Sysco Corp (SYY) — Q3 2019 Earnings Call Transcript

Good morning, everyone, and welcome to Sysco's third quarter fiscal 2019 earnings call. Joining me in Houston today are Tom Bené, our Chairman, 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 30, 2018, 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 is included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chairman, President and Chief Executive Officer, Tom Bené.

Good morning, everyone, and thank you all for joining us. I'd like to start off this morning with an overview of our third quarter performance and a discussion around our business segment and the key highlights for the quarter. Following that, Joel will cover the financial results in further detail. Overall, we are pleased with our overall operating and financial performance for the third quarter. We delivered improved year-over-year growth in line with our expectations and managed costs well including the ongoing cost savings associated with our business transformation initiatives. The improved pace of performance for the second half of fiscal 2019 we've previously spoken of is in fact taking shape. And while we still have work to do, we remain confident in our ability to deliver our adjusted operating income growth target and now expect that to be at the low end of the $650 million to $700 million range. Joel and I will both elaborate on this further. From a total Sysco perspective, our third quarter results include increased sales of 2.2% to $14.7 billion; gross profit growth of 2.9%; and adjusted operating expense decrease of 0.4%, which translated into an adjusted operating income increase of 16.6% to $620 million; and an adjusted earnings per share increase of 17.4% to $0.79. Turning to U.S. restaurant industry data, the overall sales trends remained mixed. According to Black Box and Knapp Track, we saw some choppiness throughout the quarter as March data was generally positive compared to February in part due to weather, which negatively impacted February sales. Additionally, same-store sales were positive for the quarter, although traffic once again declined. However, even with this recent choppy industry performance, the overall macro trends remained generally favorable for our customers, as illustrated by continued low unemployment, which was at 3.8% for March and strong GDP growth for the first quarter at 3.2%. Economic growth in the international markets in which we operate was mostly positive. This includes modest growth in the foodservice sector, although we continue to see the impacts of Brexit on our U.K. business due to uncertainty and low consumer confidence. In Canada, the consumer confidence index continues to rise with March seeing the third consecutive monthly increase with Technomic forecasting the Canadian foodservice industry to grow 0.6% in real terms or 4.1% on a nominal basis for calendar year 2019. Additionally, we continue to see reasonable overall trends in the other international markets where we do business. As we discussed last quarter, we anticipated seeing an increased benefit from our transformation initiatives beginning in the second half of this year and we began to see those benefits show up this quarter. Overall, our results included a bit softer top line than expected offset by good overall expense management which delivered solid operating profit performance that was in line with our expectations. Examples of initiatives that are driving benefits from an expense management perspective include our field finance transformation and the corporate office administrative restructuring which we implemented last quarter. As it relates to acquisitions, in April we acquired J&M Wholesale Meats and Imperio Foods; two smaller central California distributors. J&M Meats is a foodservice distributor that specializes in key Center of the Plate products and Imperio Foods carries dry canned goods which both are complementary to our existing Broadline businesses in the central California area. They also provide Sysco with the opportunity to further extend our reach to the important Hispanic customer segment. We will begin to see the impact to our business in the fourth quarter from both of these acquisitions. Additionally in the quarter, we made the decision to sell our Iowa Premium cattle processing business. While our 3-year plan forecast included positive operating income for this business, we believe the divestiture of this business is in alignment with our strategic priority and allows us to focus on our core strength as a distributor. The transaction will result in a reduction of planned operating income of approximately $25 million and is the reason for us now projecting to achieve the low end of our adjusted operating income growth range. Now I'd like to transition to our third quarter results by business segment beginning with U.S. Foodservice Operations. Sales for the third quarter were $10.1 billion, an increase of 4.1%. Gross profit grew 5.1% including an improvement in gross margin of 18 basis points. Adjusted operating expenses grew 2.3% and