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Sysco Corp  (NYSE:SYY)
Q1 2019 Earnings Conference Call
Nov. 05, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Sysco's First Quarter Fiscal 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 and Communications. Please go ahead.

Neil Russell -- Vice President of Investor Relations and Communications

Thanks, Christina. Good morning, everyone and welcome to Sysco's first quarter fiscal 2019 earnings call. Joining me in Houston today are Tom Bene, our President and Chief Executive Officer; and Joel Grade, our Chief Financial Officer.

Before we begin, please note that statements made during this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings. This includes but is not limited to risk factors contained in our Annual Report on Form 10-K for the year ended June 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 President and Chief Executive Officer, Tom Bene.

Thomas L. Bene -- President and Chief Executive Officer

Good morning, everyone and thank you as always for joining us. This morning, I'll provide an overview of Sysco's first quarter results, discuss the macro environment that we are currently operating in and walk through our operating performance including key drivers impacting our performance across each of our business segments. I will then turn the call over to Joel Grade, our Chief Financial Officer, who will discuss our financial results in more detail.

Sysco's overall financial results announced this morning reflect improved year-over-year operating performance, driven by a variety of initiatives across each of our four strategic priorities. Due to some temporary headwinds, including decreased inflation across some categories and the impact of Hurricane Florence that hit the Southeast late in the quarter as well as some additional and more persistent operating expense pressures, we had mixed business results across the business.

From a top line perspective, we generated sales of $15.2 billion, a 3.9% increase compared to the same period last year driven by very strong US Broadline case growth of 5.7% but offset by slower growth in our international businesses. Additionally, we saw our gross profit increase by 3.9%. Adjusted operating expense growth of 3.6%, adjusted operating income increased 5.1% and adjusted EPS increased $0.17 to $0.91.Overall, our fundamentals for the quarter were solid and as an organization, we remain focused on working closely with our suppliers and customers to deliver disciplined profitable growth to enable the achievement of our long-term objectives.

Looking at broader economic and industry trends in the US, overall consumer confidence remains high, which has driven healthy consumer spending.During the quarter, according to Black Box Intelligence, the restaurant industry saw improved performance particularly in same-store sales growth despite lower same-store traffic. In addition, other data points reflect positive implications for longer-term consumer demand such as faster than anticipated growth in US GDP of 3.5% and the strength in the labor markets all factors that historically have been positive signs for the food service industry. Economic outlet in our international geographies remains somewhat mixed. Canada's economy is performing well and food service sales are projected to continue growing. In the UK, GDP and household consumption are both forecasted to grow over the next year. But consumer sentiment remains negative in the market with further closures of restaurants and concerns about the food supply chain being driven by continued Brexit negotiations.The remainder of the European market continues to experience healthy food service growth and positive economic conditions due to improving consumer confidence. As it relates to the current operating environment at Sysco and some of the impacts affecting our business, we are seeing cost challenges specifically driven by the tightening labor market in the US and a slowdown in growth in some of our international businesses which I will address in the various segment results.

Given some of these ongoing challenges, we are accelerating our focus on managing our overall costs and have in place multiple initiatives across the business that will drive cost improvement and enhance customer service over the next several quarters. A few of these initiatives include the Finance Transformation Roadmap which we originally discussed at our Investor Day in December. This initiative increased -- increases centralization and standardization of our end-to-end global finance processes and workflow and utilizes digital automation on a more modern finance platform to improve efficiency.This also allows for increased globalization of certain roles, helping to lower our administrative costs. Job changes have recently begun and we expect to see financial benefit from this initiative to ramp up as planned over the next few quarters. Smart Spending, which is focused on reducing our overall G&A spend by taking a detailed and accelerated look at indirect spend categories to drive productivity and savings. This effort is providing unprecedented visibility, ownership and performance management in all areas of our business. And third, the Canadian Regionalization, which is focused on streamlining our back office administrative support for our Canadian operations, while maintaining an acute focus on our customers. This effort has already commenced and will contribute to increased cost savings as we move forward.

I would like to transition now to our first quarter results by business segment. Beginning with US foodservice operations. We are pleased with our top line results and local case growth but as mentioned, we continue to see significant cost challenges.The results are as follows. Sales for the first quarter were $10.4 billion, an increase of 5.6%.Gross profit grew 5.2%, operating expenses grew 5.8% and operating income increased 4.3%. As previously mentioned, local case volume was strong within US Broadline operations growing 5.2% and has now grown for 18 consecutive quarters. Total case volume within US Broadline operations grew 5.7%, reflecting a mix of both local and national customer growth. As it relates to volume, going forward, we expect to see some softening in the year-over-year growth numbers due to the annualization of both the HFM and Doerle acquisitions, the annualization of two large national customers added in the prior year and the impact of Hurricane Michael. Gross profit grew by 5.2% despite moderating inflation as we continue to see growth in Sysco brand which is up to 47.2% of local cases.

