Sysco Corp (SYY) — Q4 2018 Earnings Call Transcript

Thanks, Virgil. Good morning, everyone. Thank you for joining us and thank you for your interest in Sysco. With me in Houston today are Tom Bené, 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 July 1, 2017, 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 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.

Thank you, Neil, and good morning, everyone. Earlier this morning, Sysco announced that we concluded fiscal year 2018 with a strong quarter that ultimately translated into a successful year. Fiscal 2018 was also the final year of our three-year plan and I'm excited to share that we exceeded the various metrics that we initially outlined during our Investor Day back in September of 2015. Many of you will recall that when we initially announced this three-year plan, we had three targeted objectives we wanted to achieve. The first was to improve the customer experience of doing business with Sysco through enhanced service levels, improved sales retention, and higher customer loyalty. The second was to enhance associate engagement through improved workplace safety and associate retention by providing attractive career growth opportunities for our associates. The third was to achieve our financial goals of growing adjusted operating income by at least $400 million, which we raised twice since then, ultimately to the high end of a $600 million to $650 million range while targeting an adjusted return on invested capital of 15%, all of these excluding the impact of the Brakes acquisition. Specifically, for our financial goals, we had three key levers that would help achieve those metrics: Grow gross profit through accelerated local case growth and gross margin expansion, leverage supply chain costs and reduce administrative expenses. I'm proud to report that our team was able to successfully execute on all of these objectives, which has translated into steadily improving financial results over the past three years. At the conclusion of the three-year plan, local case growth was 3%. Gross profit dollar growth outpaced operating expense growth, creating operating leverage of 2 points, and we delivered $665 million of incremental adjusted operating income, excluding Brakes and based on a comparison of fiscal 2018 to fiscal 2015. Additionally, we grew EPS faster than operating income, and we surpassed both our adjusted return on invested capital and working capital targets. We achieved these goals by staying focused on our customer-centric vision and driving consistent execution at the operating level. Our objective to improve the overall customer experience has been a core element of our success over the past few years and will continue to be a key focus for us as we move forward. As we described at our Investor Day in December of last year, we continue to build on the momentum we've achieved against our strategic objectives, and we'll strive to accelerate our current growth guided by four strategic priorities: First, enriching the customer experience of doing business with Sysco; second, delivering operational excellence in everything we do; third, optimizing the business, what we like to call The Sysco Way; and finally, activating the power of our people. The overall macroeconomic trends continue to be positive in the United States and the underlying economic picture remains encouraging, including a strong employment market. This has resulted in a healthy consumer that is driving a positive trend in restaurant sales. We also see continued growth at local customers as they increase their reach through flexible menus, innovative concepts, and additional delivery options to reach consumers. Looking at our results for the year, sales grew 6.1% to $58.7 billion driven by strong growth with local customers, the addition of some new customers which helped accelerate our national customer growth, a few key acquisitions, and continued product cost inflation. We continue to be focused on M&A activity as a part of our strategy and also closed several acquisitions during the year, including HFM in Hawaii, Doerle Food Service in Louisiana, Kent Frozen Foods in the U.K., a small transaction in Sweden as well as acquiring the remaining 50% interest in Mayca, our Costa Rican partner. For the year, local case growth for our U.S. Broadline business was 3.6%. It was the strongest in the fourth quarter at 5%. Overall gross profit grew 5%, driven by a few key factors: First, the acceleration of local cases to improve processes and training of our marketing associates and continued growth in our digital platform; second, the growth of Sysco Brand, which now comprises nearly 46% of U.S. Broadline local cases; third, Cutting Edge Solutions, our product innovation platform, which features our exclusive product offerings has now delivered 1 million cases of new on-trend innovative products to our customers; fourth, the continued success in category management as we continue to introduce new categories to capture value; and finally, effective ongoing management of product cost inflation using our suite of revenue management tools. These positive results were partially offset by continued challenges from inbound freight costs driven by overall industry factors such as driver