adjusted operating income increased 10%. Total case volume within U.S. Broadline grew modestly at 2.1% for the quarter, of which 1.3% was organic. However, we delivered relatively solid growth in our local business, as local case growth was up 3.1%, of which 2.2% was organic. We are pleased with the gross profit growth we delivered for the quarter which was impacted by a number of factors including continued positive momentum from category management, as we continue to deepen our relationships with our strategic supplier partners; year-over-year favorability from the impact of inbound freight; and continued growth in our Sysco branded products, which increased by 28 basis points with our local customers this quarter. In addition, the inflation rate for the quarter was 2.3% in U.S. Broadline, up nearly 1 point from the second quarter of this fiscal year. Technology continues to be one of our fundamental enablers of growth, as we transform our business to serve our customers in ways that best meet their needs. We are continuing to provide new capabilities and tools to enable an improved experience of doing business with Sysco, including new ordering tools, which has driven our e-commerce ordering utilization to more than 53% with our local customers. From a cost perspective, within U.S. Foodservice Operations, our expense management was solid, as adjusted operating expenses were 2.3% for the quarter. While we continue to see supply chain cost challenges in the warehouse and transportation areas, we are seeing positive momentum from our recruiting, onboarding and retention initiatives. These challenges were partially offset by continued improvements seen as a result of our routing optimization initiatives and ongoing process improvements. Furthermore, our finance transformation and smart spending initiative have also provided benefits in the quarter. Moving on to International Food Service Operations for the quarter, sales decreased 1.5%. Gross profit decreased 3.1%. Adjusted operating expenses decreased by 5.8% and adjusted operating income grew 30%. We saw solid overall performance in Canada with strong top line growth and solid gross profit dollar growth of more than 5%, driven in part by an inflation rate of 2.6% along with strong expense management, partially benefiting from our ongoing regionalization efforts, which are progressing well. In Europe, we continue to have mixed results. The U.K. continues to feel the effects of Brexit uncertainty, causing depressed consumer confidence. However, our Brakes U.K. business continues to stabilize operationally as a result of our multi-year initiatives to transform the business. In France, social unrest continues to impact tourism and consequently food-away-from-home consumption. Our sales performance during the third quarter was adversely impacted by this unrest and by some operational challenges associated with integrating Brake France and Davigel into Sysco France. That said, the overall integration and supply chain transformation continues to be on track to deliver the long-term benefits that are part of our multi-year plan. As for our business in Latin America, we continue to see growth opportunities in this region, both with our chain restaurant customers and with our expansion of Cash & Carry locations to complement our Broadline footprint in both Costa Rica and Panama. Moving on to SYGMA. We continue to make disciplined choices in an effort to deliver improved profitability. In Q3, we saw expected softness in the top line due to transition customers while seeing gross margin increase by 28 basis points year-over-year. Solid expense management drove adjusted operating expenses down 7.1% versus the prior year, resulting in significantly improved operating performance. In an effort to improve overall profitability in this important segment of the business, we will continue to take a very disciplined approach to growth as we move forward. Lastly, in our other business segment, we recently announced the restructuring of Guest Supply. As the industry landscape evolves, we are focusing on optimizing our business model and creating a more focused and agile organization to better meet the changing needs of our customers. The new operating structure has created three distinct business units under the parent company Guest Worldwide. The business units include Gilchrist & Soames our amenity manufacturing unit; Manchester Mills one of the world's leading textile producers; and Guest Supply which serves the world's top hotel chains and independent properties in over 100 countries as a full spectrum distribution solution provider. In summary, we continue to feel good about the fundamentals of our business. Our customer and operational strategies are firmly aligned around reaching our customers' experience of doing business with Sysco. And we remain focused on engaging our 67,000 dedicated associates around the world to deliver against our financial objectives associated with our 3-year plan. Let me now turn the call over to Joel Grade, our Chief Financial Officer.

