the market leader in cutting-edge foodservice solutions. Like Sysco, I've dedicated my career to excellence to supply chain, logistics, taking a customer-first approach and leading successful teams. I've admired Sysco for its leadership, its brand and its strong culture in these areas.

When the opportunity arose to join the team, I immediately knew that this was the right next step for my career and a place where I could apply my leadership skill set and business passion. I also knew that this would present a unique opportunity to further strengthen the company as the market leader and enhance growth.

Sysco's board and I collectively agree that there are opportunities to further capitalize on our scale advantages, win in underdeveloped markets, improve our performance and increase operational efficiencies to unlock funding for growth. Our core strategy will remain in place, but we intend to accelerate execution in key areas to increase long-term value for all of our stakeholders.

I look forward to working closely with Ed, the Board and our talented global team to deliver on our strategic plan. And I look forward to speaking and meeting with you, our associates, our analysts and our investors. Your perspective on our business and the surrounding landscape will continue to be important as we move forward.

Now I'll turn the call over to Joel, so we can walk you through our second quarter results.

Thank you, Kevin. Good morning, everyone. This morning, we announced financial results for the second quarter of fiscal year 2020, which represented improved local case growth in our U.S. Foodservice segment primarily driven by our independent customers. I will start with second quarter results, continue with segment-specific commentary, transition into the first half of fiscal 2020 results and then close with a general business update.

Our total Sysco results for the second quarter include a sales increase of 1.8% to $15 billion, which was driven by U.S. Broadline local case growth of 3.7%. Gross profit grew 2% to $2.8 billion, and gross margin increased 5 basis points. We saw growth in our sales of Sysco Brand products in the second quarter, which increased 27 basis points to 47% of local U.S. cases and 42 basis points to 38.3% of total U.S. cases. Adjusted operating expense increased 1.5% during the quarter, which resulted in an adjusted operating income increase of 3.9% to $626.9 million. Adjusted earnings per share grew 13.2% to $0.85.

I'll now transition to our quarterly results by business segment, starting with our U.S. Foodservice Operations. Local case volume increased 3.7% versus the prior year period and has now grown for 23 consecutive quarters. As previously noted, we remain disciplined in our approach to managing our national account business, which was reflected this quarter in our total case volume growth. As a result, total case volume growth was 2% for U.S. Broadline operations.

Sales for the second quarter were $10.4 billion, which was an increase of 3.2% versus the prior year period. This includes the divestiture of Iowa Premium, our beef processing facility that was sold in the fourth quarter of fiscal 2019, which had a negative impact of $122 million for the quarter. Gross profit grew 2.4% to $2 billion for the quarter.

While we are pleased with the gross profit dollar growth, gross margin declined 17 basis points to 19.7%. This is primarily driven by a few key levers. First, we saw an unusually high rate of inflation, specifically in the dairy and beef categories. As a result, we're unable to efficiently pass inflation through to our customers.

Separately, but still related, we saw a return to more normalized pricing in produce markets compared to a sharp increase in the second quarter last year, which resulted in a negative impact to our gross profit dollar growth. We expect this year-over-year headwind to continue into the third fiscal quarter. Lastly, fuel surcharges, which appear in gross profit for us, were less this year than in the prior year period.

Turning our attention to costs. Our adjusted operating expenses increased 1% to $1.3 billion. As we've discussed in our previous quarters, our labor costs were slightly higher due to our decision to retain driver and warehouse personnel in a tight labor market. We will continue to evaluate our staffing trends relative to our business model over the next couple of quarters.

Additionally, we experienced a 12-day strike in Denver, which resulted in added costs from the business impact of continuing to serve customers during that period. Adjusted operating income increased 4.7% to $772 million within our U.S. Foodservice Operations segment.

Moving to International Foodservice operations. We had mixed results for the quarter. Our international results were modestly impacted by changes in foreign exchange rates. On a constant currency basis, sales increased 0.9%, gross profit increased 0.4%, adjusted operating expenses increased 2.2% and adjusted operating income decreased 11.1%.

Our business results in Canada softened for the quarter as a result of a slowing economy in some parts of the country and the loss of a large chain customer.

Our business results across Europe were mixed. As mentioned during the first quarter call, we continue to experience operational challenges arising from our integration efforts between our 2 businesses in France, which is offsetting growth in our other international businesses. We expect this to continue through the end of our fiscal year. However, the U.K. business performance remained stable, despite ongoing uncertainties around Brexit. We are continuing our work around modernizing the business and growing our customer base.

In Sweden and Ireland, we saw positive results versus the prior year period, stemming from a positive business environment and solid independent sales growth. We remain convinced that Europe will be a growth opportunity for the company in the years ahead.

As for our business in Latin America, the companies are performing well, and we remain excited about the growth opportunities in this region. We extended our retail Cash & Carry footprint from Costa Rica into Panama, with plans to open more stores there in the future. In Costa Rica, we saw solid growth, despite a slight economic slowdown due to the recent implementation of a value-added tax. In Mexico, the business has improved meaningfully year-over-year, despite continued economic contraction.

Our SYGMA segment continues to show improved profitability as we remain disciplined and focused on our portfolio of customers. As a result, we saw planned top line softness as sales decreased 5.3% versus the prior year period, but gross margin expanded 62 basis points.

Adjusted operating expenses were down for the quarter, driven by a focus on business and routing optimization, which led to an adjusted operating income improvement of $8 million versus the prior year period. We feel good about the continued progress we're making within SYGMA and are confident in our ability to drive improved performance going forward.