We also continue to see accelerating growth with local emerging concepts also known as micro-chains as these unique locations continue to resonate with today's consumers. In fact, the larger portion of our local growth is currently coming from this type of customer. From an expense perspective, operating expense for the quarter grew 5.8%, driven by supply chain cost in both the warehouse, and transportation, including significant overtime expense and cost associated with hiring due to the tight labor market. Additionally, rising fuel prices also contributed to our higher operating expenses for the quarter. We are addressing these challenges by working on the initiatives I mentioned earlier and by continuing to drive productivity, putting tighter controls in place on how we manage costs and working with our teams to improve our hiring and training practices to better retain talent in our supply chain operations.

Moving on to International Foodservice Operations, we had mixed results for the quarter. Sales increased 0.6%, gross profit grew 1%, adjusted operating expenses were flat and adjusted operating income increased 0.2%.Top line results were softer than expected in Canada. After a good second half of fiscal 2018, first quarter sales in Canada lost momentum as year-over-year growth began to moderate. In Europe, performance for the quarter met our expectations and we have a combination of activities impacting our overall performance that includes the rationalization of some customers in the UK, as we restructure our operations. Along with saturation of restaurants in the market partially driven by the uncertainty surrounding Brexit. In France, we have made significant progress toward the combining of Brakes France and Davigel which will enable us to ultimately leverage the size and scale of these businesses, to deliver accelerated performance as we create Sysco France. In our Latin American businesses, we saw solid performance, particularly in our Costa Rica operations, which were partially offset by a challenging operating environment in Mexico.

From a cost perspective, Canada is experiencing similar cost challenges to our US business in both warehouse and transportation. Additionally, our strategic transformation efforts in Europe continue with the integration of Sysco France progressing well along with the final phase of the cost synergies occurring in Ireland as we combine Brakes and Pallas foods there. Finally, our ongoing investment in multi-temperature distribution in the UK is moving forward and will eventually enable us to improve our overall cost structure and customer experience as we reconfigure the supply chain network across the country. Moving onto SYGMA, the underlying macro cost challenges with both the transportation and warehouse areas in the supply chain are also impacting this segment of our business. We continue to take a disciplined approach to growth with our customers and as we have transitioned some business, sales modestly decreased during the first quarter. We continue to look for opportunities to improve our value proposition in this important chain restaurant segment, while also looking for synergistic opportunities for growth.

Lastly, in our other business segment, guest supply also experienced cost challenges due to a combination of tariffs, which began to put pressure on certain product categories in the business along with increased cost of shipping products to our customers. Overall, we continue to see top line growth in the hospitality segment and are working on a variety of activities and initiatives to mitigate some of the increased operating expense associated with this business.

In summary, despite some of the challenges we are experiencing related to our operating environment, we delivered improved year-over-year results in our largest segment of the business. Our overall fundamental, those are solid and we remain confident in our ability to achieve our three-year plan financial objectives. Furthermore, we remain focused on delivering against our strategic priorities, which we believe will serve as our roadmap for additional growth and long-term value creation. Now, I'll turn the call over to Joel Grade, our Chief Financial Officer.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Thank you, Tom. Good morning, everyone. I'd like to provide you with additional financial details surrounding our performance for the quarter. As Tom noted, for the first quarter for total Sysco, sales were $15.2 billion, an increase of 3.9% compared to the same period last year, changes in foreign exchange rates decreased sales by 0.4%. The profit in the first quarter increased 3.9%, and gross margin increased 2 basis points, in part due to a year-over-year decline in inflation, primarily driven by deflation in the meat, poultry and produce categories. Adjusted operating expenses for total Sysco grew 3.6% for the quarter. The increase in expense as previously discussed was largely driven by supply chain costs in both warehouse and transportation, and increased fuel costs as well as increased bad debt expense in our US operations related to larger recoveries in the prior year and a couple large local customers going out of business.

Additionally, we continue to make investments in transformation and integration in our international business. Regarding the gap between gross profit dollar growth and adjusted operating expense growth, we were disappointed in that performance for the first quarter. The compression in the gap during the quarter can be attributed to continued increased costs in our US and Canadian supply chain operations, customer mix and Hurricane Florence. But as Tom indicated, we are taking an aggressive approach to accelerate our cost initiatives to improve this performance going forward.

Total adjusted operating income was $692 million in the quarter, an increase of 5.1% compared to the same period last year. Changes in foreign exchange rates decreased operating income by 36 basis points. In terms of earnings per share, our results this quarter were primarily impacted by lower tax rate, which I'll discuss more in a moment, driving an adjusted earnings-per-share growth of more than 22% to $0.91 per share. However, this was partially offset by increased interest expense, which was higher than the same period last year due to variable rate changes and slightly less stock option exercises than in the prior year. Returning to taxes, our effective tax rates for the first quarters of fiscal 2019 and 2018 were 20.3% and 32.6% respectively. The lower effective tax rate for the first quarter of fiscal 2019 is primarily due to lower tax rates resulting from the enactment of the Tax Cuts and Jobs Act and the favorable impact of excess tax benefits of equity-based compensation, partially offset by higher rates in local states and other jurisdictions.

