Good morning, and welcome to Sysco's third quarter fiscal year 2019 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions. I would like to turn the call over to Neil Russell, Vice President of Investor Relations, Communications, and Treasurer. Please go ahead.
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 are included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up. At this time, I'd like to turn the call over to our Chairman, President, and Chief Executive Officer, Tom 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 segments 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 that we previously spoke of is in fact taking shape.
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-$700 million range. Joel Grade 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%, an 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 remain mixed. According to Black Box Intelligence 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 remain 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, Inc., two smaller Central California distributors.
J&M Meats is a foodservice distributor that specializes in key center-of-the-plate products, and Imperio Foods, Inc. carries dry canned good products, which both are complementary to our existing broad line business in the Central California area. They also provide Sysco with the opportunity to further extend our reach into 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 three-year plan forecast included positive operating income for this business, we believe the divestiture of this business is in alignment with our strategic priorities 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. 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 Brand products, which increased by 28 basis points with our local customers this quarter. The inflation rate for the quarter was 2.3% in U.S. broadline, up nearly a 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. Our finance transformation and smart spending initiative have also provided benefits in the quarter.
Moving on to international foodservice 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. 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 and 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 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 structures 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 enriching our customer's 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 three-year plan. Let me now turn the call over to Joel Grade, our Chief Financial Officer.
Thank you, Tom, and good morning, everyone. I would 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 previously stated and are a result of our enterprise-wide transformational initiatives. These initiatives, which are designed to streamline efficiencies and allow us to reinvest in the business to facilitate continued growth, include our finance transformation roadmap, smart spending, and the Canadian regionalization initiative. 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. 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 three-year plan in order to achieve our adjusted operating income growth target. 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 determination made during the quarter to recognize the favorable impact of $95 million of foreign tax credits 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%-25% range. Turning to cash flow. Cash flow from operations was $1.4 billion for the first 39 weeks of fiscal 2019, which was $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 a capital expenditure forecast of approximately 1.1% of sales, down slightly from our previously stated 1.2%. 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 of the $650 million-$700 million range as a result of our planned operating income being decreased by $25 million. 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. 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 in all areas of our business that will improve our financial performance in both the near and long term. Operator, we are now ready for Q&A.
At this time, I would like to let everyone know if you would like to ask a question, please press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question is from Christopher Mandeville from Jefferies. Your line is open.
Hey, good morning. Can you speak to the gross margin improvement in the quarter and maybe help us understand those referenced impacts by order of magnitude? 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. Maybe you could help us understand that as to whether or not it was an anomaly and we can return back to that 50 to 60 basis points of expansion going forward, or any color would be appreciated.
Sure, Chris. Good morning. It's Joel. I'll start. I think the way I would think about that, again, it's really balanced across some of the levers, I would say. Certainly, our continued opportunities in our Sysco Brand certainly are a strong driver, as well as continuing Category Management efforts. We continue to obviously, it's not what it was five years ago where we had this giant year-over-year jump. The reality of it is we continue to enhance our relationships with our suppliers and continue to drive Category Management as well across our business. I think those are a couple of the areas that certainly are driving. Again, I don't interact with a margin percentage, but again, I'm really talking about what we think about most, and that is our gross profit dollars. We obviously also have some favorable benefit of some inflation.
Inflation in our world clearly is something that ultimately, certainly in the moderate range it's at today, is a good driver of opportunities, again, to continue to push cost of goods through to our customers. That's certainly beneficial in terms of the dollars in gross profit. I would say it's not necessarily at the levels that's that detrimental, really. Again, the comment that I think we've made is just we're managing these cost of goods inflation well, and I think that's really related to the fact that this kind of inflation number is really in our wheelhouse in terms of where this thing functions best. I would really say those are some of the main drivers of what we're looking at here.
Just in general, some of the tools that you've heard about in the past in terms of, again, revenue management continue to help us to drive our margins in a positive way.
Hey, Chris, this is Tom. Just maybe two other things that I'd 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 the gross margin. To 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 things. One, our customers still are reacting positively to all the Sysco Brand. Two, we continue to bring innovative ideas and solutions to the market. We actually view that to be a solid number. While it might be a little less on the growth than you've seen in a couple other quarters, it's still a really good number.
Okay. Just my final question would be, as you brought it up, Joel, inflation, what should we be expecting in the coming quarter? If there's a willingness, would you guys be able to disclose organic case growth quarter to date?