Finally, it is important to note that our core business is performing fairly well as our adjusted operating income from operations increased 5.5% versus the prior year period. However, our corporate expenses increased due to several discrete items, such as costs from the Denver strike and other liability claims. Therefore, our adjusted operating income increased only 3.9% versus the prior year period.

Now turning to our results for the first half of fiscal year 2020. Sales increased 1.2% to $30.3 billion. Our local case growth in U.S. Broadline was 2.9%, and total case growth was 1.4%. Gross profit increased 1.7% to $5.8 billion, and gross margin increased 10 basis points.

Our overall expense management was solid, with adjusted operating expenses increasing only 0.5% for the first 26 weeks. Adjusted operating income increased 5.7% to $1.4 billion, resulting in a gap between gross profit dollar growth and adjusted operating expense growth of 120 basis points. Adjusted earnings per share increased by 10.7% to $1.83.

Cash flow from operations was $754.5 million for the first half of fiscal 2020. Net CapEx for the first half of the year was $383.1 million or about 1.3% of sales, which, as a reminder, is in line with our previously noted guidance. Free cash flow for the first half of fiscal 2020 was $371.4 million, which is $329.5 million lower compared to the same period last year.

The decline in free cash flow was impacted by an increase in working capital as we continue to experience challenges from our ongoing implementation of the Finance Transformation Roadmap as well as an increase in bad debt accounts. Strong cash flow has always been a strength of Sysco, and we're confident that we will see an improvement to this trend by the end of fiscal year.

Before closing, I'd like to make a few additional comments about our financial performance, where we stand relative to our 3-year plan goals and our outlook for the year. We have a chart on Slide 14 of the earnings presentation slides on our website detailing anticipated results compared to our most recent 3-year plan guidance.

As you recall, our 3-year plan included 6 different financial objectives. These included: total case growth of 2.5% to 3%, for which we are tracking to 2.5%; local case growth of 3% to 3.3%, for which we are tracking to 3.3%; sales growth of 3.5% to 4%, for which we are tracking to 3.7%; gross profit dollar growth of 3.5% to 4%, for which we are tracking to 3.6%; adjusted operating income growth of about 8% or $600 million, for which we are tracking to 7%; and adjusted earnings per share growth of 15%, for which we are tracking to approximately 15.5%.

When we announced senior leadership changes last month, with a goal of accelerating growth and operating improvements, we noted that our fiscal year 2020 performance was generally tracking along with consensus estimates. As you can see from the chart, we continue to generate strong performance relative to our 3-year plan across virtually all metrics.

However, after closing the second fiscal quarter and considering recent performance, even with some clear positives, such as an acceleration in local case growth, we have decided to make adjustments to our outlook, specifically, given challenges we are seeing and have discussed this morning relative to year-to-date performance; specifically challenges related to inflation changes, integration challenges in France, discrete corporate expenses I noted earlier, and given certain investment opportunities we see today that can deliver strong returns over time, we have decided to amend our plan.

Specifically, we are lowering our adjusted operating income growth target to approximately $500 million to $525 million to the previously communicated approximately $600 million target and lowering our 3-year adjusted operating income growth guidance from approximately 8% to 7%.

We would note that the benefits we're seeing below the line in areas such as interest and tax rate provided added flexibility to make these investments now, while still delivering on our previously communicated top line and bottom line earnings per share targets. While we do not like to move backwards at any part of our previously communicated commitments, when given the decision between achieving a short-term goal or investing for the long term, we will always choose to invest for the future.

The investments we are making will allow us to advance work that will both further enhance our customer focus, while accelerating future growth, and to continue our efforts to efficiently manage costs through improved processes. It is important to note that we're incredibly excited about Sysco's future, one that will include continued leadership across the foodservice industry driven by investments in our customer-centric strategies and fueled by the best associates in the business.

With that, operator, we're now ready to take questions.

(Operator Instructions) Our first question comes from Edward Kelly with Wells Fargo.

And Kevin, let me just me be the first to say welcome to Sysco. My first question actually is for you, Kevin. I mean I know it's obviously very early days, but you and the Board have clearly highlighted the desire to grow faster as a company over time.

Can you just give us some sense as to what that means and how you'd get there profitably? I think there is just some concern around when companies make CEO changes and talk about accelerating growth, about what the cost of that potentially could be. And just curious, philosophically, how you're thinking about -- how you think about the path to that.

Yes. Ed, I appreciate the call -- the question on the call this morning. And first, I do want to acknowledge the good work that the company has been doing and the strong results and, as Joel said, the very capable team here at Sysco.

And to directly answer your question, where do we see opportunities for growth. The first is we need to and can leverage our scale and our size more efficiently. Joel referenced improved processes, taking cost out of the system. That cost that we can take out of the system, Ed, is where we can fuel and fund top line growth in the future. We will be very pragmatic and disciplined on our pricing strategies. Joel, I know, has covered that consistently quarter-over-quarter. We will be very thoughtful about how we price the business.

Now Ed referenced there are underserved markets for Sysco. A specific example would be the metro market, where we underrepresent versus our national average. There are some things we can do vis-à-vis how we serve those customers more strategically with, we'll call, customized, tailored supply chain solutions for those markets. And that would be, again, another area of where and how we can grow that's not tied to price.

I guess I would just wrap up with saying, as you know, this is a very highly fragmented market, one where the largest player in the space, through the investments that we can make, the capabilities that we can bring to the table, we can take increased share over time, and that's our plan.