Thank you, Tom, and good morning everyone. I'd like to provide you with additional financial details surrounding our performance for the quarter. As Tom mentioned earlier, we saw improved year-over-year results for the third quarter. Although we saw some softness in the top line, our earnings reflect solid expense management and strong adjusted operating income growth which are in line with what we've previously stated and our results of our enterprise-wide transformational initiatives. These initiatives showed our streamlined efficiencies and allow us to reinvest in the business to facilitate continued growth include, our finance transformation roadmap, smart spending and the Canadian regionalization initiatives. For the third quarter of fiscal 2019, total Sysco sales grew 2.2%. Foreign exchange rates negatively affected total Sysco sales by approximately 1.1%. In our U.S. Broadline business we experienced 2.3% inflation driven by a few categories including the frozen potato, poultry and meat categories and we are managing this modest increase in inflation well. Gross profit in the third quarter increased 2.9% and gross margin increased 14 basis points while adjusted operating expenses decreased by 0.4% resulting in strong adjusted operating income growth of 16.6% to $620 million. Changes in foreign exchange rates decreased adjusted operating income by 34 basis points. Although it will vary from quarter-to-quarter, we are focused on maintaining the 150 basis point gap between gross profit dollars and operating expense dollars that we committed to as part of our 3-year plan in order to achieve our adjusted operating income growth targets. Turning to earnings per share, our adjusted earnings per share for the quarter increased $0.12 to $0.79 per share. Our EPS results this quarter were impacted by our strong operating income, adjusted tax rate, foreign exchange impact and stock option exercises. I would now like to discuss our tax rate for the quarter. The GAAP effective tax rate of negative 2% for the third quarter of fiscal 2019 is primarily attributable to the termination made during the quarter to recognize the favorable impact of $95 million of foreign tax credit generated as a result of distribution to Sysco from our foreign operations at the end of fiscal 2018. Our adjusted tax rate for the quarter was 21%. Looking to our fourth quarter, we would expect our effective tax rate to be in the 23% to 25% range. Now turning to cash flow. Cash flow from operations was $1.4 billion for the first 39 weeks of fiscal 2019, which is $244 million higher compared to the prior year period. Free cash flow for the first 39 weeks of fiscal 2019 was $1 billion, which was $233 million higher compared to the prior year. The improvement in free cash flow was primarily due to last year's pension contribution, partially offset by cash taxes and the impact to working capital from an increase in days sales outstanding. Net capital expenditures totaled $367 million for the first 39 weeks of fiscal 2019, which was $10.8 million higher compared to the prior year period. For the full year fiscal 2019, we now expect the capital expenditure forecast to be approximately 1.1% of sales, down slightly from our previously stated 1.2%. That said, there are no changes to the prioritized order of capital allocation, which is as follows; investing in the business, consistently growing our dividend, participating in M&A, and a balanced approach to share buybacks and paying down debt. As Tom mentioned earlier with the anticipated sale of Iowa Premium, we expect to achieve our target at the low end from $650 million to $700 million range as a result of our planned operating income being decreased by $25 million. In summary, we saw improved year-over-year results for the third quarter, led by continued momentum from improved underlying business performance, solid local case growth and good cost management. That said, we have more work to do in order to achieve the financial objectives of our three-year plan, although we remain confident in our ability to achieve these objectives. We are committed to serving our customers and delivering at a high level of execution all years of our business that will improve our financial performance in both the near and long term. Operator, we are now ready for Q&A.