With regard to share repurchases, we repurchased shares based on a dollar-based amount program. With the increase in share price, this means fewer shares are being repurchased than during the same period last year. Cash flow from operations was $271 million for the quarter which is $188 million higher compared to the same period last year. Free cash flow was $171 million which is $222 million higher compared to the same period last year. It's important to note that the first quarter is often a weaker quarter for cash flows seasonally than the remainder of the year. The improvement in cash flow is mostly due to improved working capital, and I'm pleased with our networking capital performance for the quarter. We had good improvement versus the same period last year, driven primarily by changes in our receivables and payables.

In September, Sysco issued senior notes in Canada, where we previously had no fixed income exposure. This was a good opportunity to take advantage of the investor demand in Canada and further balance our assets and liabilities in different geographies as we look to term out internal debt that was created to repatriate earnings from Canada as a result of US tax reform. We're very pleased with the transaction, and the interest on the notes will be paid semiannually in April and October beginning in April of 2019. Before closing, I would like to reinforce some of the messages we've shared with you as we look ahead to the next couple of quarters. As Tom mentioned in our US business, we expect to have a continued volume growth as a result of both a healthy macro environment and our initiatives differentiate our capabilities from the competition. However, we will begin to annualize the couple of large acquisitions, one, we are beginning to annualize now, and the other we'll begin to annualize in the second half of the fiscal year, and the annualization of two large national customers, which will impact our overall volume growth.

Due to these annualizations, along with the customer mix shift toward more growth of emerging concepts or micro-chains, we expect our gross profit dollar growth to moderate. As for expenses, as Tom mentioned, we have a plan to aggressively manage and accelerate our cost initiatives and expect the benefit of these initiatives to ramp up over the next few quarters. As a result, we expect to have modest operating income growth during our second fiscal quarter. However, we expect improved performance in the second half of fiscal 2019 and are still committed to and confident in our ability to ultimately achieve the financial objectives associated with our three-year plan.

In summary, our results for the quarter reflect continued momentum from our underlying business including solid local case growth and strong gross profit dollar growth. That said, we have more work to do in order to mitigate the macro environment headwinds, manage our overall costs and achieve the full financial objectives of our three-year plan. We are committed to servicing our customers and executing on a high level in all areas of our business, to continue to improve our financial performance in both the near and long term. Operator, we're now ready for Q&A.

Questions and Answers:

Operator

At this time, (Operator Instructions). Our first question comes from Chris Mandeville from Jefferies. Your line is open.

Chris Mandeville -- Jefferies -- Analyst

Yes, good morning. You guys saw some nice sequential improvement in your organic cases of close to 70 basis points to 80 basis points. But I don't think you had provided prior-year first half numbers, so I was just hoping maybe you have those offhand on an organic cases for Q1, Q2 first half?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes, Chris. This is Joel. I think just to clarify your question, I mean, I think the -- in the first half of last year, there is very little M&A and so we hadn't, I think that's probably part of what you're looking at here is just the difference in having M&A in this year and M&A not in last year and I note that. That is your question on--

Chris Mandeville -- Jefferies -- Analyst

And my question, I suppose would be thinking about trends on a two-year basis, you referenced that you're looking for or expecting the moderation in 2Q on the top line or cases for that matter. How do you feel about maybe keeping things somewhat stable on a two-year stack basis?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes, well, I think, look. I think that the -- one of the things I will certainly reference you back to is the three-year plan that we've talked about with an overall volume growth, again that made some assumptions of some M&A of about 0.5% to 1% in there. We talked about overall volume growth of 3%, local about 3.5%. Again, every quarter is going to look a little different and there is going to be some impact of some of the things that we've talked about here, but I think we probably still feel good about the volume numbers we talked about as part of our three-year plan. Those things are just to move around some. But I think our -- what we're really trying to get at here is just to give some line of sight to the fact that as we head into this next quarter and over the next -- little bit of near future here that some of the things that we have been benefiting from including the HFM acquisition, the Doerle acquisition, some large, as we've referenced national accounts coming on that we're simply suggesting that we're seeing some of that moderation happening as we move forward.

Chris Mandeville -- Jefferies -- Analyst

Okay. And my follow up would be, so you referenced that you weren't happy with your gross profit dollar growth in the quarter and you'll be accelerating your cost saving programs going forward help trying offset that and decent improved trends on overall EBIT in the back half of the year. You also mentioned that you're still confident in your 2020 outlook, but if I recall over half of the growth was going to be predicated on gross profit dollar growth, so has the algorithm changed to some degree or should we be just thinking that there is some near term softness in gross profit dollars and will improve from here on now?

Thomas L. Bene -- President and Chief Executive Officer

Hi Chris, this is Tom. So I think -- I don't think we said we are disappointed in our gross profit dollar growth. What we said was that the gap between gross profit dollar and expenses was not where we had hoped it would be. And so, we still expect to see I think good gross profit dollar growth. What we've got to get is better focus and management of the cost, because the current cost increases are not -- we're not comfortable with where they're at. And so I think the headline here is that we still expect to see decent gross profit growth is similar to what we've talked about externally. But we just got to figure out how to mitigate some of these rising costs that were -- that are challenging us right now.