And Ed, if I could just add one thing to that. I think -- look, we've said many times and we've said that our strategy as a leader in this industry has never been to lead with price. It never has been. It never will be.

And so I think the -- again, some of the stuff that you're seeing this quarter, as we talked about, was related to some -- a bit elevated inflation that happened at a higher level and at an accelerated rate that allowed us some inefficiencies on passing that along.

But again, I just want to reiterate to what Kevin said and just add on to that question just a bit and that, that is not and never will be a strategy of ours to lead with price.

So can I just follow up then, Joel? The case level profitability on gross profit per case this quarter was -- is obviously disappointing, and you mentioned the inflation component. But inflation overall didn't really accelerate from Q1. I'm just -- I guess I'm struggling with what changed from an inflation standpoint and why you had issues with passing through costs within dairy and the protein side and then why, even through the back half of the year, it sounds like you expect that pressure to continue.

Sure. So a couple of points. First, I would say one of the things that we saw and -- remember, the average that we talked about. Inflation is one number, but obviously, it's made up of a lot of different categories. And some of those categories tend to be harder to pass along inflation with than others. And again, certainly, the center of the plate category is the ones that tend to be more emotional in our space.

And so what we experienced, and particularly in the later part of the quarter, was an acceleration in the areas that we talked about, primarily in center of the plate in beef and dairy and as well as some in canned and dry. But really, the beef and dairy categories were the primary ones.

And I think, again, as we've talked about a number of times, Ed, it's not just that overall number. It's the rate at which they're actually accelerating. And certainly, that's part of what we saw, again, towards the later part of this quarter, that we struggled to pass along.

The other point I would make, when you actually look at the overall, given, if you will, gross profit per case, one of the things we called out here is some of the produce markets that we had seen last year, it was related to weather impacts in California. And so at that time, we had some positive gains from the produce markets. That was the latter part of the second quarter last year, and we actually saw that carry into the early part of the third quarter last year as well.

And so on a per case basis, when you look at the overall gross profit, it really is related to, again, some of the struggle of the inefficiency of passing some of the inflation along from the produce markets, again, the piece around the fuel surcharge, particularly areas that we struggled with.

The question that you had in terms of -- as we see that outlook moving forward, I think one of the things we did continue to see is some of those challenges that we had towards the latter part of this quarter carry into the early part of the third quarter.

And so I think that some of it, again, will be somewhat self-correcting in a sense that, in the case of our multiunit customers, so that 50% of the business that we have on a cost-plus arrangement, where it's a relatively short-time lag pass some of that cost along, again, we'll anticipate seeing, I'd say, some improvement there.

But again, particularly, the categories that we saw the inflation in and the rate that we saw the increase is why we had some challenges passing that along. And it impacted our margins, particularly in the U.S. foodservice business.

Our next question comes from Chris Mandeville with Jefferies.

Kevin, I guess similar to Ed's question here, I imagine a little bit more of a detailed go-forward strategy is going to be laid out at some point. So I guess I'm just wondering what the reasonable time frame to expect there.

And is there any ability to elaborate a bit more on the comments surrounding a desire to improve in underdeveloped markets and your ability to deliver strong results in large complex environments? I mean -- I guess when I think about that, it sounds like you're referring to urban markets. And from what we understand, that's already a fairly competitive environment and comes with low margins. So how do you navigate those waters and accelerating sales but yet not diluting your margin?

So let me take that. I'll let Kevin add in if he so desires. Obviously, it's pretty much his first day on the job, so we should take that into consideration here.

But what I will say is the following. The idea that the metro markets are competitive is certainly true. The idea that the metro markets are somehow inherently unprofitable, I would certainly debate that with you significantly because, again, there's -- one of the areas that we have been underdeveloped is in some of the most sort of dense urban markets.

And in some of those cases, it is about the ways that we go to market and the value that we provide to those customers. And in so many of the cases, and particularly in some, again, from the high-end restaurants and some of the different metropolitan areas, again, price becomes much less of an issue when the go-to-market strategy is the right one.

And so I -- so I'll let Kevin chime in here. But I just want to probably a little bit debunk this idea that somehow we're just charging into a less profitable area. Kevin, why don't you take it from here?

Yes, Joel. It's perfect. And so what I was referring to, yes, was the more metro markets where our share underrepresents. And the why, as I mentioned earlier, was the supply chain solutions and the go-to-market strategy that works in more a suburban or rural area does not necessarily work in a downtown metro environment.

Some of these high volume, let's just call, New York City restaurants, they may need delivery multiple times per day. And what we will work on are solutions that provide more tailored support for those types of customers in a cost-efficient way, so that the business would be profitable. And Joel already covered the profit per customer, so I won't build on that.

I think the other thing I would point out, Chris, when we talk about investments that we're making, some of the investments that we're talking about here are to continue to enhance the way that our technology tools interact with our customers, to continue to enhance the way our technology tools allow our salespeople to be supported in a different way that allows, again, for these types of interactions.

So I think, again, some -- a lot of these things that we're talking about here is certainly are where we see opportunities and, again, particularly in these areas where we're very -- we're significantly underpenetrated.

Okay. That's helpful. And then Joel, I guess, recently, I believe there was a decision to outsource your customer service department. Any way that you can elaborate on what went into that analysis with respect to potential cost savings versus maybe some service disruption or just changes for that matter? How does the department change with respect to its overall interaction with accounts? And does anyone else in the industry necessarily have a similar model?

Well, let me start with the premise of why that decision was made and the thought process around that.

