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Sysco Corporation (NYSE:SYY)
Q4 2018 Earnings Conference Call
August 13, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Sysco's fourth quarter fiscal 2018 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.

Neil Russell -- Vice President of Investor Relations and Communications and Treasurer

Thanks, Vergil. Good morning, everyone. Thank you for joining us and thank you for your interest in Sysco. With me in Houston today are Tom Bené, our President and Chief Executive Officer and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes but is not limited to risk factors contained in our annual report on Form 10-K for the year ended July 1st, 2017, subsequent SEC filings, and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com or via Sysco's IR app.

Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. 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 President and Chief Executive Officer, Tom Bené.

Tom Bené -- President and Chief Executive Officer

Thank you, Neil. And good morning, everyone. Earlier this morning, Sysco announced that we concluded fiscal year 2018 with a strong quarter that ultimately translated into a successful year. Fiscal 2018 was also the final year of our three-year plan, and I'm excited to share that we exceeded the various metrics that we initially outlined during our investor day back in September of 2015. Many of you will recall that when we initially announced this three-year plan, we had three targeted objectives we wanted to achieve. The first was to improve the customer experience of doing business with Sysco to enhance service levels, improve sales retention, and higher customer loyalty. The second was to enhance associate engagement to improve workplace safety and associate retention by providing attractive career growth opportunities for our associates.

The third was to achieve our financial goals of growing adjusted operating income by at least $400 million, which we raised twice since then, ultimately at the high end of a $600 to $650 million range while targeting an adjusted return on invested capital of 15%. All of these excluding the impact of the Brakes acquisition. Specifically, for our financial goals, we had three key levers that would help achieve those metrics: Grow gross profit through accelerated local case growth and gross margin expansion, leverage supply chain costs, and reduce administrative expense. I'm proud to report that our team was able to successfully execute on all of these objectives which has translated into steadily improving financial results over the past three years.

At the conclusion of the three-year plan, local case growth was 3%. Gross profit dollar growth outpaced operating expense growth creating operating leverage of two points. And we delivered $665 million to the incremental adjusted operating income, excluding Brakes and based on a comparison of fiscal 2018 to fiscal 2015. Additionally, we grew EPS faster than operating income, and we surpassed both our adjusted return on invested capital and working capital targets. We achieved these goals by staying focused on our customer-centric vision and driving consistent execution at the operating level. Our objective to improve the overall customer experience has been a core element to our success over the past few years and will continue to be a key focus for us as we move forward.

As we described at our investor day in December of last year, we continue to build on the momentum we've achieved against our strategic objectives, and we'll strive to accelerate our current growth guided by four strategic priorities: First, enriching the customer experience of doing business with Sysco. Second, delivering operational excellence in everything we do. Third, optimizing the business, what we like to call the Sysco way. And finally, activating the power of our people. The overall macroeconomic trends continue to be positive in the United States. And the underlying economic picture remains encouraging, including a strong employment market. This has resulted in a healthy consumer that is driving a positive trend in restaurant sales. We also see continued growth with local customers as they increase their rates through flexible menus, innovative concepts, and additional delivery options to reach consumers.

Looking at our results for the year, sales grew 6.1% to $58.7 billion, driven by strong growth with local customers, the addition of some new customers which helped accelerate our national customer growth, a few key acquisitions, and continued product cost inflation. We continue to be focused on M&A activity as a part of our strategy and also closed several acquisitions during the year including HFM in Hawaii, Doerle Food Service in Louisiana, Kent Frozen Foods in the UK, a small transaction in Sweden, as well as acquiring the remaining 50% interest in Mayca, our Costa Rican partner. For the year, local case growth for our US Broadline business was 3.6%. It was the strongest in the fourth quarter at 5%. Overall, gross profit grew 5% driven by a few key factors: First, the acceleration of local cases to improve processes and training of our marketing associates and continued growth in our digital platform. Second, the growth of Sysco brand which now comprises nearly 46% of US Broadline local cases.

Third, Cutting Edge Solutions, our product innovation platform which features our exclusive product offerings has now delivered one million cases of new, on-trend, innovative products to our customers. Fourth, the continued success in category management as we continue to introduce new categories to capture value. And finally, the effective ongoing management of product cost inflation using our suite of revenue management tools. These positive results were partially offset by continued challenges from inbound freight costs, driven by overall industry factors such as driver shortages and adjusting to electronic regulation of hours driven. From an expense perspective, adjusted operating expense for the year grew 4%, driven by ongoing strategic investments in the business and a few operational challenges that impacted the year.

Some of those investments included supply chain transformation work occurring in the UK, the investment in marketing associates in the US, and a continued investment in technology solutions that will translate into a more enriching experience for our customers. Overall, we delivered adjusted operating income growth of 8.4% to $2.5 billion. With the addition of tax benefits, EPS growth was meaningfully higher than the prior year as adjusted EPS grew 26.6% to $3.14. The operational improvement in our business is a direct result of the hard work and effort of our 67,000 plus associates. We executed our business strategy that is predicated on discipline, profitable, and sustainable growth. Transitioning now to our annual results by business segment beginning with US Food Service operations. Sales grew 5.4% for the year.