shortages and adjusting to electronic regulation of hours-driven. From an expense perspective, adjusted operating expense for the year grew 4%, driven by ongoing strategic investments in the business and a few operational challenges that impacted the year. Some of those investments included supply chain transformation work occurring in the U.K., the investment in marketing associates in the U.S. and the continued investment in technology solutions that will translate into a more enriching experience for our customers. Overall, we delivered adjusted operating income growth of 8.4% to $2.5 billion. With the addition of tax benefits, EPS growth was meaningfully higher than the prior year as adjusted EPS grew 26.6% to $3.14. The operational improvement in our business is a direct result of the hard work and effort of our 67,000-plus associates who executed our business strategy that is predicated on disciplined, profitable, and sustainable growth. Transitioning now to our annual results by business segment, beginning with U.S. Foodservice operations. Sales grew 5.4% for the year, gross profit grew 4.6%, adjusted operating expenses grew 4.7%, and adjusted operating income grew 4.3%. Top-line results were strong as local case growth in our U.S. Broadline business was 3.6%, including the acquisition of HFM and Doerle Food Service. Organic local case growth was 2.8% and has now grown for 17 consecutive quarters. Total case growth was 2.9%, of which 2.1% was organic. The solid case growth performance translated into healthy gross profit dollar growth of 4.6%, driven by a combination of customer mix, product mix, and inflation. Additionally, the previously mentioned growth in Sysco Brand also contributed positively to the gross profit dollar growth. Turning our attention to cost. Our adjusted operating expense growth for the year was 4.7%, driven by rising fuel costs and increased supply chain costs in both the warehouse and transportation. These costs were largely due to a combination of a tight labor market, weather impacts throughout the year, and ramp-up costs for new business. Additionally, we had ongoing investments in our selling organization to better penetrate underdeveloped markets. In International Foodservice Operations, sales increased by 8.5%, gross profit rose by 7.1%, adjusted operating expenses went up by 9.7%, and adjusted operating income fell by 7.7%. We saw robust top-line growth for the year across all our international ventures. In Mexico, we secured a new national customer, and Canada showed strong performance due to strategic investments implemented from our U.S. business, resulting in accelerated local case growth for the year. However, the U.K. continues to face significant product inflation in the mid-to-high single digits. From a cost perspective, we continue to make investments across Europe. The supply chain transformation work in the U.K. to transition from a single temperature warehousing fleet into a multi-temperature network is progressing well and we feel good about the progress that has been achieved. We are also making good progress on the integration of Brake France and Davigel to create Sysco France and are excited about the new capabilities and the unique multi-temperature service that will better adapt to our customers' growing needs. Additionally, the integration of Pallas Foods and Brakes in Ireland is nearly complete and we've achieved good cost synergies throughout the year. We are also making technology investments to improve the infrastructure and to enhance our suite of customer-facing tools. And finally, in Mexico, we absorbed the cost of adding a new large customer during the year. The overall decline in adjusted operating income is a direct result of the strategic investments we are making in the International segment along with the impact of foreign exchange currency translation. We continue to focus on executing against our long-term plans by investing in necessary capabilities across the International business and by leveraging our position as a platform for future growth. And finally, SYGMA showed continued top-line growth during the year with sales up 6.1%, driven by inflation, along with fees growth of nearly 3%. However, the business continues to struggle with operating expenses related to increased transportation costs and a reduction in backhaul revenue due to driver availability. I'd now like to briefly discuss the announcement that will be coming out later today. Today, we're announcing our 2025 corporate social responsibility goals. These newly defined goals set a clear path for the future and demonstrate Sysco's continued commitment to care for people, supply products responsibly and protect the planet. We believe it is our responsibility to operate in a manner that meets the needs of our customers today while producing positive lasting change. We are leading our industry with our CSR initiatives and by including specific long-term goals that align with our strategic business priorities, we're living our vision of becoming our customers' most valued and trusted business partner. In summary, we are excited about the results achieved in fiscal 2018 towards our three-year plan and are encouraged by the solid fundamentals across our business, specifically the top-line