If you look at Sysco, historically, one of the challenges that we've had in servicing our national customers is the idea that we've primarily had customer care at each operating company level. So if you're a -- name a CMU customer and you had to solve issues whether it were credit issues, whether it were customer service issues, your primary points of contact were in a very decentralized -- we service in 50 locations. You basically had 50 points of contact, which obviously is suboptimal in terms of the service for a large national account.

So the basic strategic premise for doing this was to actually have a situation where you actually had, again, sort of a one call, one single point of contact for a customer care, single point of contact for credit issues, and so the whole reason, strategically, for doing this was around that.

Part of the work that we did and the decisions in terms of why we chose to do things in the way that we did was, again, both to -- have a partner that would allow us to provide the technology support to enable that work and, again, to restructure the team somewhat differently in a way that, again, it was really more focused around teams of this sort of single point of contact for customers.

So I actually look at this as a very good strategic enhancement for our business, both from the perspective of the ability to actually sell those customers and serve them in a different way and take care of their needs, but in addition to that -- and again, I'd say a little bit later down the line from a cost perspective. Obviously, there's some initial work required to invest in this model. Over time, we do believe it'll be a more efficient model, but that's the premise of what that was done for.

Our next question comes from John Heinbockel with Guggenheim Securities.

Maybe for Kevin. When you think about the market share opportunity, right, particularly in those metro markets, what's your early thought on the structure and size of the sales organization, right? Do you think you need to step up hiring of MAs in some of those areas?

And then distribution platform, do you think capital is required to put facilities in closer to some of those metro markets? Or -- it's really not a capital issue as much as it's maybe trucking equipment and scheduling?

Yes. Thank you for the question, John. I'd say on the talent and people side, it's too premature for me to comment upon that. As Joel mentioned, I just started with the company. And a big part of my onboarding will be what we call listening tour, which is going out and talking to our MAs all throughout the country, our sales associates, to listen and to learn from them.

Some of the best, most customer-centric ideas, innovations come from that frontline associate. It could be the MA. It could be the driver that's been delivering to an account for many, many years, in some instances, at Sysco, decades. They have great ideas on how we can better serve the customers.

So I can't wait to get started in regards to traveling around the country and meeting our great associates and learning from them on how we can best serve our customers. So too premature to comment upon are there more or fewer over time. You'll hear more from us later in the year on our strategy and where we're headed in that regard.

As it relates to supply chain solutions, this is my expertise by trade and by background. We will do a thorough end-to-end network optimization review to determine number of facilities, optimization of which end points are served from those facilities. The work we do there, though, will be thoughtful, and we will self-fund the work that we need to do.

We're not at this point communicating a need to increase capital investment. We can reduce cost and use that reduction in cost to fuel and fund the investments that we will make. That is our remit. That is our charter, and I know you're looking for specifics today. Those specifics will come in due time.

And then, Joel, maybe -- I don't know if you have an idea of how much lower your share is in these urban metro markets. I assume it's more than half what your overall share is. But any idea how much lower it is?

It depends on the market, as you can imagine. There's some that we're better penetrated than others. But I would say, generally, it's -- I would say somewhat less than half would be the way I would think about that.

I just want to add one thing to that. I don't want the participants on the call to perceive that our singular, sole step growth is through those metro markets. We have multiple vectors of growth. We just highlighted one of them as an example to answer a question earlier on in the call.

Our next question comes from Judah Frommer with Crédit Suisse.

I just wanted to circle back on kind of this decision to pull forward operating expense and what's going to effectively kind of limit the adjusted operating income growth over the 3-year period. So there are clearly some issues with operating expense and delivery on operating income growth, both internationally and locally, whether it's labor in the U.S. or the consolidation in France.

So can you help us with the decision to pull forward and kind of layer on top of what seems to be going in fits and starts? And then maybe more specifically, is a lot of this tied to the metro market, market share? Or are there other aspects you can highlight as well?

Sure. So a couple of points. Again, just as a -- the general gist of the 3-year plan takedown, it was -- as we talked about, some of the things related to some of the margin challenges and opportunities, the work -- the integration work in France, some of the discrete expenses from a corporate perspective.

The investments in the business, the way I would actually characterize that, and again, this falls into the category of the point I made literally toward the end of my prepared remarks, where we talked about the decision would we just simply hold off on investments that we believe are really important in order to hit short-term goals or in order to accelerate some of those investments, to continue to move forward on some of the things we believe are really important.

And a little bit -- and certainly, we always have and always will choose the latter in that scenario. To the point Kevin made earlier, again, the metro example is just simply one idea or one point that was an example of some of the areas we're looking to accelerate.

But the investment is really centered around a few key areas that I'd probably highlight for you. It centers around these areas around accelerating work in our customer-facing technologies. It centers around accelerating work in the technologies that support our salespeople and allow them to go to market, support our customers in the way that we think, again, certainly moves some of these things forward in an accelerated way.

They focus on areas -- what I would call simplification of our business in terms of the way that we interact with our suppliers, with our customers. They -- so they look at the way that we can actually accelerate, and when I say cost savings, I look at cost from almost an end-to-end view in terms of both how we accelerate areas of cost of goods, all to indirect spend. All of those types of things that some of the investments that we're making, we believe, will allow us to accelerate in each of those areas, again, both due to simplification as well as some of the enhancements, again, in technology.