Gross profit grew 4.6%. Adjusted operating expenses grew 4.7%. And adjusted operating income grew 4.3%. Top-line results were strong as local case growth in our US Broadline business was 3.6%, including the acquisition of HGM and Doerle Food Service. Organic local case growth was 2.8% and has now grown for 17 consecutive quarters. Total case growth was 2.9% of which, 2.1% was organic. The solid case growth performance translated into healthy gross profit dollar growth of 4.6% driven by a combination of customer mix, product mix, and inflation. Additionally, the previously mentioned growth in Sysco brand also contributed positively to the gross profit dollar growth. Turning our attention to cost, our adjusted operating expense growth for the year was 4.7%, driven by rising fuel costs and increased supply chain costs in both the warehouse and transportation. These costs were largely due to a combination of a tight labor market, weather impacts throughout the year, and ramp-up cost for new business.

Additionally, we had ongoing investments in our selling organization to better penetrate underdeveloped markets. Moving on to international Food Service operations, sales grew 8.5%, gross profit grew 7.1%, adjusted operating expenses grew 9.7%, and adjusted operating income declined 7.7%. Top-line growth was strong for the year across all our international businesses. Our business in Mexico as a new national customer and Canada performed well as we implemented strategic investments initiatives from our US business which led to accelerated local case growth for the year. However, in the UK, we continue to experience acute product inflation in the mid- to high-single-digits. From a cost perspective, we continue to make investments across Europe. The supply chain transformation work in the UK to transition from a single temperature warehouse and fleet into a multitemperature network is progressing well. And we feel good about the progress that has been achieved.

We are also making good progress on the integration of Brake France and Davigel to create Sysco France and are excited about the new capabilities and the unique multitemperature service that will better adapt to our customers' growing needs. Additionally, the integration of Pallas Foods and Brakes in Ireland is nearly complete. We've achieved good cost synergy throughout the year. We're also making technology investments to improve the infrastructure and to enhance our suite of customer-facing tools. And finally, in Mexico, we absorbed the cost of adding a new large customer during the year. The overall decline in adjusted operating income is a direct result of the strategic investments we're making in the international segment along with the impact of foreign exchange currency translation. We continue to focus on executing against our long-term plans by investing in necessary capabilities across the international business and by leveraging our position as a platform for future growth.

And finally, SYGMA showed continued top-line growth during the year with sales up 6.1% driven by inflation along with piece growth of nearly 3%. However, the business continues to struggle with operating expenses related to increased transportation costs and a reduction in backlog revenue due to driver availability. I'd now like to briefly discuss an announcement that will be coming out later today. Today we are announcing our 2025 corporate social responsibility goals. These newly defined goals set a clear path for the future and demonstrate Sysco's continued commitment to care for people, supply products responsibly, and protect the planet. We believe it is our responsibility to operate in a manner that meets the needs of our customers today while producing positive lasting change.

We are leading our industry with our CSR initiatives. And by including specific long-term goals that align with our strategic business priorities, we're living our vision of becoming our customers' most valued and trusted business partner. In summary, we are excited about the results achieved in fiscal 2018 toward our three-year plan and are encouraged by the solid fundamentals across our business, specifically the top-line growth trajectory we're on while continuing to be able to invest in our future. Our success is a direct result of the dedication and hard work of our associates executing on our strategic priorities.

As a reminder, fiscal 2018 is an overlap year in that it was the final year of our initial three-year plan and the first year of our new three-year plan. We are pleased with the results for the year and remain confident in our ability to deliver the financial objectives associated with our new three-year plan that we described in our December investor day. With that, I'll now turn the call over to Joel Grade, our chief financial officer.

Joel Grade -- Executive Vice President and Chief Financial Officer

Thank you, Tom. Good morning, everyone. As Tom mentioned earlier, we are excited about our performance and achieving our initial three-year plan and pleased with the results for both the fourth quarter and the full year. This morning, I'll start with our quarterly results. Sales and gross profit growth were strong at 6.2% and 5.7% respectively as we saw positive impacts from overall and local case growth, continued Sysco brand growth, and a benefit from inflation and foreign exchange. Adjusted operating expense growth was 2.5% resulting in adjusted operating income growth of 15.7% and adjusted earnings per share of $0.94. In addition, we continue to generate meaningful free cash flow as we achieved $1.5 billion for fiscal year 2018. For the fourth quarter, we saw a foreign exchange benefit to sales of approximately 1%.

Sysco also experienced inflation in our US Broadline business of 1.1%, driven by a few categories including dairy, frozen potatoes and vegetables, and paper and disposables, partly offset by deflation in poultry. Within our international business, inflation was driven by a combination of both product costs increasing and currency translation in the UK. During the quarter, we had gross profit growth of 5.7% driven by overall and local volume growth and improved Sysco brand penetration. Adjusted operating expenses grew 2.5% for the quarter. The increase in expense was largely driven by supply chain costs in both warehouse and transportation which were mostly related to increased fuel costs and a tighter labor market and the previously announced investment in our selling organization in our US operations.