growth trajectory we're on, while continuing to be able to invest in our future. Our success is a direct result of the dedication and hard work of our associates executing on our strategic priorities. As a reminder, fiscal 2018 is an overlap year in that it was the final year of our initial three-year plan and the first year of our new three-year plan. We are pleased with the results for the year and remain confident in our ability to deliver the financial objectives associated with our new three-year plan that we described in our December Investor Day. With that, I'll now turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom. Good morning, everyone. As Tom mentioned earlier, we are excited about our performance in achieving our initial three-year plan and pleased with the results for both the fourth quarter and the full year. This morning, I'll start with our quarterly results. Sales and gross profit growth were strong at 6.2% and 5.7%, respectively, as we saw positive impacts from overall and local case growth, continued Sysco Brand growth and a benefit from inflation and foreign exchange. Adjusted operating expense growth was 2.5%, resulting in adjusted operating income growth of 15.7% and adjusted earnings per share of $0.94. In addition, we continue to generate meaningful free cash flow as we achieved $1.5 billion for fiscal year 2018. For the fourth quarter, we saw a foreign exchange benefit to sales of approximately 1%. Sysco also experienced inflation in our U.S. Broadline business of 1.1%, driven by a few categories, including dairy, frozen potatoes and vegetables, and paper disposables, partly offset by deflation in poultry. Within our International business, inflation was driven by a combination of both product costs increasing and currency translation in the U.K. During the quarter, we had gross profit growth of 5.7% driven by overall and local volume growth and improved Sysco Brand penetration. Adjusted operating expenses grew 2.5% for the quarter. The increase in expense was largely driven by supply chain costs in both warehouse and transportation, which were mostly related to increased fuel costs and a tighter labor market and the previously announced investment in our selling organization in our U.S. operations. Additionally, we continue to make investments in transformation and integration in our International business. These costs were partly offset by favorable comparisons in corporate expense versus the prior year that we previously mentioned. As a result, we saw a gap between gross profit dollar growth and adjusted operating expense growth of 320 basis points this quarter. And while we don't expect to see that trend to continue, we do expect our three-year plan gap to be approximately 150 basis points. As it relates to taxes, our net earnings for the fiscal year were impacted by lower tax rates from U.S. Tax Reform where our U.S. federal rates went from 35% to 28%. Other favorable impacts include additional credits and tax benefits from stock option exercises. Cash flow from operations was $2.2 billion for fiscal year 2018. Net CapEx for fiscal year 2018 was $666 million or about 1.1% of sales, which was $3 million higher than last year. Free cash flow for fiscal year 2018 was $1.5 billion, which was $83.6 million lower compared to last year, primarily due to a pension plan contribution we discussed last quarter. As Tom mentioned earlier, we also achieved results that exceeded our original three-year plan targets, excluding any impact of Brakes. This includes an adjusted return on invested capital, excluding Brakes, of 20.2% and our working capital improvement was 5 days or 1 day better than the original target. Now, I'd like to close with some commentary on the outlook for fiscal 2019. As Tom mentioned, fiscal 2018 was the first year of our current three-year plan concluding in fiscal 2020. For this current plan, we continue to feel confident in our ability to achieve our goal of $650 million to $700 million of operating income improvement. The inflationary environment has abated throughout the year and while we can't predict the impact that macroeconomic factors will play in the cost of our products, we believe modest levels of inflation will likely continue for at least the next few quarters. Capital expenditures are expected to be approximately 1.2% to 1.3% of sales. And from a cash perspective, as we previously stated, our U.S. federal tax rate will drop to 21%. With the addition of state and local jurisdictions, we expect our overall effective tax rate to be approximately 25%, similar to the rate for this year due to some tax benefits that occurred in fiscal 2018 that we anticipate will not fully repeat in fiscal 2019. In summary, we've had a very strong performance over the past three years and the fundamentals of our business remained solid. We are excited about the future as we kick off fiscal 2019. We expect to deliver continued strong top line fundamentals and improved cost management, building on the momentum from the prior three years. Our strategic priorities of enriching the customer experience, delivering operational excellence, optimizing the business, and activating the power of our people will accelerate our current growth and position us well for future success.