Yeah. I think just on your question on inflation, I think certainly our forecast is to continue to see, I'll say, moderate levels of inflation as we move forward. Certainly, over the next couple quarters, there's nothing that jumps out necessarily that would be really significant in terms of the overall inflation numbers. I would say to expect certainly an additional moderate level of inflation over the next couple quarters. Organic case growth, I think that was part of the U.S. Foodservice ops, 2.2% was the overall number that was organic.
You're asking year to date, right, Chris?
Quarter to date.
Quarter to date numbers. Okay.
Yeah. Just to strip out some of the noise from weather and what have you and maybe like the calendar shift for Easter as well.
Yeah. When we talk about our local case volume for the quarter, because the question I was answering, was 2.2%. That was organic. Total case volume organic was 1.3%. Use top line.
Is there any real comment for April?
Not really. I think we feel good about the continued momentum of the business. I don't think there's anything necessarily. There was a bit of an Easter shift, but not a big shift given the timing of when it fell last year in the quarter versus this year.
Okay. Thanks, guys.
Yep.
Your next question comes from the line of Edward Kelly from Wells Fargo. Your line is open.
Yeah. Hi, guys. Good morning.
Morning.
I want to start with OpEx, I was hoping that you could give us a little bit of help here. Obviously, you had a big quarter from a cost perspective. Maybe just dig in a little bit more related to the drivers. I'm asking this question because I think a lot of the accelerated efforts that you guys have been talking about weren't supposed to be at a full run rate this quarter. I'm just trying to figure out how we think about OpEx going forward. As part of this, Q4's comparison looks pretty hard, and I think you had a workers' comp benefit last year that you have to lap. Can you get to that 1.5% spread in Q4?
Well, I'll start. A couple things I would say to that. Number 1, I'll maybe take the last point first. The one half point spread, obviously, and I think I even said in my prepared comments, is something we looked at over the course of the three-year plan. That doesn't mean that necessarily every quarter is going to look the same. Some actually be higher, some actually possibly be lower, as obviously we've seen both here. I think the way I would look at it, though, again, as we did signal, we did anticipate some improved performance in the second half of the year. Obviously, some of these benefits started to kick in from our finance technology roadmap, smart spending work, the Canadian regionalization, and some of the other administrative cost work that we did around some of our corporate office transitions.
We feel good about those things kicking in, as we said, in the second half of this year and as we head into next year as well. I would also call out just, again, overall, our operating performance continues to be pretty strong in the expense line, and that's in the face of actually, we had a little bit of a fuel headwind this particular quarter that was about $0.03 a case. I think the question is, do we expect this to continue in these areas? I do. To your point, there are some headwinds that we're anticipating that we're going to be up against in the fourth quarter. Certainly, as we've talked about here for a little while, we certainly anticipated our leverage from the second half of the year to be better than the first half, and I think we're certainly starting to see that.
Just a follow-up on CapEx. 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. How sustainable a rate of sort of 1.1% would be going forward?
The way I would look at that, number 1, it's not that off from our forecast. The reality of it is we spend our CapEx and make our investments based truly on the needs of the business. There's been absolutely no change in terms of our perspective on our capital allocation priorities that always start with investment in our business. We're obviously very committed to doing that. We've got a lot of change programs and things transitioning in our organization that will continue to require investment. I would just tell you from a timing perspective, some of those things happen. Things do move around in the business in some ways, some of that's probably a little bit of timing as much as anything.
I would definitely not take away that there's some change in terms of the way we're looking at forecasting our CapEx. We just adjust spending and investment in terms of the needs of the business.
Great. Thanks, guys.
Thanks, Ed.
Your next question comes from the line of Karen Short from Barclays. Your line is open.
Hi, thanks. First thing I just wanted to ask was, in terms of the composition of the now, I guess, the kind of $650 million, is there any change to the breakout between gross profit and then the supply chain versus the admin?
No, Karen. There's not. The only shift at all was related to the anticipated sale of the business. No, there's no bucketing difference, if you will.
Okay. The second question I just want to ask, I know you obviously mentioned, and you have been mentioning positive same-store sales, but traffic weakness. I was just wondering if you could talk a little bit about trends with traffic and I guess same-store sales on a true mom-and-pop local basis in terms of the independents versus kind of the micro chains. Any patterns or differences you could point to there?