Additionally, we continue to make investments in transformation and integration in our international business. These costs are partly offset by a favorable comparison corporate expense versus the prior year that we previously mentioned. As a result, we saw a gap between gross profit dollar growth and adjusted operating expense growth of 320 basis points this quarter. And while we don't expect to see that trend to continue, we do expect our three-year plan gap to be approximately 150 basis points. As it relates to taxes, our net earnings for the fiscal year were impacted by lower tax rates from US tax reform where our US federal rates went from 35% to 28%. Other favorable impacts included additional credits and tax benefits from stock option exercises. Cash flow from operations was $2.2 billion for fiscal year 2018. Net CapEx for fiscal year 2018 was $666 million or about 1.1% of sales which was $3 million higher than last year.

Free cash flow for fiscal year 2018 was $1.5 billion which is $83.6 million lower compared to last year, primarily due to a pension plan contribution we discussed last quarter. As Tom mentioned earlier, we also achieved results that exceeded our original three-year plan targets excluding any impact of Brakes. This includes an adjusted return on invested capital excluding Brakes of 20.2%. And our working capital improvement was five days or one day better than the original target. Now, I'd like to close with some commentary on the outlook for fiscal 2019. As Tom mentioned, fiscal 2018 was the first year of our current three-year plan concluding in fiscal 2020. For this current plan, we continue to feel confidence in our ability to achieve our goal of $650 to $700 million of operating income improvement. The inflationary environment has abated throughout the year.

And while we can't predict the impact that macroeconomic factors will play in the cost of our products, we believe modest levels of inflation will likely continue for at least the next few quarters. Capital expenditures are expected to be approximately 1.2 to 1.3% of sales. And from a tax perspective, as we previously stated, our US federal tax rate will drop 21%. With the addition of state and local jurisdictions, we expect our overall effective tax rate to be approximately 25%, similar to the rate for this year due to some tax benefits that occurred in fiscal 2018 and we anticipate will not fully repeat in fiscal 2019. In summary, we've had a very strong performance over the past three years. And the fundamentals of our business remain solid. We are excited about the future as we kick off fiscal 2019. We expect to deliver continued strong top-line fundamentals and improved cost management building on the momentum from the prior three years.

Our strategic priorities of enriching the customer experience, delivering operational excellence, optimizing the business, and activating the power of our people will accelerate our current growth and position us well for future success. Operator, we're now ready for Q&A.

Questions and Answers:

Operator

As a reminder, if you would like to ask a question, press * followed by the No. 1 on your telephone keypad. Your first question comes from Edward Kelly from Wells Fargo. Please go ahead.

Edward Kelly -- Wells Fargo Securities -- Analyst

Hi. Good morning guys. Nice quarter. I wanted to start really with gross profit and gross profit per case. The per case result this quarter was a little bit weaker than really what we've seen in some time. Although, there was, it seems like, more MA benefit this quarter than what we've had. You have a harder comparison there. I was just wondering is there any real change in the underlying rate of profit per case growth? Or does this more relate to one-off issues? And I know freight plays a role within all this. So, if you could help out at all, that'd be great.

Joel Grade -- Executive Vice President and Chief Financial Officer

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

Edward Kelly -- Wells Fargo Securities -- Analyst

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

Tom Bené -- President and Chief Executive Officer

Yeah. Good morning. This is Tom. We've been talking about this for a few quarters now. The freight challenges out there are real. I think that every industry use moving freight dealing with them. And so, what I'd say is moving all the way back to our probably second quarter when we first started feeling the impacts of this, we struggled a little bit early on making sure we were getting our lanes filled, we were getting our service levels from our suppliers where we needed them. We started a very aggressive approach back then and continued on through our third and fourth quarter trying to really make sure we get the right relationships in place with carriers, we've got the right plans in place with our suppliers so that we don't have the type of service issues that one could expect or might expect in dealing with this situation. So, I think we've done a lot of work as a team to mitigate that as much as we can.

That doesn't mean we don't have some of the cost impacts because we gotta get the freight there. In some cases, we're still having to go to spot market. We're still having to pay higher rates than we were a year ago. But from a service level perspective, I don't think we're having nearly the challenges that maybe some others have talked about. What I'd say relates to our own drivers and more on the outbound side, we do have challenges filling driver roles in certain markets where the labor market's just very tight. We see regularly drivers being offered significant upfront incentives to join a company. We're having to do some of that same type of thing. So, it is very real that there's a tight market out there for drivers. And we're experiencing some of that just like everyone else is.

Edward Kelly -- Wells Fargo Securities -- Analyst

Great. Thanks, guys.

Tom Bené -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Chris Mandeville from Jefferies. Please go ahead.

Chris Mandeville -- Jefferies -- Analyst

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

Tom Bené -- President and Chief Executive Officer

Good morning, Chris. Yeah. So, regarding case growth, I'd say really, a continuation of a lot of things we've talked about. But certainly, e-commerce, as it does grow, we're not at about 50%. We have seen some improved penetration with customers who are buying on the e-commerce site. So, that's certainly helping. But I would say the additional MAs that we added in the year. We talked a bit about that as well as the training programs we now have and the way we can get our MAs up to a rate of productivity a little faster maybe than we've historically been able to would be maybe another driver.

We talked a lot about our focus in this area. And I think it really is about 1) applying the resources in the places where the biggest opportunities exist. That's some work we've been doing now for a while. And then additionally, making sure they've got access to the right resources, whether that's specialist to help them grow the parts of their business where maybe we're underdeveloped or even accelerating our business review process we've talked to you all a fair amount about. So, it really is a lot of the same fundamental things. But I think as all those things start to come together, we see that acceleration there. I also mentioned, and I think this is true, that that independent customer continues to be well-positioned. And we're seeing that work out for us too.