Tom and Joel, I'd like to begin by discussing gross profit and gross profit per case. This quarter's per case result was slightly weaker than what we've observed recently, although it seems that there was more benefit from M&A this quarter compared to the past. There’s a tougher comparison to consider. I'm curious if there has been any significant change in the underlying growth rate of profit per case, or if this is more related to one-off issues. I understand that freight is a factor in this, so any insights would be appreciated.

Sure, Ed. I'll start. And I think the answer to that is there really is no, what I'd call, fundamental changes in our view of that. I think you've hit on a couple of the points. I mean, certainly our contract growth was again a bit higher this quarter as well as the freight certainly has still continued to have an impact. And again, we certainly anticipate that continuing, but in terms of any other fundamental impact to that, Ed, there's really none I would call out there.

And just as it relates to freight, there's been talk about incremental freight challenges from one of your largest competitors. Can you just maybe talk about what you're seeing in regards to getting product from vendors on a timely basis, filling open driver positions? Any disruption that you are seeing related to any of this or how you're mitigating it? Is it reflected in the top line at all? I mean, it doesn't seem like and maybe you're actually benefiting, but just some help there would be great.

Yes, good morning. This is Tom. We've been discussing this for a few quarters now. The freight challenges are significant and affect every industry involved in moving freight. I think we first noticed the impact back in our second quarter. Initially, we had some difficulties ensuring that our lanes were filled and that we were receiving the required service levels from our suppliers. We adopted an aggressive approach at that time, which continued through the third and fourth quarters, to establish strong relationships with carriers and develop solid plans with our suppliers to avoid the service issues that could arise from this situation. We've made substantial efforts as a team to address this as effectively as possible. However, that doesn't mean we're free from cost impacts since we still need to get the freight delivered. At times, we're forced to use the spot market and pay higher rates than we did a year ago, but in terms of service levels, I believe we're not facing nearly the challenges that some others have reported. Regarding our drivers, we face difficulties filling positions in certain tight labor markets, where drivers are being offered substantial incentives to join companies. We are also implementing similar strategies to attract drivers. The competition for drivers is very real, and we are experiencing the same challenges as everyone else.

Tom, on the case growth acceleration, trends improved really quite nicely on both the one and three year. What would you attribute that to? In terms of influence, how would you rank things? Was it similar to what you outlined on gross profit dollar growth? And have you seen some momentum that was observed in Q4 in 2019 thus far?

Regarding case growth, I would say it's a continuation of previous discussions. E-commerce has now reached about 50% growth, with improved penetration among customers using our e-commerce site, which is definitely beneficial. Additionally, the new MAs we've onboarded this year and our training programs are helping us get them to be productive more quickly than in the past. Our focus has been on directing resources to the areas with the most significant opportunities, which we've been working on for some time. It's also crucial that they have access to the right resources, such as specialists who can help them develop underperforming areas of their business, as well as speeding up our business review process. Overall, these fundamental strategies are coming together and resulting in accelerated growth. I've noticed that our independent customers are also performing well, which is encouraging.

Okay. That's helpful. And then, Joel, just for the three-year plan into 2020. This past year that you just completed, you were just shy about 8.5% EBIT growth. Can you just provide some color on how we should think about progression for fiscal '19 that need to show a little element of acceleration in the growth rate? And then what may be the primary drivers are that we should be thinking about for the coming year?

I believe one of the key points we have discussed is that fiscal year '18 was not only a strong finish to the previous period but also a year of investment. Looking back about a year and a half, given our trajectory in the last three-year plan, we received numerous questions about whether we were projecting an even stronger conclusion to the plan than what we achieved. We emphasized the upper end of our guidance because we have ongoing investments in our business that we expect will yield benefits within the next three-year plan and beyond. I would view '18 as a year marked by these investments, which we highlighted in areas such as our sales force and international operations, including technology transformations, merger integration, and supply chain improvements in the U.K. Moving ahead, a significant factor we foresee is the gap between gross profit and operating expenses. This year, the gap was approximately 1%, largely due to the mentioned investments. Looking forward, we expect this gap to widen to about 1.5% as we progress through the three-year plan, indicating potential expense improvements during this period.

Chris, the only thing I'll add is, I mean, I think what you should take away is we're committed to that three-year plan number that we talked about last December. And so as Joel just said, there's some things we need to accelerate and improve on in '19 and '20 and we feel comfortable we can do that.

Maybe just to follow-up on some of the questions so far. So for the three-year plan going forward with that 1.5% gap between gross profit dollars and OpEx dollars, how should we think about the flattish gross profit per case in the U.S. in Q4 and extrapolating that forward versus the control you have on operating expense and your ability to leverage that line?

So Judah, let me start and then Joel can add his thoughts. When you mention flat gross profit, we're actually on track or even exceeding our gross profit target for our three-year plan. We're confident in our ability to achieve gross profit growth. If we receive some support from product performance and inflation trends, we believe we can reach our goals. I think your point relates to what Joel just mentioned regarding costs. We need to maintain our focus on costs to ensure that we uphold the 1.5-point gap we've discussed for this three-year period. There's still work to be done, but we're optimistic about our capability to get there.

Yes. Judah, the question you raised was about the gross profit per case, and as I mentioned earlier, there seems to be a bit of a flattening out this quarter. However, I'm not overly concerned about that in the long run. As Tom mentioned earlier, we are optimistic about our three-year plan moving forward.