Yeah. Good morning, Karen. This is Tom. Look, I think we have seen certainly some choppiness this quarter in particular, and I think there are probably a bunch of different things driving that. It depends really on what source you look at. NPD would call out that while overall spend is up, traffic is up in some areas as well and down in others. Black Box and Knapp-Track, they're probably a little more consistent, and they've called traffic down really across most of the segments. I think it's driven by everything from some weather choppiness in our Q3, and mostly in February, and then I think, again, kind of consumer efforts during that time. The small chains seem to be doing a little bit better, so that's going to be your kind of micro chains.
The pure independents, at least in this quarter, according to NPD, tend to be a little bit softer. I wouldn't say from our perspective, we have seen necessarily any major difference in trend line that we've experienced over the last couple of quarters. We continue to feel like this independent growth that we've had in 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.
Sorry, just last housekeeping. Corporate came in on a dollar basis, a lot higher than I would've expected given the layoffs that you'd announced. I don't know if that's just an allocation issue or what, because I would've thought on a dollar basis, it would've been quite a bit down sequentially and year-over-year.
Are you talking about the last specifically corporate layoffs that you took? Again, we're talking in total administrative costs.
Yeah.
Obviously, there's a lot of things that are part of what we call our finance technology roadmap that are very much field focused. In fact, there were, again, why we feel confident about this, because there have been notifications of a sizable number of field personnel. I would tell you, I think the majority of what you're seeing is probably even more field-focused than corporate, but it is balanced between the two.
Thank you.
Your next question comes from the line of Andrew Wolf from Loop Capital Markets. Your line is open.
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, February not good. Should we take away from that sort of March and April have somewhat normalized? People are obviously trying to get a sense of whether the industry has slowed or not, in your view, sort of on a normalized basis.
Yeah, I think we would say that we feel like certainly things since the weather impacts in the early part of the quarter, things have stabilized.
I noticed you gave us, I may have missed this, but I heard a Technomic forecast for Canada. Do you have one for the U.S. that you might be able to share with us?
As you know, Technomic kind of gets out ahead of it, they do it by quarter, kind of by subsegment. I may have that information. Let me see if I have it, I can get it to you. We may need to get back to you on that, we generally do have that information.
Okay. I just had one other question unrelated to sales. You took a $35 million charge that was related to a change in the business technology strategy. Could you expand a little upon that? What the change is in your business technology strategy?
Can she ask that question one more time, maybe?
Of the $72 million charges you excluded out of operating expense, $35 million was allocated for what you call the change in business technology strategy. Is that basically going to the cloud? Could you expand on so we can understand that a little bit?
Yeah, it's some of that. It's also kind of a variety of things. There was actually an accelerated depreciation we took in Europe that was related also to a technology change. There's been a few things that, again, and that number also accelerated our GMA little bit, but I wouldn't say there's one thing that it fell into. There are a number of things that are just parts of our technology strategy that are included in that number, and there's not necessarily one big thing there. I guess maybe the takeaway would not be that we somehow have a significant change in technology, because we do not. There's just a variety of things going on.
That was what I was trying to get to, so appreciate it.
Yeah.
Yeah. Think of it as more specifically around the finance transformation, which has 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. Those are the two main drivers of it.
Thank you.
Yeah.
Your next question comes from the line of Marisa Sullivan from Bank of America Merrill Lynch. Your line is open.
Great. Good morning. Thanks for taking the question. I just wanted to touch on fuel quickly. You called it that it was a slight headwind in the third quarter. How should we think about fuel in the fourth quarter as it impacts your expenses?
Marisa, I'd anticipate some of those continued headwinds as we head into the fourth quarter and probably a little bit as we head into next year as well.
Gotcha. I haven't heard you guys talk about category management in a while on these calls. I'm wondering, was there anything you guys were doing differently in the third quarter that kind of made it of greater impact? Anything that you're planning for the fourth quarter as we should think about gross margin in Cat Man?
Hey, Marisa, it's Tom. No, I wouldn't say anything unique. I think what we were just trying to highlight is it's an ongoing process. It has been now for years, and we're starting to do some deeper work with some of our more strategic supplier partners and think about that more as some potentially long-term benefits as we begin to partner more deeply with some suppliers.
Got you. Are you seeing any impacts or any customer feedback on category management? Are they liking what you're doing, or are they having to adjust to assortment changes?
No, I think we're at a point now where it's early days. Quite a few years ago now, I think because we were changing some suppliers in some areas or products, that was creating some choppiness. We've actually continued to have a very good feedback from our customers around the work we're doing in Cat Man. Obviously, if it drives cost benefit for them, they're very excited about that. As I mentioned, we are getting more focused on strategic partnerships so that we can have more consistent supply for the long term. It's generally been very positive.