Chris Mandeville -- Jefferies -- Analyst

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

Joel Grade -- Executive Vice President and Chief Financial Officer

Sure. So, I think one of the things that we've spent a fair bit of time talking about is the idea that, to some extent, FY18 was certainly a strong finish to the last plan. But it was also an investment year. We talked about the fact that if you rewound about a year and a half ago, given the trajectory we're moving on in the last three-year plan, we got a lot of questions on, hey, are we actually extrapolating that out to even a stronger end of the three-year plan than we even ended up in. And part of the reason we continued to emphasize the high end of the range that we talked about was just the fact that we continued to -- we do have some investments in our business that we're planning to make that we anticipate will continue to benefit here us over the next three-year plan and then certainly beyond.

So, I would just look at '18 somewhat -- and again, it was something that we had had a view of and then talked about of some investments that we've made that we called out in our sales force in our international business in terms of some of the transformation work from technology, from the integration, the merger, from the supply chain in the UK. And so, I think I would look at it that way. And as we move forward, obviously, the main impact this year that I would say we anticipate accelerating over the course of the three-year plan is really set around this gap between gross profit and operating expenses. This year came in at a gap of about 1%. And again, much of that was related to some of the investment that we talked about. And so, I would anticipate as we move forward, as we called out earlier in the call today, that 1.5% gap as we go through that three-year plan. And certainly, that means from an expense perspective probably some improvement there as we move into that three-year plan.

Tom Bené -- President and Chief Executive Officer

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

Chris Mandeville -- Jefferies -- Analyst

Okay. Thank you very much and best of luck.

Tom Bené -- President and Chief Executive Officer

Thanks.

Joel Grade -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Your next question comes from the line of Judah Frommer from Credit Suisse. Please go ahead.

Judah Frommer -- Credit Suisse -- Analyst

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

Tom Bené -- President and Chief Executive Officer

So, Judah, I think -- let me just start, and I'll let Joel jump in. When you say flattish gross profit, we are on our gross profit or actually above our gross profit target for the three-year plan. So, I think we feel good about our ability to deliver the gross profit growth. And obviously, if we can get some help from what's happening with products and inflation, we feel comfortable we can get there. I think you're raising the point that Joel was just referring to which is the cost side. We need to continue to focus on the cost to make sure that we can, in fact, keep that 1.5 point gap that we have alluded to over the three-year plan. And we've got some work to do there, but I think we feel good about our ability to get there.

Joel Grade -- Executive Vice President and Chief Financial Officer

Yeah. And again, Judah, the question I think you may have asked was on the gross profit per case. And that's, again, as I mentioned earlier, I don't know that any -- there's a bit of a flattening out at this particular quarter. And I'm not overly concerned about that on a long-term basis. And as Tom said earlier, we still certainly feel very good about our outlook for our three-year plan moving forward.

Judah Frommer -- Credit Suisse -- Analyst

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

Tom Bené -- President and Chief Executive Officer

No. I'd say look, you guys know -- we talk about this pretty often. It's very competitive out there. Remains very competitive. I wouldn't say that anything that they talked about was necessarily a similar impact for us. And I'm not necessarily sure we, in any way, benefited by the challenges they were facing. So, I think it's pretty much we see the same competitive environment we've always operated in.

Judah Frommer -- Credit Suisse -- Analyst

Great. Thanks.

Operator

Your next question comes from the line of Karen Short from Barclays. Please go ahead.

Karen Short -- Barclays -- Analyst

Hi. Thanks. Just a couple questions. And in terms of -- I'm gonna ask the case growth a little bit differently or the gross profit growth question a little differently. So, your case growth was up 5.3%, and gross profit was up 5.2% which is definitely the narrowest gap we've seen in a long time, looking back eight quarters kind of thing. So, is it really just a function of freight? Or is there anything else you can point to?

Tom Bené -- President and Chief Executive Officer

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

Operator?

Operator

Pardon me. Your next question comes from the line of Bill Kirk from RBC. Please go ahead.

Bill Kirk -- RBC Capital Markets -- Analyst

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

Joel Grade -- Executive Vice President and Chief Financial Officer

Sure. This is Joel. So, I think a couple points on that. No. 1, as we've headed into this quarter, one of the things that we've given a heads up to people on is the fact that we anticipated this quarter and this gap being very strong as it relates to last year due to some things that were in last year's expenses and, in particular, on the corporate side that were not in this year's. And we also, I think, made a point today of making sure to point out that look, obviously a 320 basis point gap is extremely strong. That's not something I would look at as a long-term trend but really settling in around over time. Again, this long-term view of one and a half points between GP and OpEx.

This is not a matter of somehow doing something that is a one-time expense cut that hit that. It's simply something we anticipated coming. We've continued to improve, again, our management and our expenses. We had a strong year in general in our corporate expenses. And so, that was something that over the course of the year, certainly helped us manage the gap that we had and, again, made some of those savings and investing them in our operations, as we've talked about throughout the year. But in no way, shape, or form should you interpret the strength of what happened in this fourth quarter as somehow anything that was a management of resources that's gonna impact us negatively moving forward.