Okay. Great. If I could sneak one more in on that national competitor Ed mentioned. So beyond the freight implications, clearly they struggled in this calendar second quarter. Is there anything you'd call out in terms of a benefit from their struggles on cases or kind of business as usual?

No, I would say that it's quite competitive out there and continues to be. I wouldn't say that anything they mentioned had a similar impact on us. I'm not sure we benefited in any way from the challenges they faced. Overall, we are experiencing the same competitive environment we've always been in.

I have a couple of questions. I'm going to approach the case growth and gross profit growth a bit differently. Your case growth increased by 5.3% and gross profit rose by 5.2%, which is definitely the closest gap we've seen in a long time, looking back over the past eight quarters. Is this mainly due to freight, or are there other factors you can identify?

We talked about there are a couple of things driving that. So if you think about the freight impact for sure on the inbound side; the customer mix, which as Joel talked about earlier, the fact that we had more growth in our national customers or our contract business; and then product mix also comes into play there some so which products are inflating versus not. So I'd say those 3 things and combined probably affect that, but we still feel really good about those numbers. And we're able to basically hold our margin flat given everything else that's going on. We feel actually really good about that.

So in the quarter, your expense control in that final period of the first three-year plan, it was very strong. So can you help us better understand those year-over-year improvements? And how do you make sure you aren't cutting resources that may be needed somewhere in the future?

Sure, this is Joel. I want to highlight a couple of important points regarding this quarter. First, as we entered this quarter, we informed everyone that we expected the performance to be significantly stronger compared to last year, mainly due to certain expenses on the corporate side that were present last year but not this year. We also emphasized that the 320 basis point gap is exceptionally strong, but it should not be viewed as a long-term trend. Instead, we are aiming for a long-term perspective of maintaining a 1.5 point difference between gross profit and operational expenses. This isn't about making one-time expense cuts; it's something we anticipated. We've been effectively managing our expenses, which contributed to a successful year overall in corporate expenses, helping us bridge the gap and allowing us to reinvest those savings into our operations as we've discussed. Importantly, the strength we experienced in this fourth quarter shouldn't be interpreted as a management strategy or resource allocation that will negatively affect us in the future.

Got it. And on the inflation commentary, I think you said you expect a little or a modest inflation for the next few quarters. Do you expect something different after those next few quarters or that's just the timeframe you're comfortable commenting on?

Yes. I would say that's typically how we comment on these things. Obviously, much beyond that is not really any basis on anything and wouldn't be responsible in our part so that's just our typical comfort of how we look forward.

Wanted to just go back to the sales force investments. Could you just kind of give us an update? I know you said kind of part of the solid case growth this quarter was due to that, but kind of where are we, what inning in terms of the low investment? And then just any color you can give us in terms of productivity, what may be the newer class of folks versus years past are looking like? And I know you said kind of e-commerce around 50%. I'm guessing that's the local restaurant cases. I feel like not too long ago it was 40%. So kind of where are some of the better productivity tests going toward, that would be helpful.

Sure, Vinnie. You mentioned several key points, noting that e-commerce has continued to grow, and we are currently at 50%. This growth has been a consistent trend. We see e-commerce as a customer choice platform, and the positive news is that more customers are moving towards e-commerce. Regarding our sales force, we've previously discussed adding marketing associates in the last few quarters, and we are currently at that level. While we may not be adding more associates at this time, there are still ongoing expenses related to the new hires. To enhance the productivity of these marketing associates, we are focusing on placing them in territories where they can achieve results. Our training programs and onboarding processes are designed to get them productive more quickly. In the past, it took 18 months to two years for someone to become fully productive, but we have reduced that timeline significantly. We believe we will continue to improve in this area. A key factor in this progress is the support resources we provide to help shift them from merely taking orders to becoming more consultative sellers. We're seeing good advancements there, and our team's capabilities are growing. As a result, their time management is improving, leading to larger territories and, more importantly, more effective and productive selling efforts.

Okay. Super helpful. And if I could just slide one other one in here. Just turning to International for a second. Granted, I kind of knew the currency translation and inflation, all that was continuing to be a part. Just more on the kind of what's more under your guys' control with the temperature zones and more of the fundamental changes, where would you say we kind of are with some of those investments from an inning perspective?