Gotcha. Thank you so much.
Your next question comes from the line of Judah Frommer from Credit Suisse. Your line is open.
Hi. Thanks for taking the question. Maybe first, just on the changes to guidance related to Iowa Premium. I think you said the entire kind of reduction in guidance is due to Iowa Premium. If we're stripping $25 million out, obviously, that's not necessarily the low end. When you say the low end, are you saying $6.50 to $6.75 effectively?
Yeah, no, I think.
I think we talked about our previous guidance really around the midpoint of the range. If you do $6.50 to $7.00, that would be $6.75. What we're talking about here is a $25 million related Iowa Premium, and yes, that is the only adjustment to our guidance at this point, which takes us from that midpoint down to the lower end of the range.
Okay, that's helpful. Switching gears, I saw 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? Any commentary around the freight situation and driver shortages and ability to retain drivers lately would be helpful.
Sure. Just remember, we have to separate a couple of things here. Inbound hits our gross margin, I did mention that we had some year-over-year positive impact of that, again, because a year ago, we were still dealing with quite a few challenges that related to inbound freight. I would think about it as it has gotten better. We're not feeling that kind of impact, and there was a piece of that gross margin improvement that was driven by that this year. As it relates to outbound, we continue to certainly be managing that, I think, better than we were a year ago as well. We still have challenges from a transportation perspective, although, albeit, I think the work that we're doing around recruiting and retention is much improved, and we are seeing positive impacts across our operations versus a year ago in that regard.
Yeah, Jude, just as one thing I'd just add to that, I think 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 has happened. Relative to Tom's point to where we were at last year, we're really up against some real major challenges. We have less of a headwind this year, the way I think about that.
Great. Thanks.
Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is open.
Tom, maybe 18 months ago, you guys selectively added MAs in a few markets. How are they performing? 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?
Hey, good morning, John. Thanks for the question. I would say, first of all, we felt really good about the work we did around MAs a little over a year ago. If you recall, when we talked about it back then, what we really focused on was a few tools that enabled us to do a better job of understanding where the biggest opportunities were then applying those resources to those specific geographies or areas. We continue to believe that that targeted approach is the right approach. As I think about over time, it's not as much just about adding MAs for the sake of adding MAs. It's about adding them where we now know we have the biggest opportunity to succeed.
We'll continue to selectively do that, and we're candidly all the time evaluating our territories and each of our opportunity areas, and that may encourage us to shift in certain areas versus others. I would say just outright adding a bunch more MAs for the sake of that is not really our strategy. We continue to see our territory size get a little bit larger as we are able to provide the Marketing Associates with more tools and support. We talk a lot about the tools and support that we offer our customers on that side of the business, and we continue to do, I think, a really nice job of building out those capabilities, whether that be things like menu planning analysis for our business review process, where we have our chefs engaged.
I think we're continuing to focus those total resources on the local side of the business, not just the marketing associate, but leveraging the MAs to bring these other tools and capabilities that we've built behind them to the market.
Have you guys started to give thought to when you provide the next plan, what's the timeframe for that? Is the idea another three-year plan or sort of shift to a year-by-year outlook?
I don't think We haven't made a call on that yet, John. I think we're still working through ourselves what's the best approach. I'd say more to come. We'll certainly talk with you all when we're in a place we want to do that.
Okay. Thank you.
Thank you.
Once again, in order to ask a question, please press star and then the number one on your telephone keypad. Your next question comes from the line of Ajay Jain from Pivotal Research Group. Your line is open.
Yeah. Hi. I know you guys don't typically comment on case growth internationally. Tom, you did mention in the prepared comments that top line in Canada is really strong. Then you also talked about some of the challenges in France and the U.K. 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, AJ, I think it's part of the challenge for us in this area is the way we are still, I would say, managing through that transition. The cases that we talk about in the U.S. and the consistency that we can provide you guys does not exist in that business yet. So potentially over time, we might be in a place to do that. Today, the way we still account for the sales and the way we think about the cases or the pounds or the units that we sell. What I did say, and I will reinforce here, we did have strong top-line growth in Canada. What we said in Europe is, look, we had a couple of things going on in Europe that are impacting us. Certainly, the U.K. and everything with Brexit has created some choppiness over there.