And then -- so I -- those are the way I would categorize some of the work in the investments. And certainly, as we've talked about, the need to continue to accelerate growth in this business, the need to leverage scale in a better way, the need to go-to-market in a way that enhances our ability to service this wider group of customers in a better way, I would characterize our investments as falling into that. And again -- and frankly, we felt it is important to -- they're important long-term investments that we thought were very much worth accelerating.

Okay. So maybe just to follow up on that. Kevin, would you say you had a hand in kind of pulling forward these investments? Or are these kind of investments that have been now, they're beyond the current 3-year plan that the Board is deciding to pull forward? And then, Joel if you could just help us with modeling the EPS growth coming in, in line. Any help on the interest expense or tax line would be great.

So Joel will start and then I'm going to do a follow-up close to what Joel covered.

Yes. I mean -- so look, I -- what I would say is that there's -- it is a continuation of some degree of investments that have already been made, but an acceleration at work. And so what I would say is -- and again, I'll let Kevin say this to you. I mean I think, Kevin, there's an alignment with the strategic approach we're taking. But to say Kevin was one that directly said, "Hey, we'd accelerate that," would not be a fair statement." We certainly believe that as a leadership team that, that was important work, again, supported by Kevin and by our Board.

I'll let you...

Yes. I'll just -- I'll build on. I'll ask a question and answer and that's, "Kevin, are you aligned with the Sysco priorities and the investments that Joel just referred to are directly driving those key priorities?" The answer to that is yes, I am. The company's #1 priority is to be a customer-first culture, and I'm 100% aligned to that culture.

As I mentioned earlier, the best ideas, the most innovation -- innovative solutions come by better understanding the needs of your customer and providing solutions that help you do better business with those customers. Joel referenced that. It's also our MA sales force, providing them with better tools to be able to be more effective at their roles. That's a part of this investment, and I'm 100% aligned with that.

The second one is our local transformation, and Joel talked about essentially a framework of capabilities that can then be deployed to match the needs of a local trade area. One of those happens to be metro, and that's customer onboarding. I mentioned supply chain solutions and a customer ordering tool improvement. I'm aligned with all of those things.

And last, but not least, is business optimization. Joel talked about funding sources for growth by improving the manner with which we run our business. We've talked about leveraging our scale. Leveraging our scale is we should be the lowest cost operator in the business and, therefore, then be able to pass upon to our customers savings tied to the efficiency improvements and also create sources for investing growth dollars.

So I am aligned with the priorities, and I'm very supportive of the decision that was made.

Our next question comes from Jeffrey Bernstein with Barclays.

Great. Keith, you talked about just -- I'm sorry, Kevin, you've talked about traveling the country and meeting with associates and management across the organization. I'm just wondering how long you think before you complete that initial review and maybe we get an update on the -- what you see as the vision for Sysco and whether or not we would get another 3-year guide or how you kind of think about the strategy of providing guidance to the Street.

Yes. That's a great question, Jeffrey. Thank you for it. I think most new CEOs coming in, there's a 90-day, 100-day plan, and this listening tour will be a part of that, in addition, by the way, to doing very specific deep dives into the business while doing that. It's not just a listening tour, but the listening tour is a vital and important part of onboarding.

I think what I would say at this point in time is late summer is when you could expect to hear from us from an update perspective on where we are with our strategies. And more on that later, Neil will help manage and communicate in that regard.

Got it. And then I know you mentioned in your updated kind of 3-year plan guidance chart within the slide deck, you talked about continued disciplined approach to profitable growth with your national and SYGMA accounts, and this has been something we've been hearing for a little while now.

I'm just wondering, as it relates to that, where do we stand on that?

I mean is that a process that you think is just something that we should expect to hear about for just ongoing, and therefore, it's just every quarter, every year, that's kind of that? Or maybe is there kind of a short-term opportunity to pull that forward in order to no longer having to be focused on pruning those national accounts?

No. I mean I would think that -- again, my -- that's something I think you'll actually continue to hear us talk about. Actually, we've talked about that consistently for actually many years in terms of how we view, that -- again, those customers and opportunity to be really disciplined in how we grow.

I would say the only thing I would maybe say is, I mean, what you're seeing in our SYGMA segment right now, which actually has a fairly acute decrease in the top line that was planned for and as part of this thing, again, that's probably a little stronger year-over-year than you may anticipate as we move forward. But I think, generally speaking, we will remain disciplined in this space.

It is an important area to us, both strategically and in terms of covering fixed and providing opportunities for us to enter in service markets in outlying areas that may have that type of business that then allows us to have a great local business there as well. So again, it's a strategically important part of the business, but nonetheless, one that I think you'll continue to hear us talk about as one that we'll be disciplined in terms of how we approach.

Understood. And then lastly, just -- I think, Joel, you mentioned something about bad debt expense. It sounds like you're making reference to it increasing of late. So I'm just wondering if you could talk about where you're seeing that pressure from. We didn't get much color in terms of -- from a restaurant industry perspective, whether you're talking about national chains or independents or maybe one or both of their operating environment is becoming more difficult, leading to the elevated bad debt expense.

Yes. Here's how I'd answer that. I mean there's a little bit of both in terms of a market. I think -- again, I -- just one thing I would really emphasize here, we're -- there's no panic button being pushed for us in terms of the market itself. There is a bit of softness. We've had a few increased bankruptcies. And again, I would say it's really both across the national and the local.

I'd say the bigger impact, though, at this point, certainly remains just continued challenges around the stabilization and implementation of some of the work that we did that really centralized credit activity in an area that used to be a very decentralized activity across our businesses.