Bill Kirk -- RBC Capital Markets -- Analyst

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

Joel Grade -- Executive Vice President and Chief Financial Officer

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

Bill Kirk -- RBC Capital Markets -- Analyst

Got it. Thank you.

Tom Bené -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Vincent Sinisi from Morgan Stanley. Please go ahead.

Vincent Sinisi -- Morgan Stanley -- Analyst

Hey. Good morning, guys. Thanks for taking my questions and congrats on the nice quarter here. Wanted to just go back to the sales force investments. Could you just give us an update? I know you said part of the solid case growth this quarter was due to that, but where are we in terms of the level of investment? And then just any color you can give us in terms of productivity? What maybe the newer class of folks versus years past are looking like. And I know you said e-commerce around 50%. I'm guessing that's the local restaurant cases. I feel like not too long ago, it was 40. So, where are some of the better productivity tasks going toward? That'd be helpful.

Tom Bené -- President and Chief Executive Officer

Sure. Good morning, Vinny.

Vincent Sinisi -- Morgan Stanley -- Analyst

Good morning.

Tom Bené -- President and Chief Executive Officer

Look, I'd say you actually hit on a few of the things yourself which is e-commerce has continued to grow. As you said, we're 50% now which has been an ongoing move. As we've talked a lot about how we think about e-commerce, it's really been this customer choice platform. And so, the good news is we're seeing more and more customers wanting to migrate to e-commerce. But the other big thing with our salesforce -- and so, let me go back to the MAs. We talked through over the last couple of quarters we had marketing associates. And we're at that point now -- I wouldn't say we're actually adding more, but we still have some of the expenses associated with those new marketing associates in our numbers. When I think about getting those market associates more productive, what we're really talking about is how do we get them into a territory where they're actually delivering results.

And I think the training programs we now have, the way we bring them on board, and the type of more focused effort we got around them is really helping us get them into a territory, starting to produce, if you will, on a much quicker basis. We used to talk about that would take 18 months to two years to get someone up to speed. And we've cut that in about half now. We believe that that is certainly something that we're gonna continue to get better at. Part of what helps drive that is the support resources we give them as we try to move them from being order takers to more consultative sellers. And I think we've made really good progress there as well. So, our people's capability is growing. Therefore, how they're investing their time is getting better. And that's translating into not only larger territories but more importantly, more effective and productive selling resources.

Vincent Sinisi -- Morgan Stanley -- Analyst

Okay. Super helpful. Thank you. And if I could just fly one other one in here. Just turning to international for a second, granted, knew the currency translations and inflation. All that was continuing to be a part. Just more on what's more under your guys' control with the temperature zones and more of the fundamental changes. Where would you say we are with some of those investments from an inning perspective? Thanks a lot.

Tom Bené -- President and Chief Executive Officer

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

Vincent Sinisi -- Morgan Stanley -- Analyst

Very helpful. Thanks very much. Good luck, guys.

Operator

Your next question comes from the line of Karen Short from Barclays. Please go ahead.

Karen Short -- Barclays -- Analyst

Hi. Thanks. My follow-up quick question would be on international. When we look at, obviously, the improvement throughout the year, as we look to '19, how should we think about the run rates? Should we think about it as more related to the back half of this year? Or do you think you'll actually start getting to see a little bit more profitability?

Joel Grade -- Executive Vice President and Chief Financial Officer

Yeah. And so, again, as I think you remember, some of the calendar challenges that we outlined in the beginning that certainly actually had certainly a more positive second half than the first half of the year. But I would anticipate and think about that business more along the lines of what you saw in the second half. The first half was clearly impacted by a fairly negative calendar impact. And I think there's certainly an expectation. And we continue to grow profits there. And I think that's a somewhat reasonable run rate to think about within the second half of the year.

Karen Short -- Barclays -- Analyst

Okay. And then just a follow-up on inflation. I know you talked about modest inflation. So, is there a chance though, do you think, that we end up going back into deflation I guess in your fiscal '19? And then also, thoughts on inflation both from an OpEx perspective and just product cost in international.

Joel Grade -- Executive Vice President and Chief Financial Officer

So, in the US Broadline, for your first question, again, our current view is that we anticipate a modest level of inflation. So, at this point, we're not seeing what you're suggesting in terms of deflation. But I would say a modest level of inflation. Primarily in the UK, again, depending on the variability of the sterling, we certainly still anticipate some challenges there given the fact that, I think as we've talked about, probably half of their product is procured from outside of the UK. Actually, they're working hard to do things to manage that more effectively. But that still continues to be an issue. And we anticipate that carrying forward a bit.

Karen Short -- Barclays -- Analyst

Okay. thanks.

Tom Bené -- President and Chief Executive Officer

Hey, Karen. Just on that inflation in the US, it has gotten less throughout the years. So, in the beginning of the year, we talked it was two to three points. It has slowed to one to one and a half. So, it is slowing. We don't necessarily believe that it's gonna go deflationary. But you're right in assuming that it's mitigating some.