Chris Mandeville -- Jefferies -- Analyst

Thanks, guys.

Operator

Our next question comes from Bob Summers from Buckingham. Your line is open.

Bob Summers -- Buckingham -- Analyst

Good morning, just to leverage off that a little. I mean, like, when I think about the gap between case volume growth and gross profit dollar growth, wind out in a not favorable way, like any more texture to that, and if I think about deflation impacting that number, what's the right way to view it?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Bob, this is Joel. And so I think the -- couple of things on that. I'll start with the deflation point is, obviously, there was an anticipated level of inflation in and some of the projections we had as part of this three-year plan and where we're at today is less than that. So, I think part of what we're calling out is -- is the fact that again in a deflationary environment, which you -- or a less inflationary environment, you typically have some mathematical improvement in the margin percentage, but you actually have less gross profit dollars. And so when the impact of lower inflation does tend to be having lower gross profit and so I think that's part of what we're seeing there. I think some of the other -- we talked about a little bit here was about a bit of the mix -- we called out some of this mix between some of the even within our local cases of some of the micro-chains, some of the things that are actually growing at an accelerated rate versus some of them even, is what I call, some of the pure independents, that's part of we're also referencing is something we're seeing as a somewhat a leveling off of our gross profit. That's I think probably what we're calling out here. So those are couple of--

Bob Summers -- Buckingham -- Analyst

And then you referenced the hurricanes, but you didn't size it up in any way on the cost side, on the case volume side, how should I try and normalize?

Thomas L. Bene -- President and Chief Executive Officer

I think typically, Bob, the way we try to look at those hurricanes and the reason we talk about both of them is one of them impacted quarter one. The other one, Michael will actually more impact quarter two, but typically what we find is we lose the top line, where we don't get the cases because outlets were shut down, the markets basically shut down, but we still have some of the cost. We still pay our people, we still and sometimes we try to recover, we paying overtime, because we are having to struggle to get as many people where we need them, when we need them there. And so we tend to get as less top line and more cost in those situations and that's what we experienced in both of those situations. Obviously, in the first quarter, we had a little bit of that a year ago with a couple of hurricane. So the real impact probably here is somewhat smaller, in the first quarter and will be a little maybe larger in the second quarter.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes, and you're right, Bob. We didn't size it out, I mean somewhere the impact of the, let's say, Florence itself it's pretty somewhere, less than a penny, I would call it.

Bob Summers -- Buckingham -- Analyst

Okay. Thank you.

Operator

Our next question comes from Edward Kelly from Wells Fargo. Your line is open.

Edward Kelly -- Wells Fargo Securities -- Analyst

Yes, hi guys, good morning. I just wanted to dig a little bit further into the the cost pressures that you're talking about in here and -- and just, so I guess how they're impacting the P&L right because there is a part of their COGS that is impacting this part of OpEx. As we think about, and Bob started -- asked sort of along this line, as we think about gross profit dollar growth this quarter relative to case growth, there clearly was a shortfall within that relative to, I think what has been going on historically. What is going on with inbound freight? Has that gotten worse to some extent or is this truly just a -- more of a mix issue and lack of inflation issue?

Thomas L. Bene -- President and Chief Executive Officer

I'll just start and then, Joel, could jump in. I think it's probably more what you suggest, but I think it's more of a mixed issue and somewhat of a -- it's a slowing down of the inflation that we had planned, but are also seeing deflation in a couple of key categories, which is impacting us. I think in addition, look I think the inbound freight is gotten better. It's still not great, but it's more I think more consistent than maybe what we are experiencing last year. So I think that consistency enables us to manage through that a little bit better, it's still up, obviously it's still continues to be a challenge as all of the -- what we say, everything around drivers is a challenge, whether it's our ability to hire and retain and make sure we're doing everything we can to get our products out the door or the impact of products coming in. I think, what we're just seeing within inbound is we're a little more stable than we were a year ago. We are cautiously optimistic that that will continue through rest of the year but as we get to this holiday season, we do worry that that we see more pressure there, as there's just more freight on the road.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes. And I think this -- the one thing I'd add to that --add is, just, I think Tom's comment earlier, but the categories themselves that are actually in deflationary are important and we've always, I think we always talked about this pretty consistently. It matters what inflation or deflation is, but it also in some ways matters what the categories that are inflating or deflating on. In this case, some of that again we've had in our FreshPoint business for example, we had fairly significant deflation in the produce area and again on the center of the plate in the meats area. Those are large dollar cases where you start experiencing some of the deflation in that, that has some more impact on the per case number that you're referring to.

Edward Kelly -- Wells Fargo Securities -- Analyst

Just a follow-up on the cost side and the potential offsets. How are you thinking about pricing at this point in the industry given the rising cost pressures? I mean your top line is obviously very strong and it doesn't take a lot of pricing to offset issues like driver pay and what's going on with the warehouses. Are you actively looking to try to offset some of this with price and if not, then why?