Hey, good morning. Can you speak to the gross margin improvement in the quarter and maybe help us understand those reference impacts by order of magnitude? And then Tom or Joel, as it relates to private label penetration, it was again expansion, but it was one of the lower rates we've seen in recent quarters. So maybe you could help us understand whether or not it was an anomaly and if we can return back to that 50 to 60 basis points of expansion going forward or any color would be appreciated.

Good morning, Chris. It's Joel. To address your question, it's important to consider that our growth is balanced across several factors. Our Sysco Brand continues to be a strong contributor, along with our ongoing efforts in category management. While the sharp increase we experienced five years ago isn't replicated, we are pleased with how we have strengthened our relationships with suppliers and advanced category management across our businesses. These areas positively impact our margin percentage, but our primary focus remains on gross profit dollars. We are also benefiting from moderate inflation, which helps us pass some costs onto our customers, ultimately improving our gross profit. We're managing these costs effectively, and while inflation is significant in our sector, it hasn't been detrimental. Additionally, the management tools we've discussed previously are aiding us in enhancing our margins positively.

Hey Chris, this is Tom. Just maybe just two other things I would reinforce as well. We did get some positive year-over-year benefit on the inbound freight side which as we've talked in the past does impact gross margin. And then your question around Sysco Brand, we look at 20 basis point improvement as a very positive number still as long as that continues to move in the right direction. That's a reflection for us of a couple of things. One, our customers are still reacting positively to all Sysco brands. And two, we continue to bring innovative ideas and solutions to the market. So, we actually view that to be a solid number, while it might be a little bit less than the growth that you've seen in a couple of quarters, it's still a really good number.

Okay. My last question is about inflation. What should we expect in the upcoming quarter? Also, if you’re able, could you provide insight on organic case growth for the current quarter?

Yes. And so I mean I think just on your question on inflation I mean I think certainly our forecast is to continue to see, I'd say, moderate level of inflation as we move forward, certainly over the next couple of quarters. There's nothing that jumps up necessarily that would be really significant in terms of the overall inflation numbers. So, I would think we expect certainly an additional moderate level of inflation over the next couple of quarters. Organic case growth I think it was part of the U.S. Foodservice ops, 2.2% was the overall number that was organic.

But you're asking for year-to-date, right, Chris?

Quarter-to-date?

Not really. We continue to feel good about the ongoing momentum in the business. There was a slight shift related to Easter, but it was not significant given the timing of when it occurred last year in comparison to this year.

Okay. Thanks, guys.

Yes. Hi, guys. Good morning.

Good morning.

I would like to begin with OpEx and seek some clarification. You've experienced a significant quarter concerning costs, and I want to delve deeper into the factors behind this. I'm asking because it seems some of the accelerated initiatives you've mentioned weren't expected to reach full run rate this quarter. How should we view OpEx moving forward? Additionally, the comparison for Q4 looks challenging, especially considering the worker's comp benefit you had to account for last year. Can you achieve that 1.5% spread in Q4?

I will begin by addressing a couple of points. First, regarding the 1.5 percentage point spread, as I mentioned in my prepared comments, this is something we evaluate over a three-year plan. It doesn't mean that all reports will be uniform; some may be higher or lower, and we have observed both scenarios. However, we did anticipate improved performance in the second half of the year, as benefits from our finance technology roadmap, smart spending initiatives, Canadian regionalization, and changes in our corporate office costs begin to materialize. We expect these improvements to continue into next year as well. It's worth noting that our operating performance remains strong, and expenses are well-managed, even though we faced some headwinds this quarter, specifically about $0.03 per case due to fuel costs. There may be headwinds in the fourth quarter, but we believe the leverage we see in the second half of the year will surpass that of the first half, and we are already observing that trend.

Okay. And then, just a follow-up on CapEx. So the CapEx guidance is down a bit. Can you just talk a bit about what's driving that? I don't know if Iowa Premium has anything to do with it. And how sustainable a rate of sort of 1.1% would be going forward?

The way I see it, while the forecast may not be ideal, the reality is that our capital expenditures and investments are based on the actual needs of the business. Our commitment to prioritizing capital allocation towards our business remains unchanged. We have several programs and transitions that will necessitate ongoing investments. Some of the changes in timing are expected, and there have been some fluctuations within the business that have influenced this. It’s important to note that how we approach forecasting our capital expenditures is evolving. We are simply adjusting our spending and investments to align with the needs of the business.

Great. Thanks guys.

Thanks, Ed.

Hi, thank you. My first question is about the $650 million. Has there been any change in the breakdown between gross profit and the supply chain compared to administrative expenses?

No, Karen. There is no change. The only shift was related to the anticipated sale of the business, but there is no difference in how things are categorized.

Okay. And then the same question I just want to ask. I know you obviously mentioned and you have been mentioning positive same-store sales, but traffic weakness. So, I was just wondering if you can talk a little bit about trends of traffic and I guess same-store sales on a true like mom-and-pops local basis in terms of being independent versus the micro change? Any patterns or differences you could point to there?