Our sales are positive. It's just that they're not growing at the rate we would like them to or would want them to at this point. Then in France, I think we all thought the unrest that was going on, the social unrest in France, would have by now certainly cleared, and it just has not. While it's not a huge impact because it's a big country, there's certainly still some things going on there that are creating issues for our customers and therefore us getting products to them. Long-winded way of saying, I think we still feel generally good about those businesses. We would have liked to see a little more top-line growth in Europe in this last quarter, and that's kind of built into my prepared comments, driving that overall number because we feel good about the U.S. numbers and certainly about Canada.
We just don't have the information in a way that we feel like it's easily provide-able to you guys.
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 was 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.
AJ, here's how I'd answer that. In our non-GAAP recs, we do have a fair amount of detail that is probably the best I'd be able to give you here in terms of spelling that out. Obviously, if you think about the areas, certainly really across our business, there's finance technology roadmap, some of the work we talked about at corporate here in the U.S. side. Obviously, the Canadian regionalization. Some of the work being done in France in terms of those programs. Obviously, again, some of that, I think you'll see spelled out in some of our non-GAAP rec, but I think that's probably the right way for you to the best view of that. The one thing I would say is, obviously, there are some pretty sizable numbers in there, particularly last quarter, as it relates to Europe.
Obviously, that was, while not all inclusive, I would say that was obviously the biggest majority of what was going to come there, at least in that part of the world.
Okay, in terms of the impact from the recent headcount restructuring, will that be more reflected in Q4, or was the majority of that allocated in Q3?
Yeah, I think the majority of that is actually going to be within Q2, but then also here in Q3. I wouldn't expect a lot of that to be reflected in Q4. Obviously, the benefits we're starting to realize here, as we talked about in the second half of the year and as we head into 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 have cycled the technology restructuring plan from a few years ago. Maybe I can get some clarification offline. I thought conceptually at this point, there shouldn't be any residual impact from the SAP accelerated depreciation unless your year-to-date adjustments are for Europe or unrelated to the previous-.
Yeah, I would think about it that way. We actually had some D&A, in particular on the D side, increase this quarter that was related to, I would call accelerated depreciation in Europe, for the most part. As Tom referenced earlier, there's some of the technology changes we're making over there that, again, allowed us to actually accelerate some depreciation there. The majority of the depreciation increase you're seeing is related to some technology transitions in Europe. It's not related to what you were talking about before in terms of some of the SAP write-offs here in the U.S.
Okay, thank you.
Your next question comes from the line of Vincent Sinisi from Morgan Stanley. Your line is open.
Hey, great. Good morning, guys. Thanks very much for taking my questions. Wanted to just go back to the choppiness in the top line in the domestic business. Obviously, as you said a few times, it seems like more kind of February and weather specifically. Just wondering, was there 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 might just be worth us knowing?
Yeah, I would say nothing that was inconsistent with what you just said. When I talked about weather, we saw certain parts of the country where there were more impacts than others. I would say nothing else beyond that that we saw.
Okay. Just on-- I appreciate the color on the Iowa Premium versus the three-year plan. As you had this quarter, very nice expense control. Just kind of curious, more from a high level perspective, with the buckets that you're getting more of the cost cuts efforts pulled to date, how much lead time or planning is there with some of the levers that you have to pull? Kind of said another way, how much quarter by quarter planning or impact or not? Is there any kind of way to think about that?
Maybe I'll start and then let Joel chime in. If you think about the way our business operates, we have regular operating expense, which is generally built into the is going to have a probably pretty consistent cadence depending on volume and our top line being a big driver, right? Because a lot of that's driven by cost per unit. In addition, we've talked about big strategic initiatives like finance transformation, like Canadian regionalization, like smart spending, that we have planned out, and we believe we have a good view as to when those impacts would be happening. We have things like our last quarter when we announced the corporate restructuring, that is more of a one-time event where we see that coming into the business. A long-winded way of saying is, I think generally speaking, our operating expense moves with our business performance, meaning our volume.
Certainly any headwinds or tailwinds we'd see in the business, fuel being a great example of a headwind we're feeling right now. Certainly, things like driver and warehouse turnover in the past and just the low unemployment rates driving higher cost of some of those roles in the company. Everything else is generally planned out, and we have visibility to that, except for these one-timers. Does that get at what you're asking?
Yeah. No, that was very helpful and did get at it. Thank you, Tom.
Okay.
Your next question comes from the line of John Ivankoe from JPMorgan. Your line is open.