Thomas L. Bene -- President and Chief Executive Officer

Yes. So of course, we are and we always try to look at what is reasonable to pass along from a pricing perspective. I think the only challenge I'd say we've seen is the, as we talk between the inbound freight, which is adding to our COGS and some of the inflation in some categories that we've seen. We are trying to pass along as much of it as we can. Having said that, we did see a little bit of a gap between the COGS rising in our pricing in this quarter and that is obviously creating some of this pressure we are talking about. So we continue to leverage our revenue management tools and all the work we've done over the last couple of years. We're just -- we're doing everything we can to move it along without creating issues obviously for our customers or for our overall top line growth.

Edward Kelly -- Wells Fargo Securities -- Analyst

All right, just last question, when you think about the back half of the year, obviously you are expecting an improvement there. When you say that you mean back to that 1% gap in GP versus SG&A growth?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes, that's very much the focus is how do we get -- keep our top line growing very strong and then make sure we are managing the cost side of the business tighter.

Thomas L. Bene -- President and Chief Executive Officer

And again, just as part of that three-year plan, if you remember that gap was targeted at 1.5 (ph) for that three-year time period. So certainly there is a plan as that acceleration.

Edward Kelly -- Wells Fargo Securities -- Analyst

Okay, thanks guys.

Thomas L. Bene -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from John Heinbockel from Guggenheim. Your line is open.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay. So, Tom, and Joel, let me start with corporate overhead right over your corporate EBIT. Did that grow a little faster in the period than you would have liked or have planned? How do you attack that -- I know that a lot of the shared services are part of that, but maybe talk about the way you're attacking that here, specifically on the next couple of quarters and then is it fair to for us to think that that line item can grow? Can can hold the growth to 1% or 2% on a go-forward basis or is that too low?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Okay, let me start and then Tom can chime in a few moments . I mean, I -- first of all, no, the answer to your original question is we did not actually -- that was not part of the cost acceleration that happened this quarter. So -- but to having said that, one of the things that Tom had referenced in his comments were around some of the areas in terms of the finance technology roadmap, some of the smart spending. So that is not to suggest we don't still have areas of opportunity that we're continuing to address. And again in a world where we have some of the challenges we talked about in some of the macro in particular on the operations side, these are areas that we need to consider accelerate even at a faster rate than we have today. And so, I think as we always think about those cyber costs, I mean there are pay increases and there is things and so each -- there are going to be couple of points of the increase in any given year, but what we're talking about now is actually doing some things that are going to further accelerate decreases in that area, and again, it starts with these things that we've -- Tom referenced in terms of finance technology roadmap and the Smart Spending categories.

John Heinbockel -- Guggenheim Securities -- Analyst

Yes. And are you pulling forward the timetable on some of that in light of the warehouse cost pressure, it's on the same timetable?

Thomas L. Bene -- President and Chief Executive Officer

In some cases, yes. But obviously there is some puts and takes in all that, but we're certainly making sure we either stay on track or it's -- where we can accelerate, we're doing so.

John Heinbockel -- Guggenheim Securities -- Analyst

All right. And then maybe just for Tom, when you think about this question of pricing, the flip side being but obviously you've got a lot of data and you think about the position you are in versus a lot of your peers, right, which is far better competitive position, if you don't take pricing and they do, is there an idea that when you look at elasticity that that can lead to a step up in share or not, and I know it's account by account, item-by-item, but that's really not the path you want to go down?

Thomas L. Bene -- President and Chief Executive Officer

Yes. As you know, John, that we've talked a lot about this in our past, we are not looking to buy share, if you will. We need to be obviously competitive in the marketplace, but you should not expect and we would not be out there kind of leading with pricing downward to drive market share. We need to earn that based on all the things we've talked about and we're very focused on all those what I would call differentiators in the business to create a better experience for our customers.

John Heinbockel -- Guggenheim Securities -- Analyst

All right, thanks.

Thomas L. Bene -- President and Chief Executive Officer

Yes, thank you.

Operator

Our next question comes from Karen Short from Barclays. Your line is open.

Karen Short -- Barclays Bank -- Analyst

Hi, thanks. So, my question is, I guess, in early September, you kind of indicated that you loosely achieved a third of your three-year goals in operating income in '18 and you had indicated that the remaining two-thirds would be pretty evenly distributed between fiscal '19 and '20, and obviously with what you've given us today, that doesn't appear to be the case achieving your remainder of the $400 million or $450 million to $500 million in operating profit is pretty heavily weighted to fiscal '20. So I guess the first question is that, I mean, that is an accurate statement, right? And I guess the second question would be, I would guess, I'm still trying to understand really what changed from early September to today?