Joel Grade -- Executive Vice President and Chief Financial Officer

Well, and I think -- just as one other comment on that, the category, as Tom mentioned earlier in his comments, it does matter in terms of the categories. We have seen some deflation in certainly some of the play categories. Poultry are less inflation, I'd say. And meat's been another one of those that, as of late, we've seen some of that. So, I think there's -- that gets back to a little bit of the GP per case as well. But there's been some level of that that we've experienced.

Karen Short -- Barclays -- Analyst

Okay. that's helpful. Thanks.

Operator

Your next question comes from the line of Andrew Wolf from Loop Capital Market. Please go ahead.

Andrew Wolf -- Loop Capital Markets -- Analyst

Good morning. Wanted to focus on the US Food Service and the big step up in the organic case growth for the local customers. Could you help allocate that? I know you're hiring sales folks. So, how would you allocate that between existing customers doing a little better -- because it looked like the restaurant sector picked up in the second quarter -- count penetration and maybe your sales folks bringing in some new customers?

Tom Bené -- President and Chief Executive Officer

Andrew, I think it's a combination of all those things which is good news. We have seen our penetration which is that same-store turn going up which is good. That's some of the hardest growth to get. But we have seen penetration improve which does speak I think positively around some of the trends we're seeing in the industry. And then, obviously, we continue to focus on new customer growth. And that's always an opportunity and certainly something that's the lifeblood of this business. So, it's really a combination of both.

Andrew Wolf -- Loop Capital Markets -- Analyst

And I don't know if I missed this, but could you give us a quantitative -- what is your growth rate in the salesforce?

Tom Bené -- President and Chief Executive Officer

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

Andrew Wolf -- Loop Capital Markets -- Analyst

And just one follow-up. Could you give us a sense of the cadence of the acceleration in the organic days growth and sustainability? How's it going toward date?

Joel Grade -- Executive Vice President and Chief Financial Officer

Yeah. So, I'll take that. I think we've been off to a decent start here. And the first part of the CSR on regular disposal is some type of a one-time shot at the end of the year. We continue to see some good progress here in the first part of this year.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. So, the cadence was moderately up, and it's maintained or something along those lines?

Joel Grade -- Executive Vice President and Chief Financial Officer

Correct.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. Appreciate it. Thank you.

Operator

Your next question comes from the line of Marisa Sullivan from Bank of America. Please go ahead.

Marisa Sullivan -- Bank of America Merrill Lynch -- Analyst

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

Tom Bené -- President and Chief Executive Officer

Sure. Good morning, Marisa. As you think about the rate, look, I think we do know we're gonna start lapping some of that here in our second quarter. I think that based on that, we think about that maybe flat. Maybe up slightly. Again, hard to predict what's gonna continue to happen in the space. And then as you think about customer mix, that obviously will continue to play a role until we cycle some of that new national customer business. But we continue to look at, obviously, category management as a way to offset some of that as well as our Sysco brand which we continue to be very focused on.

So, if you think about the combination of inflation, the work we're doing around category management in our Sysco brand, our revenue management tools we talked about and to help us manage through that inflation and even deflation if it flips on us, we feel pretty good about our gross margin focus. We're not looking to see a step-up necessarily in gross margin on a percentage basis. But we aren't necessarily looking to see it go the other way either. We're just looking to manage it as best as possible in the new year.

Marisa Sullivan -- Bank of America Merrill Lynch -- Analyst

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

Tom Bené -- President and Chief Executive Officer

I think we see it actually on both. And there probably may even be more opportunity on the contract side. I think there's work we still have to do there to create the environment where that's easy for those customers to participate more in Sysco brand. But we still see an opportunity on the local customers as well. It's really a balance of making sure we're bringing out the right type of products. You heard me talk about the cutting edge solutions. And we're now at a million cases. The majority of those items are Sysco brand items. And we can continue to bring innovation solution type products to the marketplace. We are seeing good traction there. And we think that creates even more runway for us on the Sysco brand.

Joel Grade -- Executive Vice President and Chief Financial Officer

Yeah. And Marisa, again, just a reminder. We don't set a target, per se, in terms of -- but we certainly do anticipate some continued runway there. And again, it's all driven by our ability to continue to drive value-added products into the marketplace. That creates a pull on our demand for those products and ultimately grows our percentages.

Marisa Sullivan -- Bank of America Merrill Lynch -- Analyst

Thanks so much.

Operator

Your next question comes from the line of Karen Holthouse from Goldman Sachs. Please go ahead.

Karen Holthouse -- Goldman Sachs -- Analyst

Hi. Thanks for taking the question. Couple of follow-ups to things that you've talked about already. First, on the international business, should we think of next year as a year where total investment dollars could still be going up or still high but maybe a step down from this year?

Joel Grade -- Executive Vice President and Chief Financial Officer

Karen, it's Joel. I would think about that as us still having some level of increase next year.

Karen Holthouse -- Goldman Sachs -- Analyst

Great. And then just maybe remind us as we're looking into the fiscal first quarter any sort of things we should be keeping in mind in terms of laps related to hurricane disruptions last year either on the case growth or the cost side.

Joel Grade -- Executive Vice President and Chief Financial Officer

I don't know that I'd overemphasize that. There may be a little bit of it, but the reality of it is we managed our way through that pretty well. Again, the last question Marisa had on the freight, there's probably gonna be a little bit of overlap. And we saw some of that big impact in the second quarter. But in general, we're not anticipating anything of real significance there in terms of the overlap.