Yeah, good morning, Karen. This is Tom. I mean I think we have seen certainly some choppiness this quarter particularly. I think there are probably a bunch of different things driving that, but it depends really on what source you look at. I mean NPD would call out that while overall spend is up traffic is up in some areas as well and down in others, and Firefox, Naptrack is probably a little more consistent than they have called traffic down really across most of the segment. So I think it's driven by everything from the weather choppiness in Q3, our Q3 and mostly in February and then I think again consumer efforts during that time. The small chains seemed to be doing a little bit better, so that's going to be your micro change. And then the pure independents at least in this quarter according to NPD tend to be a little bit softer, but I would say from our perspective we have seen necessarily any major difference in trend line that we've experienced over the last couple of quarters, so we continue to feel like this independent growth that we've had and that sector is doing well and we continue to feel pretty confident in our ability to continue to grow and take share in that space.

Okay. And so then just last housekeeping. Corporate came in on a dollar basis was higher than I would have expected given the layoffs that you'd announced. I don't know if that's just an allocation issue or what because I would have thought on the dollar basis that would have been quite a bit down sequentially and year-over-year.

Are you talking about the last kind of the specifically corporate layoffs? We're talking in stream stocks…

Yes, yes.

There are many aspects of our financing technology roadmap that are very much focused. One point we discussed in the first half of the year is that we feel confident about this due to the field personnel. I believe that most of what you are observing is likely even more focused on corporate, but it maintains a balance between the two.

Okay. Thank you.

Good morning. I wanted to follow-up on the cadence of sales question that people asked about. You guys said, January was strong on a good weather comparison for February, but it's not good. Should we take away from that sort of March and April have somewhat normalized and if people are trying to get obviously trying to get a sense of whether the industry has slowed or not on a normalized basis?

We believe that while there were some weather-related impacts early in the quarter, things have since stabilized.

I noticed you mentioned the Technomics forecast for Canada. Do you have a forecast for the U.S. that you could share with us?

Technomic often provides forecasts on a quarterly basis by subsegment. If I have that information, I can share it with you. We will follow up on that, but generally, we do have that data.

Okay. I have one other question that isn’t about sales. You recorded a $35 million charge, and I understand it was related to a change in your business technology strategy. Could you provide more details about what this change in your business technology spend entails?

So, could you clarify that question one more time?

Of the $72 million charges you excluded from operating expenses, $35 million was designated for what you refer to as the change in business technology strategy. Is that primarily related to transitioning to the cloud, and could you elaborate on this so we can gain a better understanding?

Yes, some of that. It's also a variety of things including actual accelerated depreciation we took in Europe, which was really due to changes in technology. So there are several factors that contributed to that number, including some acceleration in our G&A. However, I would say that this encompasses multiple aspects of our technology strategy and it's not just one single factor. The main point is that there hasn't been a significant change in technology; it's simply a mix of various elements at play.

Yes. Think of it as more specifically around Finance Transformation which is a technology component of it and then the European work we've been doing where we have an ERP in France that we've been updating and so those are the two main drivers of it.

Thank you.

Great. Good morning. Thanks for taking the questions. I just wanted to touch on fuel quickly. You called it that there was a slight headwind in the third quarter. Well, how should we think about fuel in the fourth quarter as it impacts your assumption?

Marisa, I’d anticipate some of the continued headwinds as we head into the fourth quarter and probably a little bit as we head into next year as well.

Got you. And then I haven't heard you guys talk about category management in a while on these calls. I'm wondering was there anything you guys are doing differently in the third quarter that kind of made it a greater impact, anything that you're planning for the fourth quarter as we should think about gross margin in CatMan?

Marisa, it's Tom. I wouldn't say anything unique. We're just trying to highlight that this is an ongoing process that has been happening for years. We're starting to engage more deeply with some of our strategic supplier partners, considering the potential long-term benefits of partnering more closely with them.

Got you. And are you seeing any impacts or any customer feedback on category management? Are they liking what you're doing? Or do they have to adjust to assortment changes?

No. I think we're in a point now its – early, early days so call it a few years ago now. I think because we were changing some suppliers in some areas or products that was creating some choppiness and we've actually continue to have very good feedback from our customers around the work we're doing with CatMan, obviously, that drives cost benefit for them and they're very excited about that. And as I mentioned, we are getting more focused on strategic partnerships so that we can have more consistent supply for the long term. So, it's generally very positive.

Thank you so much.