Hi, thank you. I want to follow up on 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. I mean, the context of the question, and 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 are in general lower than chains. Are you actually seeing a pickup in closures on the independent side that's noteworthy even on a very market-specific basis?
Hey, John, good morning. Look, I wouldn't say anything that's unique that's happened there. As we all know, in this industry, you've got a lot of new business coming online all the time, and you also have folks that are closing. I wouldn't say that we have seen any dramatic shift in that area. As I mentioned, the different data sources have some mixed information, but all of them generally talk about positive spend dollars being up in that kind of 2.5%-3.5% range. Then you have traffic generally down with the exception of NPD, which is showing slight increase in traffic. I don't think there's anything unique or anything in this quarter that we've seen that is highly different than what we've seen in the past quarters.
Is there anything to note by category or by regional that you're beginning to see? Obviously, I think there's a lot of questions that are being asked to you of whether you think there's a slowdown, and I think the answer, at least as it stands today, is no. When you look at different categories or different regions, is there anything interesting that you're seeing in the marketplace with 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 that's any different.
Understood. Thank you.
Thank you.
Your next question comes from the line of Kelly Bania from BMO Capital. Your line is open.
Hi. 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? Then maybe can you tie in just the impact of the corporate restructuring on the expense performance this quarter?
Yeah, Kelly, I'll start. I think the answer to that is, obviously, we're continuing to do a lot of work there to streamline and make our operations more efficient. I'd say that there is some run rate consistency there. What I would also tell you is, we just have a lot of moving parts right now in some of our international business. What I would not necessarily tie it to, one of the things we've talked about in the past is this sizable transformation we're doing in France. I think the majority of that benefit really we'd start to see next year. I would not tie a lot of that necessarily to that big restructuring that we're doing in our French business.
I would say, generally speaking, I think it's fair to continue to see that as a relative run rate, realizing, again, we've just got a lot of moving parts over there in terms of the transformation we're doing. I guess my answer is generally yes but again, just realize things are going to move around quarter-to-quarter based on the amount of stuff we've got moving around in that business.
Okay. That's helpful. Maybe just in terms of the U.S. broad line 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. I think we continue to feel really good about our specialty company strategy. As we've talked for a few years, we know that our customers certainly value broad line, but they also have needs oftentimes that can be better met by some specialty companies, and in our case, meat, seafood, poultry on that side, and then the produce with FreshPoint. I think we continue to feel really good about overall what we bring to the market and the value proposition we have there. We've been working on ways of even helping our customers make that easier for them to procure products both from Sysco and from the Sysco specialty companies, and we're seeing benefits of that as well.
Creating the environment where it's easy for them to do business with both of those entities as they need to and as they feel like they want to, versus it feeling maybe like two or three different companies that they're doing business with, the idea that they can do business with one Sysco and get the value out of that. We continue to believe that's an important part of the market, and we continue to feel really good about the work we're doing there.
Thank you.
Yeah.
Your final question comes from the line of Bob Summers at Buckingham. Your line is open.
Yeah. Good morning, guys. I just wanted to dig a little deeper into the transportation. Dry van spot rates have been contracting all year. Can you maybe talk about how that flows through in your business, either by talking about the % of business that you do at the spot rate, maybe talk about how that spot rate influences contract rates, as you maybe threaten to move more to the spot market. Lastly, how that impacts what you have to pay your drivers.
Hey, Bob. Again, back to this conversation about transportation and cost, the piece you're really referring to is the inbound freight part for us, which does hit our gross margin. We called out in the prepared comments, we've talked a bit here this morning about that we are seeing some year-over-year improvement benefit there. It's not huge, it's not something that is a major driver for us. The market has come down, certainly from where it was a year ago, obviously, everybody benefits from that. We obviously try to minimize the spot market, because that's the one that gets the most out of whack the fastest, that's what happened a year ago. We continue to manage that side of our business, mostly with contracts. Yes, it certainly is, that whole market comes down, that affects both sides, the spot and contract side.
As it relates to our drivers, as we said, I think we've done a lot of work around both recruiting and retention and the way we're operating our business, to improve as much as we can our driver retention. We feel better about where we're at than we were a year ago, it continues to be a challenging part of the business, I think will be as long as the market's the way that it is, meaning unemployment's low, there's a lot of freight on the road. We feel much better where we are now than we were a year ago, that doesn't mean that we don't still have ongoing challenges associated with hiring and retention of drivers.
Okay, thanks.
Yeah.
That concludes today's conference call. You may now disconnect.