Sure. I think we're still early days on a lot of those investments. Now, we kind of break up some of the countries in Europe. We talked about the Irish business where we had owned Pallas Foods for quite a few years now. That integration between Brakes and the Pallas business in Ireland has actually gone very well and I'd say in that place where we're close to the end of our full investment as well as benefits that are coming out of there. In the U.K. and France in particular, both those geographies, we still are kind of early days and are investing there to get these distribution businesses and the operating environment, we talked about our multi-temp, up to where we'd like it to be. The good news is, in both places, we think once we get there, that will be a competitive advantage for us, but we do have a few years ahead of us of investments and really bring that organization along to some of those changes.

My follow-up quick question would be on International, when we look at obviously the improvement throughout the year, as we look to '19, how should we think about the kind of run rate? Should we think about it as more related to the back half of this year or do you think you'll actually start getting to see a little bit more profitability?

Yes. I think you recall some of the calendar challenges we discussed earlier. The second half of the year has been more positive compared to the first half, which was negatively affected by the calendar. I expect that business to align more closely with the performance seen in the second half. There's a clear expectation for continued profit growth, making that a more reasonable outlook for the remainder of the year.

Okay. To follow up on inflation, I know you've mentioned modest inflation. Is there a possibility that we could return to deflation in your fiscal '19? Additionally, what are your thoughts on inflation from both a foreign exchange perspective and product costs internationally?

So in the U.S. Broadline, just to your first question, again, our current view is that we anticipate a modest level of inflation. So at this point, we're not seeing what you're suggesting in terms of deflation, but I would say a modest level of inflation. In the European, primarily in the U.K., again, depending on the variability of the sterling, we certainly still anticipate some challenges there given the fact that, I think as we talked about, probably half their product is procured from outside of the U.K. Obviously, they're working hard to do things to manage that more effectively, but that still continues to be an issue and we anticipate that to carry forward a bit.

Karen, just on that inflation in the U.S., it has gotten less throughout the year. So the beginning of the year, we talked it was a couple, 2 to 3 points. It has slowed to kind of 1 to 1.5. So it is slowing. We don't necessarily believe that's going to go deflationary, but you're right in assuming that it's mitigating some.

I would like to add a comment regarding the categories that Tom mentioned earlier. The categories do have an impact, and we have observed some deflation in certain key categories. For instance, poultry has seen less inflation recently, and meat has also experienced a similar trend. This situation contributes to the gross profit per case we have been dealing with, but it is a phenomenon we have encountered.

I wanted to focus on the U.S. Foodservice and the significant increase in organic case growth for local customers. Can you help clarify that? I know you are hiring sales staff. How would you divide that between existing customers who are performing better, especially since it seems like the restaurant sector improved in the second quarter, account penetration, and possibly your sales team bringing in new customers?

I believe it's a combination of various factors. We've seen our same-store turnover increase, which is positive news. That's often the most challenging type of growth to achieve, but the improvement in penetration reflects well on some of the trends in the industry. Additionally, we are consistently focused on attracting new customers, which is essential for the vitality of this business. So, it's really a mix of both elements.

Could you provide us with a quantitative measure of your growth rate in the sales force?

We don't necessarily comment on the number of salespeople we've added, but again, we're much more targeted today than we were in the past and we feel good about how we approach the focused kind of resourcing that we do out in the market.

And just one follow-up. Can you give us a sense of the cadence of the acceleration in the organic case growth and sort of sustainability and how's it going quarter toward to-date?

Yes. I'll address that. We have had a solid start in the early part of this year. This is not just a one-time occurrence from last year. We are seeing continued good progress in the beginning of this year.

I just wanted to touch on gross margin outlook for fiscal 2019 and just kind of talk through some of the puts and takes. For freight, how should we think about your assumptions for freight if you start to lap the step-up post-hurricanes last year? Are you kind of assuming steady state? Are you assuming that it could potentially get better or worse? And then on customer mix, how should we think about the headwinds and tailwinds? You've brought on some new chain customers that I assume are lower gross margin. How much of a headwind would that be and what are some of the offsets?

Sure, Marisa. As we consider freight, we know we will begin to compare against the impacts from last year in our second quarter. Based on this, we expect it to be somewhat flat, possibly with a slight increase, though it's hard to predict future developments in this area. Regarding customer mix, this will still influence our results until we cycle through some of the new national customer business. We will continue to focus on category management and our Sysco Brand as strategies to counter these challenges. Taking into account inflation, our category management efforts, our Sysco Brand initiatives, and the revenue management tools we've discussed, we feel confident about managing our gross margin. While we do not anticipate a significant increase in gross margin percentage-wise, we are not expecting a decline either. Our aim is to manage it as effectively as possible in the upcoming year.