Thomas L. Bene -- President and Chief Executive Officer

So Karen, couple of -- I would say -- not just fiscal year '20, I think we're selling you is back half of '19 and '20, but we are still confident, we can achieve those numbers that we've shared with you all. So I think from that standpoint, I wouldn't assume by any means that this is a -- we're pushing everything off to the last year and we're going to have some big balloon we needed to solve for. So as far as what's changed? I mean, I think what we -- one big thing that we are dealing maybe more right now than we had anticipated or had been prior to that, is this -- this cost pressure on the supply chain side. And look, we knew it was out there, we were managing it pretty well, but I think we've gotten to a point now where we are like probably everyone starting to feel the impacts of that kind of day in and day out. And if we think about what that really looks like. It literally is, if you don't have enough drivers in the building, then we need to pay, what we have over time to get those products out. We need to invest more in recruiting people faster because we're not getting the folks in the door, and so, whether it's incentives we have to pay to get people in, it's all of these things, we all know are out there, but I think maybe we were feeling less of that than others in the last couple of quarters and now, it's hit us kind of squarely like everyone else. So I think that's the single biggest thing that's changed here. Obviously, we talked about going forward, more of these just lapping issues that we have, where we had some acquisitions a year ago that will start to lap, and we had some new -- some bigger customer acquisitions. But it's really about the supply chain costs, and all we're seeing is, we're going to accelerate some things in some other areas, knowing we've got to offset that.

Karen Short -- Barclays Bank -- Analyst

So then just to clarify also you were kind of asked this earlier, but in terms of the components of achieving that 650 to 700 (ph), I think you were asked, gross profit was 55% to 65% of that, so is that still the case or should we expect the leveraging still -- I call not leveraging supply chain but reducing admin costs to be more of a contributing factor, and then if you could give us just some color in terms of the dollar buckets in the three areas that you called out the Finance Transformation, Smart Spending and Canadian Regionalization? That would be helpful.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Hi, Karen, it's Joel. I'll start. I mean, I think the buckets broadly speaking, I wouldn't call them materially different, there's probably some shifting around a little bit there that skews toward some more of the cost side, again, out of necessity. Again, we're -- again every -- when we again express confidence in our goals and if it looks a little different than we had originally anticipated, but I wouldn't necessarily come to conclusion right now, that all those things are going to just dramatically shift in terms of the buckets. I think that's, again, we're -- all we're really saying is that where we have some experiences of some of these issues, particularly in our supply chain area, we're just going to continue to focus on accelerating those areas that we can continue to take cost out of our system. So I think that's really the main message here and I think, you're (multiple speakers). And on the specifics, Karen, again, we're not going out and actually signing specific cost to those items. Just sufficing to say that, we talked about this at Investor Day. Those were certainly a sizable portion, when we talked about our G&A savings and where we can accelerate some of that and we're looking to do so.

Karen Short -- Barclays Bank -- Analyst

Got it. Thanks.

Operator

Our next question comes from Vincent Sinisi from Morgan Stanley. Your line is open.

Vincent Sinisi -- Morgan Stanley -- Analyst

Hey, great, good morning, guys. Thanks very much for taking my questions. Also, of course, just wanted to follow up with the cost focus. So I guess, Tom, you said, certainly supply chain seems to kind of be the biggest difference versus last quarter. But then in your prepared commentary, it felt at least like you talk quite a bit around kind of opportunities for cost cuts across really all your geographies and not maybe just with breaks and whatnot. So I guess, first, is that a fair statement? And then just more holistically, are some of these cost initiatives strictly to combat the headwinds that you ran through or by different geographies neither maybe just be more efficiencies that you should be realizing overall?

Thomas L. Bene -- President and Chief Executive Officer

So Vincent, there are couple of things, so the cost challenges are, if you think about the various segments of the business we talked about, our biggest cost challenges are in North America. So, the US business in Canada from a supply chain perspective, that's where we're feeling the majority of the impact. Our European business, while there's a few things, that's not a big driver of our our cost issue. So it's the supply chain in North America, big focus. So that's number one. Second one I would say is, while I referred to other opportunities, those are the ones we've been talking about Finance Roadmap, Smart Spending, some regional, I talked about Canadian Regionalization. Some of those are kind of normal course of business opportunities and we'll continue to look for those as well, whether they're in the US or whether they are in international, we'll will continue to look for, and we will drive out cost opportunities that exist beyond big strategic focus areas. And so the last thing I think US is, are they in the plan or not? Some are and some aren't. And so, Finance Roadmap, we talked about that at Investor Day, we plan for some of that, we're accelerating some of the work there, but we had planned for some of these things. So I think some of them are in the numbers, some of them are going to be accelerating. But I think the key message for you guys is, look, we understand that we are seeing some cost headwinds today that we had not anticipated and you should expect and we are focused on mitigating those by taking out cost in other areas. That's why we're not really saying, we should be shifting the model a lot, there might be slight adjustments as Joel suggested, but this is basically saying, look, we got some more cost headwinds than we had anticipated and we are aggressively going after those, so we feel comfortable we can deliver the numbers we've committed.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes. And I think just again the benefit, again, we certainly anticipated seeing some of that starting in the second half of this year as opposed to again somehow jamming all that into the final year of the three-year plan.