Hi thanks for taking the question. Maybe first just on the changes to guidance related to Iowa premium. I think you said it's the entire kind of reduction in guidance is due to Iowa premium. But if we're stripping $25 million out, obviously, that's not necessarily the low end. So, when you say the low end, are you saying $650 million to $675 million effectively?

Yes. I believe the way to approach this is that we are discussing the midpoint of the range. If we consider $650 million or $700 million, that averages to $675 million. What we are really referring to is the $25 million related to the Iowa premium, which is the only adjustment to our guidance at this time. This adjustment brings us down from the midpoint to the lower end of the range.

Okay, that's helpful. And switching gears. I thought you said that freight was a tailwind on the inbound side in Q3. Is that right? Are you telling us that you're actually getting a benefit there? Or that it was less of a headwind year-over-year? And any commentary around kind of the freight situation in driver shortages and ability to retain drivers lately will be helpful.

Sure. We need to distinguish a few things here. Inbound is related to our gross margin, and I mentioned that we experienced a positive year-over-year impact on that. A year ago, we faced several challenges with inbound freight, but things have improved since then. We're not experiencing the same level of impact now, and part of this improvement in gross margin can be attributed to that. On the outbound side, we're managing the situation better than we were a year ago, although we still face challenges with transportation. However, the efforts we're making in recruitment and retention have significantly improved, and we're observing positive effects across our operations compared to a year ago.

Yes. Judah, just one thing I would just add to that. I would characterize the inbound freight as less of a headwind and not necessarily a benefit. In other words, there is some level of resetting in the overall structure that happened. But relative to Tom's point to where we were at last year, we were really up against some real major challenges that we have left ahead. We have to think about that.

Great. Thanks.

So, Tom maybe 18 months ago you guys selectively added MAs in a few markets. So, how are they performing? And then if you think about the opportunity on the share side, is there an opportunity today to go out and redirect some of the cost savings into more MA hiring to try to drive more share? Or is that not productive?

Good morning, John. I'll address your question. First, we felt confident about the work we did regarding MAs a little over a year ago. When we discussed it back then, our main focus was on a handful of tools that helped us identify the biggest opportunities and allocate our resources to those specific areas. We still believe that this targeted approach is the right one. It's not merely about adding MAs for the sake of it, but rather adding them where we see the greatest opportunity for success. We'll continue to be selective in this process and evaluate our territories in each of our opportunity areas, which may lead us to adjust our focus as needed. However, simply increasing the number of MAs without a strategic purpose is not our plan. We are observing that our territory sizes are gradually expanding as we equip the marketing associates with more tools and support. We're actively enhancing the resources we provide to our customers and are successfully developing those capabilities, including aspects like menu planning and analysis during our business review process with our chefs. Our focus remains on utilizing our resources effectively on the local side of the business, not only with the marketing associates but also with the additional tools and capabilities we have developed.

And then, if you guys started to give thought to when you provide the next plan, right, what's the time frame for that? And is the idea another three-year plan? Or, sort of, shift to year-by-year outlook?

I don’t think we’ve made a decision on that yet, John. We’re still figuring out the best approach, so I would say there’s more to come. We’ll definitely talk with you all when we reach a point where we want to share that.

Okay. Thank you.

Thank you.

Yeah. Hi. I know you guys don't typically comment on case growth internationally. And Tom, you did mention in the prepared comments that top line in Canada is really strong and then you also talked about some of the challenges in France and the U.K, but is there any way you can give some directional commentary about organic case growth internationally, specifically, for Canada, the U.K. and the rest of Europe sequentially and year-over-year?

Honestly, Ajay, part of our challenge is how we are managing through this transition. The cases we've mentioned in the U.S. and the consistency we can provide is not yet present in that business. Over time, we may reach a point where that changes, but currently, the way we account for sales and think about the units we sell in different regions is not consistent. However, I want to emphasize that we experienced strong top-line growth in Canada. In Europe, we've faced some issues. The situation in the U.K. due to Brexit has caused some instability. Although our sales are positive, they are not growing as quickly as we desire. In France, we anticipated that the social unrest would have resolved by now, but it hasn’t. While the impact isn’t significant due to the country's size, it is causing challenges for our customers and our ability to deliver products to them. In summary, we remain generally optimistic about our European businesses, although we would have liked to see stronger growth in this last quarter. That context is part of my prepared comments regarding our overall numbers, and we're pleased with our performance in the U.S. and Canada. We just lack consistent information that we can easily share with you.