Got it. Just as a follow-up on private label, you've obviously seen some nice growth in the penetration. How much more runway do you think there is for increasing private label penetration? Will it come more from the local customers or do you actually see some opportunities on the contract customer side?

I think we see it actually on both. And there probably maybe even more opportunity on the contract side. I think there's work we still have to do there to create the environment that's easy for all those customers to participate more in Sysco Brand, but we still see an opportunity in the local customers as well. It's really a balance of making sure we're bringing out the right type of products. You heard me talk about the Cutting Edge Solutions and we're now at 1 million cases. A majority of those items are Sysco Brand items and we can continue to bring innovative solution-type products to the marketplace. We are seeing good traction there and we think that creates even more runway for us on the Sysco Brand.

Yes, Marisa, just as a reminder, we don't set a specific target for this, but we do expect to see some continued opportunities. This is all driven by our ability to offer value-added products in the market, which generates demand for those products and ultimately increases our market share.

A couple of follow-ups to things that you've talked about already. First, on the International business, should we think of next year's year-over total investment dollars could still be going up or still high but maybe a step-down from this year?

Karen, this is Joel. I would think about that as still having some level of increase next year.

Great. As we look into the first fiscal quarter, are there any factors we should consider regarding the impacts from last year's hurricane disruptions, particularly related to case growth or costs?

I wouldn't want to place too much emphasis on that. There might be a little bit of it, but the reality is that we managed the situation pretty well. Regarding the freight, there may be some overlap from the significant impact we saw in the second quarter, but overall, we don't expect anything major in terms of that overlap.

Curious in terms of both freight and fuel prices. I guess, in the context of your performance this quarter and as you look out over the next few years and part of your three-year plan, can you just help us understand the magnitude of the pressures from those factors? Are there items that are coming in better than you expected to offset those pressures? Or are you just maybe conservatively forecasting those areas with some cushion in order to still kind of beat or meet your targets?

I'll start by discussing the freight perspective in relation to our three-year plan. There are many factors affecting our numbers, but we remain committed to achieving growth in gross profit and operating expenses. We're optimistic about reaching those targets. Despite potential challenges, especially with fuel costs impacting gross profit, we expect strong growth in our local cases, brand, category management, and revenue management. While not everything always goes as planned, we are confident in our projections. On the fuel side, there have been minor impacts on our costs, but we have implemented hedges to provide stability and consistency in our fuel pricing, which covers a significant portion of our purchases. Overall, we believe we have enough strategies in place to manage any challenges we may face in our three-year plan.

I’d like to add on the operating expense side regarding the fuel pressure discussed by Joel. On our end, we're facing challenges with delivery driver retention and hiring, alongside some emerging issues in the warehouse. It's essential for us to enhance productivity within our supply chain. These are genuine obstacles we need to address. Our focus is on how to overcome these challenges through improvements in productivity, whether that means increasing the number of cases we deliver per truck and route or optimizing all the relevant metrics to boost our overall operational productivity. To Joel's point, we have a significant amount of this work ahead of us. Currently, we face more headwinds than we have in recent years, primarily due to the tight labor market and recent increases in fuel prices.

Okay. That's helpful. And then maybe, Joel, just one other one for you just in terms of the quarter, the operating income growth. If my math is correct, it seems to imply that the Brakes operating income was kind of flat year-over-year. Is that the right way to think about it for the quarter?

I believe that's about accurate. If you exclude all the foreign exchange impacts and look at it on an adjusted basis, our entire International operation experienced a slight increase. However, it seems that Brakes might have decreased slightly. I would characterize it as down a bit rather than remaining flat.

Two things. On the selective, very surgical MA hiring that you did over the last year, were those predominantly experienced distribution foodservice salespeople? And, I guess, those investments have worked. Were those markets kind of one-off or is there opportunity to do the same thing very strategically in other markets and get a similar return?

I believe we have opportunities in many markets, with some being larger than others where our market position is stronger. We are hiring a mix of individuals, including those with experience in the industry as well as those from the operator side. Additionally, through our new development and onboarding programs, we are also bringing in individuals earlier in their careers. Ultimately, we are focused on finding the best candidates who we believe will be successful at Sysco.