And so that's accelerated a bit over the last couple of quarters. We're certainly doing a lot of work to continue to stabilize that and certainly anticipate that happening. So again, I'd say it's a little more self-induced. But again, there's, I would say, a little bit of softness, certainly though not ready to push the panic button on the marketplace.

Our next question comes from Joshua Long with Piper Sandler.

Wanted to circle back to the commentary around outsourcing the support. That was very helpful. Curious if that was more of a proactive decision or if this is feeding off of commentary you've received from your customers and your team members.

Well, I would say it's probably a little bit of both in the sense that, obviously, feedback from customers in terms of how we have serviced them over many years is that, "Hey, I'd rather have a single point of contact. I'd rather have -- instead of calling 50 people, I'd rather call one. I'd rather have a team that knows my business well that can relate to me, again, both from a care perspective, from a credit perspective, et cetera, et cetera." So I would say it's in response to customer feedback and how we can do a better job servicing.

But again, in that sense then, I would call it proactive in the way that is something that we believe was an important investment, one that we, again, found both the right, what we believe, structure, partner and technology support in order to do that. It's still new. We're still, again, moving into that, and we'll continue to improve and evolve, but the team has done a great job of rolling that out. And so again, I'd call it proactive, but in response, certainly, to listening to our customers and feedback that we received from them over a number of years of doing business with us.

Great. That's very helpful context. And then thinking about the international strategies, particularly in Europe, sounds like that's still a long-term growth opportunity for you. Can you talk about what you've learned with the integration process, particularly with this -- the French businesses that you mentioned and kind of how that process is coming along?

Sure. So I think a couple of areas that I would say -- thinking about how that business is integrating. It was 2 businesses that were acquired even prior to our acquisition of Brakes. They were similar-sized businesses that we have then ultimately chosen to bring together.

And I would say the 2 bigger challenges really are what we call a single delivery, meaning instead of customers getting delivered by both businesses are being delivered by one, and the technology to support that. And so I think those -- in both cases, there's been challenges in making that happen.

On a positive note, doing some of that type of integration in France is often complex due to some of the labor and work councils and all that. And I think, actually, we got through that part of it very well, but nonetheless, those challenges remain.

And some of the impact you've seen have been service levels that have been less than we'd like them to be, which then has translated into gross profit dollar impact there, and then what I'll call dual running costs, meaning we've had to have some of those things where both businesses running longer than we would have liked them to have done.

So I think, again, we're certainly -- we've got a strong leadership team there. We've got lots of resources that we've dedicated both there and from here in order to enhance that. Some of the investments that we're talking about here as well fall into the category of how we accelerate the stabilization of that. But as you said, again, we certainly are confident that we'll get there. And certainly, as you pointed out, I believe that, again, this is a good long-term investment for us and, again, in a market that we certainly think will be one of the strongest ones that we have in future.

Our next question comes from Kelly Bania with BMO Capital.

I was wondering, maybe for Joel, the decision to kind of -- the less consensus 2 weeks ago and lower kind of the outlook today. Can you just help us understand that decision?

You talked about some of the factors. I'm just trying to really understand how much was the quarter and how much really is these investments and certain opportunities that you talked about. And I think what people are trying to struggle with understanding today is how many more investments really need to be made out there over the next couple of years.

Sure. Let me start with the first, and what I would say is a couple of things. So the timing of the announcement that was made on January 13 of -- was obviously fairly early in both the process of closing as well as the -- how we got into the third quarter.

So I think one of the things that I would say as we've evolved and certainly finished the closing process of this quarter as well as saw some of the results that we talked about as we moved into the third quarter, part of that was some of the reasons that you probably heard a little bit different tone from both of those things.

And so I think as we looked at some of the challenges that we talked about from a margin perspective that we continue to see fall into the third quarter, we took a look at some of the work that, again, was happening in this business in France, as we talked about, and looking -- certainly looking forward to see some continued challenges there.

And in addition to that, again, it was just some of the work that we talked about with some of the investments. Again, these aren't brand-new investments. They're things that we've never talked about doing. But certainly, the opportunity to accelerate that growth, to accelerate as we build some momentum at the end of this year and head into the next year, we thought, were very important in terms of how we did that.

And so I would just say the combination, Kelly, of some of the kind of ramping up of the quarter, the -- seeing some of the way the third quarter was starting to play out in a number of different areas of the business, obviously, some transition costs as well of the leadership change and then thinking about how we actually spend that investment dollars moving forward.

The question is how much are we going to continue to need to invest in this business. Look, I think this has been, as I know you know, a multiyear journey of transformation because the reality of it is, is that this company, again, 10 years ago, was a business that had -- it was significantly decentralized in a way that we approached the marketplace.

If you think about the things that used to happen at a local operating level where, for the most part, I always joke about this a little bit, but pretty much only things they couldn't do are they couldn't give themselves a pay raise and they had to report according to U.S. GAAP. Other than that, it was, for the most part, their business to run.

And so when you think about the things that we've done in terms of how we standardize, how we leverage scale, how we -- the category management processes and the way that we go to market and set an assortment in a different way that is not just decided by every individual operating company, those type of transformations -- again, the latest one, again, we've talked about on this call are things like Finance Technology Roadmap, things like the centralized customer care, all those things are bits -- are one steps along the way to continue to drive a more leveraged, efficient, nimble organization that can go to market in a different way.

And so again, there's not necessarily sort of a beginning and an end point to that. I do believe this business will continue to invest in itself. As we've talked about our top capital allocation priority is and has been the ability to take the cash we generate and reinvest it in this business to continue to get better.