Karen Holthouse -- Goldman Sachs -- Analyst

All right. Thank you.

Operator

Your next question comes from the line of Kelly Bania from BMO Capital. Please go ahead.

Kelly Bania -- BMO Capital Markets -- Analyst

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

Joel Grade -- Executive Vice President and Chief Financial Officer

Well, I guess I'll start. And I think the main way I'd think about that from a freight perspective -- obviously, on a three-year plan. And there's a lot of puts and takes on a lot of these numbers. We certainly have committed to a level of growth in gross profit and OpEx on a relative basis and certainly feel good about the fact that we, again, feel strongly about achieving those numbers. In other words, some of the takes that we may have on fuel in terms of the freight gross profit area, we certainly anticipate strong results in growing our local cases and our brand, our category management, our revenue management. There's certainly all these things that we've factored into this whole thing realizing not everything goes exactly how you think it's going to all the time. But feeling very good about that number. On the fuel side, again, from a magnitude perspective, there's a couple cents per case in fuel that have been impacting us here.

But certainly, as we've talked about, we've done a lot of work around some derivative hedges to make sure that we're giving ourselves some consistency, some stability around those numbers. And it's on a rolling basis a year ahead. And so, I think that's certainly a good -- at least two-thirds of our fuel purchases are covered by some of that. And so, there's certainly some level of consistency we achieved through that. So, I guess what I would say to you is a lot of our role in running this company is there's a lot of puts and takes that go into some of this stuff. And we certainly believe there's enough levers to pull in different places that neither of those two things are of any dramatic impact to us as we look at our three-year plan but challenges nonetheless.

Tom Bené -- President and Chief Executive Officer

Hey, Kelly. The only thing I'd add on the operating expense side is with that fuel pressure that you all talked about and this -- our side, now -- the delivery driver retention and hiring along with just some challenges we're starting to see in that same way in the warehouse, we just got to be really good at driving productivity in our supply chain. And so, those are real headwinds that we'll be dealing with. And what we're very focused on is how do we cover those through productivity improvements, whether that's in our cases that we deliver per truck and per route and all the metrics that we really focus on to improve the overall productivity of our operations. So, to Joel's point, we have a lot of that that we try to build in. We've got a lot of work to do. And we probably have more headwinds than we've had in a few years, mostly driven by that tight labor market and some of the recent fuel increases.

Kelly Bania -- BMO Capital Markets -- Analyst

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

Joel Grade -- Executive Vice President and Chief Financial Officer

I think it's roughly that. I think it's not the -- if you back out all the FX impacts and then the adjusted basis, our whole international operation was up a little bit. And so, I think Brakes was probably off a bit. I'd call it more down slightly than flat.

Kelly Bania -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of John Heinbockel from Guggenheim. Please go ahead.

John Heinbockel -- Guggenheim Securities -- Analyst

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

Tom Bené -- President and Chief Executive Officer

Hey, John. Good morning.

John Heinbockel -- Guggenheim Securities -- Analyst

Hey.

Tom Bené -- President and Chief Executive Officer

Look, I think the approach we now have, I would tell you that there's opportunities in many markets. And some markets bigger than others where maybe our market position's a little stronger. But many markets have those opportunities. And as far as the type of individual we're hiring, I'd say it's a combination. We certainly are still finding folks who are looking to join Sysco who've got experience either in the industry on our side of the industry or even on the operator's side of the industry. And then we also, with our new program, have brought in some folks more early in their career. And we now have a program and a development training program, an onboarding program that allows us to do that. So, it's really a balance of -- we're looking for the best people in general who we feel like would be successful working for Sysco.

John Heinbockel -- Guggenheim Securities -- Analyst

Is the greatest impact of this hiring cycle, say, the last -- I don't know -- six, nine, 12 months, is that still out of this? Or we're at that run rate now?

Tom Bené -- President and Chief Executive Officer

If you're talking about from a total number, the majority of that in this last year, or the year that we're in that we're talking about now -- so, there's a little bit of overhang as we go into '19. We continue to hire, obviously. We turn a bit of the salesforce every year. So, we're always in the market hiring. And we're always gonna look at putting those people where the biggest opportunities exist. And so, you should think about it more as we're gonna continue to use the tools we have now to deploy our selling organization in the right places, as we talked earlier, hopefully continuing to drive more productivity because of things like e-commerce and focusing them more on consultative selling versus order taking. But generally speaking, I wouldn't think about a further ramp-up of more MAs in fiscal year '19.

John Heinbockel -- Guggenheim Securities -- Analyst

All right. And then just lastly, the outbound driver shortage, do you think that that -- has that had any adverse impact on top-line over the past whatever, six months, year? Or is it really more throwing more cost and more dollars at the situation? And then what can you do -- you think about giving drivers an ability to do more. Is there any way to restructure how you load trucks, how you lay out the processes so the existing drivers can actually do more out on the road?

Tom Bené -- President and Chief Executive Officer

John, that's a really good question and important point. So, thanks for bringing that up. If you think about one of the things we've talked about recently is we have got a initiative out there. We talked about small vehicle initiative. And part of the reason for that is there are really a couple drivers of it, not the least which is the fact that it enables us to get around with smaller drops to customers to increase and improve our service level. But one of the things we're also learning is that because those trucks don't require a certain class driver, the pool of potential candidates to fill those routes is larger. And that's something we're gonna be accelerating in fiscal year '19 because we've gotten the learnings now and seen some of the benefits. So, that's certainly one way that we're gonna try to deal with this ongoing challenge.