Vincent Sinisi -- Morgan Stanley -- Analyst

Okay. All right. That's helpful guys. Thank you. And maybe just as a quick follow-up, Joel. I guess this is more for you, just in terms of the rest of this year. How are you thinking about inflation which was just very slight and then also how should we think of tax rate going forward?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes. So from an inflation perspective, I mean, I think you were certainly coming around this flattish area, and I would just say that our anticipation over the next couple of quarters is, I'd say somewhat modest. Inflation/kind of deep, this is kind of right around this flattish area over the next couple of quarters. I think is probably the best view you can have right now. Tax rate, certainly at this point continued. We talked about 20 -- about I think a 25% tax rate that we called out in our earnings call for our fourth quarter is some, some guidance there. And well, obviously, we certainly continue to drive for additional opportunities there. At this point that certainly though we're still -- we're still looking at that 25% effectively at this point.

Vincent Sinisi -- Morgan Stanley -- Analyst

Okay, all right, guys. Good luck. Thank you.

Thomas L. Bene -- President and Chief Executive Officer

Thanks Vincent.

Operator

Our next question comes from Judah Frommer from Credit Suisse. Your line is open.

Judah Frommer -- Crédit Suisse -- Analyst

Hi guys, thanks for for taking my question. Maybe just to break out the expense pressure from the top-line strength. I mean, it does sound like the expense pressure is expected to continue but that's tied to wage growth. And you're talking about a pretty supportive macro in the US. That said, it sounds like there is some channel shifting going on that's kind of pressuring margins. You talked about the macro change versus independent. So how much confidence do you have in continued top line strength potentially offsetting elevated costs in the near term.

Thomas L. Bene -- President and Chief Executive Officer

Hey Judah, I would say, look, I think we feel like the top line should continue to see solid growth where all of the -- as you said the macro environment, there is pretty positive and a lot of the things we're seeing across the Foodservice segment continue to give us confidence there. I think the other thing you're raising and we've talked about this little bit already this morning on the call is there is some potential pressure on margin based on the mix of the customers and where some of that growth coming. So I think the growth will continue but this kind of emerging segments, micro-chains growing at a faster rate maybe than we had seen earlier is creating some pressure there. We're going to have to figure out how to manage through that as well. And I think your point on expenses was, these are't short term, these are -- we see these continuing at this point. And so, yes, that's why we have to get aggressive in some of these other areas, because we don't see those costs increases mitigating any time in the short term.

Judah Frommer -- Crédit Suisse -- Analyst

Okay and then kind of beyond the broader expense pressures in the industry. I mean there's clearly different things going on at each of the public players, is there anything you'd call out in the first quarter or going into second, where you've seen material share shifts among the top players in the industry or is this kind of you guys executing on your plan and that's where the top line is coming from?

Thomas L. Bene -- President and Chief Executive Officer

I would say, in our case, I can't really speak for the other guys, but we're, -- this is more just continued execution of our plan. We continue to be very focused, we talk about this disciplined profitable growth. And while we have some of these challenges, we're talking about, we're still very focused on each customer and making sure that there is value we can create for the relationship, but also being thoughtful about not every customer is a good fit for what we're trying to accomplish and we will continue to focus on managing our business that way.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes, and just remember the size -- the sheer size of the industry in terms of competitors. Again we often -- the conversation is often around the three of those, but it really, again those -- the three of us may be on a 30% share at the top. And so I think there's just a lot competition in there where share moves around.

Judah Frommer -- Crédit Suisse -- Analyst

Makes sense. Thanks.

Operator

Our next question comes from Marisa Sullivan from Bank of America. Your line is open.

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

Good morning, thanks for taking my question. I just wanted to follow up on the top line focus. Can you just give us a little bit more detail on the drivers of the healthy case focus on US, was it more new business that you're bringing in, was it increased penetration, are you seeing accelerated share gains? And then, any commentary on quarter-to-date, whether that's continued? Thank you.

Thomas L. Bene -- President and Chief Executive Officer

Hey Marisa, so from a top line standpoint, I think it's really all of the above. We continue to see obviously some new business gains, obviously that's an important for all of us in this segment of the industry. I think in addition, we are seeing improved penetration in certain geographies with certain customers, which is a good sign. Again, the kind of -- some of the robustness in the industry in certain segments of the industry, I should probably say. And then the last, I guess I'd say is we have like everybody, we have markets that are performing better than others. And I see market -- from a geographic market, say in the US and so we are constantly kind of managing through that, whether it's competitive situations or weather-related situations or whatever, we've got to manage through those on a regular basis. So I'd say the top line is nothing changed dramatically from what we've seen historically. Again, some of that growth as we've talked was still acquisitions and some non-organic but we feel really good about organic growth and we're kind of right where we thought we would be from that top line perspective. As it relates to -- what was the second part of your question?

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

Just quarter-to-date, if you've seen the momentum continue.

Thomas L. Bene -- President and Chief Executive Officer

Yes, I think in general as we go into the second quarter, we talked about some of these things, some of the lapping issues. So I would say in general, yes. Understanding that we have some of these lapping things that we shared occurring as we speak.

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

Got it. And if I can just quickly follow-up on the cost side, given that a lot of this is coming from wage pressures, both in the warehouse and transportation, can you give us a little bit more detail on some of the productivity initiatives you have under way in both the warehouse and supply chain. Are there opportunities for automation that you see that could help offset some of these pressures over the mid term, just any more color there? Thank you.