And as Kevin said and as you've heard Ed talk about, our ability as the market leader to continue to leverage scale, to drive the things that we can do and, again, go to market in a different way, I think, are important. And so you will -- you should expect us to continue to invest in our business that way.

Okay. And then maybe just one follow-up on the gross margin and the inflation impact, how much of that -- just given that it does look relatively manageable on an overall basis, but obviously, there's more happening, I think, in meat and dairy, but how much of that is just pure mechanics of the type of inflation and the environment you're seeing versus the execution of that, either at the local or the chain side?

Yes, it's a little bit of both. I mean on the chain side, again, it's actually a fairly mechanical process, in the sense that as we've talked about before, there's -- depending on the category, there's about a 7- to 30-degree -- 30-day lag in terms of when prices recalculate. So that one is a little more, I'd call, mathematical and environment-driven.

Obviously, there's some market-driven, and there's some execution as well on the local side. Although as we've talked about, historically, one of the areas that's actually really allowed us to do a better job of that, certainly, over the last few years, is our revenue management function. That's been an area that we've leveraged well, both in deflationary times and inflationary times.

And I certainly anticipate work that we have done and will continue to do in the RevMan area will help us work through that. But we've also talked about the fact that in certain cases where inflation -- and in certain categories when inflation hits higher levels and escalates in a more rapid way, that we still have some challenge in passing some of that along.

So I think that's how I would frame it up. It's probably a little bit of all of that, but certainly, something that I believe, moving forward, we'll get a handle on. Again, our RevMan function is -- has certainly done a good job and will help us work through that over the number of years, and I anticipate that continuing to move forward.

Our next question comes from Bob Summers with Buckingham.

So just help me understand, of the operating income revision, which I think is really just, what, 2 more quarters, how much of that is being driven by this investment pull forward. And what I'd really like to understand is what's the run rate of that investment, how should I think about it as we bleed into 2000 -- or 2021.

And then on the benefit side of the equation, how are you thinking about the return on this, either through cost savings or bolting on acceleration and case volume growth? And when is that? Or when should we expect that?

Sure. So just starting with your first point on sort of the takedown. Again, we haven't broken out the specifics of those things, but just to reiterate again, a couple of the key points. Again, it is -- there's a portion of it that's related to some of the challenges we've talked about both, again, as we kind of exit this quarter and enter the next one as it relates to some of the margin challenges.

Again, it's related to some of the challenges that we've talked about in France. Again, there are some discrete costs, again, in corporate that I'd call are unplanned, things like the strike we had in Denver, things like that we've seen a bit of higher level, I'll call, claims activity in terms of things like auto liability and workers' comp, some of those type things that were part of where you saw our corporate expenses elevate a bit, obviously as well as some of the transition costs we talked about related to leadership. So those are things that are -- again, some of the components to that as well as investment.

Bob, I don't know that we're going to go and break down the detail, every one of those components. I would say, certainly, probably -- and the biggest ones really fall into the category that some of the point on the margins, the areas in France as well as the investments, broadly speaking.

And I guess some -- from a run rate perspective, as I said, I don't know if we're going to go into that type of breakdown detail, what you could -- what you should expect though, as we head into our Investor Day and as we talk about, as Kevin onboards, as we talk about our ongoing strategic opportunities, we certainly plan to go into more detail of that, both in terms of how it impacts our growth, how it impacts the expenses and the ability to fund that growth through some of the efficiencies. So certainly, more to come on that. But I would say, again, those are the main categories of how to think about why the takedown happened.

Our next question comes from John Ivankoe with JPMorgan.

I think the comment was made that we shouldn't expect an increase in CapEx, I do just want to make sure that I heard that correctly, I guess especially in the context of what may be in coming years, kind of a broad need to modernize facilities, really, not just for you, but across the industry, and also potentially the use of new facilities into smaller facilities to better penetrate some of the urban markets. So that's kind of the first point.

And secondly, is part of the plan or part of the thought at this point that you would enter new European countries? Or it's kind of getting the current countries to your [sort of lower turns] the priority in the near term.

Yes. So let me take that one first, then I'll go back to your other one. I think the answer on that is that, certainly, stabilization is the highest priority right now in terms of that.

And then again, just -- maybe just to reiterate one thing, and then we talk about Europe as just one entity. Within that, again, the 3 out of the 4 main countries we're in, in Europe are actually performing what I'd call acceptably well. And obviously, the biggest challenge is in France. But from a priority standpoint there, definitely, stabilization is our focus at this point in time. Certainly, over the long term, we'll continue to look for opportunities to grow in that part of the world.

The CapEx piece. So look, a couple of things I would say on that. As we have -- as we've talked about, actually, over the last couple of years, we actually have accelerated, even heading into this year, our CapEx level a bit. In other words, we've been running in that 1, 1.1%-ish range, somewhere 1.1% to 1.2%.

As we talked about this year, we actually bumped that up a bit to a 1.3% of sales for some of the investments we plan to make. And as we talked about a little bit earlier in the prepared remarks, we're actually running at that rate. And so I would say, on one hand, there is a bit of acceleration from the perspective of that, but that was talked about, and it's where we're going.

And so I think Kevin's point was we're not certainly saying what we're doing now at this moment in time. There are going to be, I think, some increased potential investments. But as we also look at how we rationalize those things at the moment as a percentage of sales, I think you can think about fairly consistently how we've talked about, as we head into this year, we've talked about a bit of acceleration.

Okay. So more or less model 1.3% would be safe.

I think that's fair.