Is the greatest impact of this hiring cycle, over the last 6, 9, or 12 months, still ahead of us, or are we currently at that run rate?

If you consider the total, we accomplished the majority of our targets this past year. There is some lingering impact as we move into 2019. We are actively hiring and increasing our sales force each year. We are consistently looking for opportunities to place new hires where they are most needed. Our strategy will continue to revolve around effectively utilizing our current tools to deploy our sales team in the most advantageous locations. As mentioned earlier, we aim to enhance productivity through e-commerce and shift our focus towards consultative selling rather than just order taking. Overall, I do not anticipate a significant increase in the number of new employees in fiscal year 2019. Lastly, regarding the outbound driver shortage, has it impacted revenue over the past six months to a year, or is it more about increasing costs? What steps can be taken to allow drivers to do more? Is there a way to modify truck loading or processes so that current drivers can be more productive on the road? John, that's an important question. Recently, we've initiated a small vehicle initiative, which has several drivers. One major benefit is that it allows us to make smaller deliveries to customers, thereby enhancing our service level. We've also discovered that these smaller trucks don't require a specific class of driver, thus widening our potential candidate pool for those routes. We're planning to accelerate this initiative in fiscal year '19 as we’ve learned from our experiences and observed some benefits. This is one way we'll address the ongoing driver challenge. Additionally, anything we can do to streamline efforts in the warehouse will not only improve the satisfaction of our delivery drivers but also help us meet customer service requirements. As you've pointed out, while there may have been a slight impact on top line growth in certain markets due to driver shortages, the more significant issue is the increased costs. Therefore, we must continuously seek new and effective methods to tackle these challenges.

My question is more industry-specific. So even if it's not evident in your results, I'm just wondering if there's any industry-specific softness that might be impacting your competitors more than Sysco. So in terms of overall spending in independents, traffic and based on net unit growth for independents, are you seeing any change at all from an industry perspective as you're heading into fiscal '19?

Ajay, I actually think we see a lot of positive trends still in the industry. So I don't think we see really a lot of negative headwinds relating to industry performance. If you look at the quarter 2 for various parts of the industry that were fairly positive, certainly still some traffic challenges across some of the segments, but the spend was up very nicely. And so I think we continue to feel pretty good about it. The food-away-from-home, while growing less maybe than it did for a while, is still positive. And so we're seeing pretty good trends. And we think that not the least, which is like this delivery trend, you think about food delivery, the results we're hearing is they're seeing pretty significant growth, like 40% to 50% growth in that area. So that just creates more opportunities for consumers to get the products they want from restaurants. So we're seeing a lot of positives.

Okay. And obviously, you finished the three-year growth plan on a high note. And I think, Tom, you mentioned in the prepared comments that that figure excludes Brakes. So if that's the case, I estimate you did something like $105 million of operating income growth in Q4 alone. That's 3x more than the prior quarter. So does that sound right? I think you were at $526 million through Q3.

Yes, Ajay. I'll take that. It's Joel. Part of this is due to seasonality. Our third quarter is usually smaller, so a comparison between Q3 and Q4 won't be alike. As we discussed before this quarter, you are correct that there was no impact from Brakes on that number. We had a strong quarter and expected some year-over-year changes in corporate expenses compared to the prior year, but overall, we finished strong for the quarter and the three-year plan.

I wanted to go get back to a couple of questions ago and tie that in to your prepared remarks where you mentioned the additional delivery options. I mean, clearly, we understand some drivers don't necessarily need CDL licenses and they can be in sprinter-type vehicles. But I wanted to get a sense, are we beyond pilot at this point and you're kind of thinking about doing that where it makes sense nationally? And secondly, does this type of service make sense to be driven in that your main operating companies? Or are you considering a number of smaller distribution facilities, I guess, kind of spokes, if you will, within different metropolitan areas can actually be closer to the customer to where the driver can go back and forth and reach more customers in a day than just operating out of the operating company itself?

We've been testing our approach for some time, exploring both urban markets and traditional operating companies, and we've gained insights from both. We plan to continue expanding in these areas. The initial results have been encouraging. It's important to note that there isn't a one-size-fits-all solution; these vehicles are not just for filling gaps or responding to late product deliveries. Instead, they are integrated into our regular delivery and routing processes. We're observing a range of benefits across different markets for various reasons, and we will keep exploring all the options you've mentioned as we broaden our operations.