Okay, thank you. Would it be possible to confirm how much you've allocated for severance in Q3 and year-to-date? I think there were some kind of breakdown provided last quarter for Canada and Europe, but I'm just wondering if there's any update on severance that includes U.S. Foodservice and also wondering if you can give your outlook for severance for Q4.

Ajay, there’s a lot to discuss. These numbers aren’t GAAP restated. I can provide some detail, which is probably the best I can do to clarify. If you look at our business areas, we’ve made progress on finance technology roadmaps, and we talked about our corporate structure in the U.S. compared to the Canada regionalization. There’s ongoing work in freight programs, and you’ll likely see some impact in our non-GAAP product as a result. Additionally, last quarter, there were significant figures from Europe, which were primarily what contributed to those numbers in that region, although not everything was included.

Okay. And in terms of the impact from the recent headcount restructuring, will that be more reflected in Q4, or will the majority of that be allocated in Q3?

I think most of that will actually occur in Q2 and also in Q3, so I wouldn't expect much of it to show up in Q4. We are beginning to see the benefits as we discuss the second half of the year and look toward next year.

Okay. I had one final question if I can. I think you've made some adjustments in the financials for accelerated depreciation year-to-date. I'm not sure if there was any impact in Q3 itself, but I thought at this point you should cycle the technology restructuring plan from a few years ago. And maybe I can get some clarification offline, but I thought conceptually at this point there shouldn’t be any residual impact from the SAT accelerated depreciation less your year-to-date adjustments are for Europe or unrelated to the previous?

Yeah, I wouldn't think about it that way. It's actually was in D&A, in particular the site volume increased this quarter. That was related to I would call accelerated depreciation in Europe for the most part, actually accelerated some depreciation there. And so the majority of the depreciation increase you're seeing is related to some technology transitions in Europe, but it's not related to what you're talking about before in terms of the mess right here in the U.S.

Okay. Thank you.

Hey, great. Good morning, guys. Thanks very much guys for taking my questions. Wanted to just go back to the choppiness and the top line in the domestic business, obviously, as you said a few times, it seems like you know more kind of February and weather specifically. Just wondering was there are a lot of variability that you could see by region? Another way of asking was it basically the weather and largely February the way to think of it? Or were there any other factors that just might be worth us knowing?

Yes, I don't have anything to add beyond what you mentioned. When discussing the weather, we noticed that some areas of the country experienced more impact than others, but that's about all we observed.

I appreciate the insight on Iowa Premium compared to the 3-year plan. Given the strong expense control this quarter, I'm curious about the higher-level perspective regarding the various cost efforts implemented so far. Specifically, I'd like to understand the lead time or planning associated with some of the measures you've taken. In other words, how should we approach thinking about the quarter-by-quarter planning or impact of these efforts?

I can start with an overview and then let Joel add his thoughts. In terms of how our business functions, we have regular operating expenses that typically follow a consistent rhythm based on our volume, which significantly impacts our revenue. A lot of this is influenced by the cost per unit. We've also discussed broader strategic initiatives such as Finance Transformation, Canada Regionalization, and Smart Spending, which we believe will yield positive results. Additionally, we faced a corporate restructuring last quarter, which is more of a one-time event that will affect the business. To summarize, our operating expenses generally align with our business performance and volume. We are currently experiencing some challenges, like increased costs due to driver and warehouse turnover and low employment rates. Overall, most of our expenses are planned and we have a clear view of them, aside from these one-off occurrences. Does that address your question?

Yes. That was very helpful. Thank you, Tom.

Hi, thank you. I want to follow-up on your some comments that were made about maybe independent restaurants being a little bit softer in the March quarter. I mean whether we adjust for weather or not. And the context of the question really what I'm getting at is, have you seen a significant rate of openings for independent restaurants? In other words, your addressable customer base maybe over the last 12 months? And considering the amount of labor pressure that independent restaurants are facing and just margins which were in general lower than chains are you actually seeing a pickup in closures on the independent side that's noteworthy even on like a very market-specific basis?