Our next question comes from Rebecca Scheuneman with Morningstar.

So I'd like to circle back to protein inflation. Given the global protein shortage that has resulted from African swine fever, it's likely to think that this protein inflation will continue for at least the next year. Are you beginning to like proactively work with your customers on some price increases?

Or are you just kind of playing it by ear? They have been admittedly volatile, the prices. I'm just wondering what we should expect if we'll -- if there are possibly some further gross margin compression due to difficulties passing on this expected inflation.

Sure. Thanks for the question. So I would, first of all, decouple a couple of these things a bit. The impact that we've seen from the African swine flu has actually been very minimal, I would say. This is something we've taken questions on for some time, and again, that's not something I would say has been a sizable or even, again, just barely above minimal impact in terms of us.

I think the markets for center of plate and beef do move around some, and I'd say, again, we experienced a little bit more of acute inflation here in that category. I don't know that I'd look right now, though, out a longer term and say, yes, there's some fundamental reason that there's going to be a highly inflationary center of the plate markets for any time to come of any real significance.

Here's what I would say, though, just as a reminder, in terms of how we deal with some of those things and why -- back to maybe your customer point, why this has been something actually we have historically been a strong partner for our customers. And obviously, we have scale benefits that have allowed us to -- in any of these types of moments, have access to products, have a traceability that, obviously, is deep and well appreciated by our customers, the availability of substitutes. And so I think -- and alternative products.

And so I think if you think back a few years ago, even when we had the issues with the avian flu, one of the things that we were able to bring to our customers is simply the availability of product and, again, a traceability program that actually ensure that those are safe and in the way that they would expect.

So I think -- I guess what I would say to summarize that all, again, decouple a little bit the African swine flu elements that is not been something that we've done -- we've had a significant issue with, some center of plate challenges right now, although, again, not necessarily looking at what I'd call acute inflation to that area over the longer term. But in the event of any of those things, I think the company is well positioned to manage through that stuff in a better way.

Our next question comes from Marisa Sullivan with BofA Securities.

Just wanted to circle back. Joel, I think you referenced some challenges with the implementation of your Finance Transformation Roadmap. Just wondering if you can give a little bit more color on that and then in the time frame for working through those. And then as it relates to working capital and free cash flow, can you just comment on when or how quickly you might start to see improvements there?

Yes. Sure. So a couple of things on -- so think about the Finance Technology Roadmap as -- in our history, we would have had all of the finance-related functions, things like credit, things like cash AP, accounts payable, general ledger, each of those types of areas that would actually have been in each individual operating units that, over the last couple of years, enabled by technology, we've moved many of those functions into a centralized place, and in some case -- and some cases, with an offshore partner as well.

And I think that what you're hearing us talk about here are challenges related specifically to local credit, where, in the past, each one of our operating units would have had a credit department responsible for credit and collections in each of their local markets.

And in today's world, it's certainly, again, through the use of technology and a bit of a different structure, we're just working through some of the bumps in terms of managing how to do that in a way that's more somewhat market but also as much more centralized. And so again, an interesting example on working capital of a process.

Accounts payable had some bumps along the way as well, and we had a little bit of a positive benefit, if you will, on working capital on that in our previous year. That process has actually stabilized and, again, in a strange way, had a little bit of a negative impact on working capital in the sense that we paid our suppliers in a more efficient manner.

So I would say that, in general, we certainly feel confident about our ability to stabilize that. We're certainly making the appropriate investments and leveraging the technology in order to do so, but there are some short-term bumps that we're having along the way. And I actually, certainly in some of my prepared comments, talked about the fact that we anticipate some of this continuing to improve over the course of the year, and I certainly expect that to be the case.

The other point I would make, and just as a reminder as part of the free cash flow, is related to CapEx on a year-to-date basis. If you remember at the end of our fiscal 2018, based on some opportunities presented by U.S. tax reform, we actually accelerated the process of investing in some fleets that actually then allowed us to invest at a lesser rate at the beginning of our fiscal 2019.

So where we've gotten back to what I'll call a more normalized capital spend as it relates to fleet, the year-over-year comparison, certainly for the first half of the year, and again this will level out a little bit as the year goes by, looks worse particularly due to that factor. So again, all that to say I do think we'll see some improvement in this area in the second half and, certainly over the long term, feel good about where we're at.

And so then just very quickly. I'm wondering if you can give any comments about the current trends you're seeing with independent restaurants. You saw a nice acceleration in your local case growth this quarter, and I'm just wondering if you expect this to continue in the third quarter or if you can comment on quarter-to-date trends.

Yes. I think, look, a couple of things. I mean, I think the team did a great job of this. We talked about actually a favorable exit rate from the first quarter that continued to accelerate over the course of this quarter, particularly on our local business and I would say, particularly, in the area of account penetration.

So what this was not was just kind of going out and just -- people often ask, where did the growth come from? And it wasn't so much in the area of new customers but is an area that, actually, as we've talked about, is best for us in that further account penetration.

The market itself, I would say, is kind of where it has been. I think it's in a decent place. There's sort of lots of reports that move around from time to time, and check sizes generally seem to be continuing to elevate. Traffic seems to be flattish. A few say it's up a little, a few say it's down a little.

But I would generally say the market is in an okay place, probably similar to what it has been. But I think -- again, certainly, a lot of good work by our teams in the U.S. to drive a strong level of growth, again, certainly in the independent space. And we anticipate some of those trends continuing as well.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. We'd like to thank everybody for participating. You may all disconnect, and have a wonderful day.