And then additionally, you talked about -- look, anything we can do to move more effort into the warehouse and make it easier for that delivery driver to do his job not only creates satisfaction for them but also helps us deliver and meet the service requirements of our customers. Ultimately, as you articulated, I think it had probably maybe a small impact in certain markets when we can't get the drivers that we need from a top-line perspective. But more importantly, I think it's affecting our cost. And it's why we've gotta continue to look for new and different ways to manage that.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay. Thank you.

Tom Bené -- President and Chief Executive Officer

You bet.

Operator

And our next question comes from the line of Ajay Jain from Pivotal. Please go ahead.

Ajay Jain -- Pivotal -- Analyst

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

Tom Bené -- President and Chief Executive Officer

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

Ajay Jain -- Pivotal -- Analyst

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

Joel Grade -- Executive Vice President and Chief Financial Officer

Yeah, AJ. I'll take that. It's Joel. So, obviously, part of that is some seasonality. Our third quarter typically is a smaller quarter. So, it's just purely a -- compare Q3 and Q4. Again, I wouldn't expect that to actually be similar. And as we talked about heading into this quarter -- and yes, you're correct. There's no impact whatsoever of Brakes with that number. We had a strong quarter. We anticipated some year-over-year impact on some corporate expenses that we had in the prior year versus this year. But in general, we had a strong quarter and certainly finished the year and the three-year plan up in a strong way.

Ajay Jain -- Pivotal -- Analyst

Okay. And just finally, I think you had some kind of calendar shift in the reporting for Brakes. So, Joel, I think you mentioned that Brakes didn't play a role in the fourth quarter performance. But I thought that there was some kind of change to conform to your fiscal year indicating June from December at Brakes. So, can you quantify if there was any benefit as a result of vendor allowances in the latest quarter for Brakes in terms of the year-over-year incremental impact if there was any?

Joel Grade -- Executive Vice President and Chief Financial Officer

Sure. So, we don't quantify [inaudible]. What I can say to you is you're correct. We did talk about a calendar shift that impacted, I'd say, negatively the first half of the year and more positively the second half of the year for Brakes. However, that had zero impact at all on our three-year plan. And the vendor allowances you're referring to and any sort would actually be -- anything would be in their business. And that would all be within Brakes. And so, there's no impact at all in any of the numbers that we had as far as our three-year plan. It was a very pure number. And we exceeded it. Or what we exceeded called out earlier. We came out ahead. Feel very good about it.

Ajay Jain -- Pivotal -- Analyst

Great. Thank you very much.

Operator

Your next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe -- JPMorgan Securities -- Analyst

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

Tom Bené -- President and Chief Executive Officer

Hey, John. Thanks for the question. So, I'd say look, we've been in pilot mode for a while. And we've looked at both what I would call metro or urban markets as well as more standard operating companies. And we have learnings from each of those. We will continue to add these in the market. We feel like the results have been positive. There's no one set situation. These are not recovery type vehicles meaning if we have something that's missed or a product comes in late then we get it out to a customer. This is actually part of our everyday delivery and routing. And so, we're seeing lots of different benefits in different markets for different reasons. But a little bit of all the things you talked about are certainly options for us and something we'll continue to learn about as we expand it.

John Ivankoe -- JPMorgan Securities -- Analyst

And when you look at the total addressable market, how much do you think that the total addressable market for Sysco gross just because you can -- it's a different kind of customer. It's a different amount of case volume requirement. Maybe in some cases, actually pay for delivery. How big of an idea is this if you're ready to talk about that?

Tom Bené -- President and Chief Executive Officer

Well, first of all, it's still very early as we're going through this learning. But I don't necessarily think it opens up a new market for us. I think it's just being more efficient with what we do today and whether it's the size of the drop and we have a smaller vehicle than a larger one making that drop or allows us to get into some places that are a little harder to deliver to. But I don't think this necessarily opens some new market for us.

John Ivankoe -- JPMorgan Securities -- Analyst

Understood. Thank you.

Tom Bené -- President and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. This concludes today's call. Thank you for your participation.


Duration: 65 minutes

Call participants:

Neil Russell -- Vice President of Investor Relations and Communications and Treasurer

Tom Bené -- President and Chief Executive Officer

Joel Grade -- Executive Vice President and Chief Financial Officer

Edward Kelly -- Wells Fargo Securities -- Analyst

Chris Mandeville -- Jefferies -- Analyst

Judah Frommer -- Credit Suisse -- Analyst

Karen Short -- Barclays -- Analyst

Bill Kirk -- RBC Capital Markets -- Analyst

Vincent Sinisi -- Morgan Stanley -- Analyst

Andrew Wolf -- Loop Capital Markets -- Analyst

Marisa Sullivan -- Bank of America Merrill Lynch -- Analyst

Karen Holthouse -- Goldman Sachs -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Ajay Jain -- Pivotal -- Analyst

John Ivankoe -- JPMorgan Securities -- Analyst

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