John, good morning. I wouldn't say anything particularly unique has happened there. As we all know, this industry constantly sees new businesses coming online, while others are closing. I wouldn't say we've observed any dramatic changes in that area. The various data sources provide mixed information, but they generally indicate positive spending is up in the 2.5% to 3.5% range, while traffic is generally down, except for NPD, which shows a slight increase in traffic. Therefore, I don't think there's anything noteworthy or significantly different in this quarter compared to past quarters.

And is there anything to note by category or by region that you're beginning to see? And obviously, I think there's a lot of questions that are being asked you of whether you think there's a slowdown and I think the answer, at least, as it stands today is no. But when you look at different categories or different regions, is there anything interesting that you're seeing in the marketplace a little bit more detail either positive or negative that you can basically talk about now that gives us, I guess, somewhat of a forecast of the future from Sysco's perspective as opposed to some of the third-party sources that you use for your data?

Not really. I mean there's nothing else that I would tell you that we're seeing as any different.

Hui, good morning. Thanks for taking my questions. Just going back to expenses, again, it seems like there was a good amount of upside at least in our model on the international. Can we think about the performance this quarter? I think it was down about $30 million year-over-year. Is that kind of the right run rate to think about for the next few quarters international? And then maybe you can tie in just the impact of the corporate restructuring on the expense performance this quarter?

Yes, I'll begin. We're actively working on streamlining our operations to enhance efficiency. I would say there is some consistency in the run rate, but there is still significant potential in our international business. I wouldn't directly link it to the transformation we are implementing in France, as I believe the main benefits from that will be realized next year. Generally, I think it's reasonable to view this as a stable run rate, though we have many factors at play in terms of the transformation we're undertaking. So, while my answer is generally affirmative, it's important to recognize that things may not change drastically from quarter to quarter due to all the moving elements in that business.

Okay, that's helpful. And maybe just in terms of the U.S. Broadline business. Can you talk a little bit about some of the specialty meat and produce, some of the categories that aren't necessarily part of the normal case growth? And what kind of trends you're seeing in those other areas of the U.S. business?

Sure. This is Tom, Kelly. Good morning. We remain very optimistic about our specialty company strategy. As we have discussed over the past few years, our customers truly appreciate our Broadline offerings, but they often find that their needs are better served by some specialty companies. In our scenario, this includes meat, seafood, poultry, and the produce segment with FreshPoint. We are confident in what we bring to the market and the value proposition we offer. We have been exploring ways to simplify the procurement process for our customers, enabling them to easily source products from both Sysco and our specialty companies, and we are seeing positive results from these efforts. Our goal is to create a seamless environment for customers so they can efficiently do business with both entities, rather than feeling like they are dealing with multiple companies. We believe this approach is vital to the market, and we are pleased with the progress we are making in this area.

Thank you.

Hey, good morning, guys. So I just wanted to dig a little deeper into the transportation. Your dry van spot rates have been contracting all year. So can you maybe talk about how that flows through in your business, either by talking about the percent of business that you do at the spot rate? Maybe talk about how that spot rate influences contract rates as you may be threatened to move more to the spot market? And then, lastly, how that impacts what you have to pay your drivers.

Hey, Bob. Following up on our discussion regarding transportation and costs, the area you're mentioning pertains to inbound freight, which affects our gross margin. We highlighted this in our prepared comments and addressed it this morning. We are observing some year-over-year improvements, though they are not significant and aren't major drivers for us. The market has certainly decreased from a year ago, and everyone benefits from that. We aim to limit our reliance on the spot market, as it tends to fluctuate sharply, which occurred last year. Therefore, we primarily manage that aspect of our business through contracts. When the overall market decreases, it impacts both the spot and contract sides. Concerning our drivers, we've made considerable efforts in recruiting and retention, enhancing our business operations to improve driver retention as much as possible. We are feeling more positive about our current situation compared to a year ago, but it remains a challenging aspect of the business, particularly with low unemployment and high freight volume on the road. While we feel more confident about our position now, we still face ongoing challenges related to hiring and retaining drivers.

Okay. Thanks.

You bet.