Thomas L. Bene -- President and Chief Executive Officer

Sure. And just on the pressure. So it's wage to some extent, I think the important thing for everybody to remember. I know we've talked about this is, we are -- folks who are out there may be increasing the minimum wage or coming out with higher wages for their associates. We generally aren't as impacted by that becasue we are already at or above those rates, but what we're finding is with the reduced availability of workforce, with the current levels of employment, we're just having a harder time attracting and retaining a certain associate and I think that's where we get into this little bit of a churn situation where, again, we don't have enough for paying overtime and that's driving our cost or we're having to spend money at a higher rate to get people in the door. And it's not necessarily the pay rate or the wage rate, it's more of that churn that we're experiencing there and everything around that. That's when we talk about trying to retain folks longer, we know just like customers that we can retain our associates, it helps our overall cost.

As far as other things we're doing, we've talked about things like small delivery vehicle. So let's talk about that for a second. That's a great example of where you may -- instead of having to find a CDL driver where we know there is huge pressure right now for that commercial drivers license person, we can use folks who don't necessarily need a CDL. Ability to accelerate initiatives like that can be -- can do a couple of things. Help us dramatically in our service for our customers, but also impact that overall cost or wage rate and expense of that driver issue we've been dealing with, that's an example. Automation, we have a fair amount of automation in our facilities not like what you might think of as high-tech automation but automation around some of the slower-moving items. So we're able to put more items into our facilities. We have piloted and tested some various types of warehouse automation and we will continue to look at that. We've not seen necessarily that being a big driver for us in the short term, but that doesn't mean we don't continue to look for ways to do that. I'd say the other areas where we might use think about automation is around analytics as you think about the AI, you hear a lot about how do we take the information we have, enables us to make quicker decisions, enable us to do some things in a way that maybe in the past, it took us a little more manual approach to. And then maybe the last thing around our delivery is the way we route our trucks and the way we -- the more we can be efficient in our routing and also enables us to kind of to manage through this driver challenge but also improve our cost, meaning we can get more cases on the truck and we can obviously -- if we can have bigger drops with our customers, all those things really do help and improve that pressure on the supply chain costs.

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

Thank you so much.

Thomas L. Bene -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from Kelly Bania from BMO Capital. Your line is open.

Kelly Bania -- BMO Capital Markets -- Analyst

Good morning, thanks for taking my question. I guess just another way to ask the cost question, do you think that your planned initiatives on the cost side just need to be bigger than maybe previously expected over the three-year period in order to offset some of the supply chain costs, which sounds like it's more drivers and warehouse labor versus maybe freight. But I guess the question is, what are you assuming for those kind of supply chain costs over the next year, year and a half?

Thomas L. Bene -- President and Chief Executive Officer

So Kelly, I think it's a combination of things. I think as we were just talking with Marisa's question, we need to improve the current run rate of our supply chain cost. They are higher than we are comfortable with and I think we've got some initiatives under way to continue to manage that. But to make sure we cover this increase that we're seeing, we are going to, I'd say probably not necessarily bigger but accelerate some of the cost initiatives that we've had out there. We have a pretty good line of sight to the areas of opportunity and I think it's really about accelerating those faster versus making them bigger if you will.

Kelly Bania -- BMO Capital Markets -- Analyst

Okay. And I guess, Joel, just on the comment on gross margin and the impact of deflation and the mathematical impact that has, I guess, can you quantify what that did have on the gross margin rate? I guess I would have thought gross margin would have been up a little bit more of last time you went through this deflationary cycle. It was also up a little bit more. So can you help us understand maybe kind of some of the puts and take underlying gross margin?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes. So again, just to be kind of clear on that. Again, we haven't quantified that, but I mean the point here really is, we're not in deflation yet. What I was really referring to is that we were actually having, you want to call it less inflation and in certain categories, we're actually experiencing some level of deflation. But we're not in an overall deflationary place now. The point I was also making was that if you look at last year in the same quarter, we actually had more inflation and so I guess that was really the point of the kind of the year-over-year comparison that there is some -- there's some mathematical if you want to call it contribution to the gross margin percentages that happens when you look at that year-over-year, but that's really the point I was trying to make. But we're not in a deflationary environment right now in total. So again, which we are -- when we were talking about this couple of years ago, we were at a couple points of deflation and that obviously has certainly a much more significant margin percentage impact than we're talking about today.

Kelly Bania -- BMO Capital Markets -- Analyst

Okay. And can you also just help us understand how you're defining these micro chains? How big are they and how close is the margin profile to more of a local independent restaurants versus a chain and how we should think about that?

Thomas L. Bene -- President and Chief Executive Officer

I think typically we've talked about them kind of less than 100 units, but generally covering multiple from our view -- multiple operating company. So instead of being like within a local geography with a few locations, these are emerging concepts that are starting to grow beyond their traditional borders. And think about it as their concepts that usually have done well for a while as the local or independent customer and now are at the stage where they feel like they're ready to expand, and so we're just seeing that segment of the market is starting to grow a little bit faster as they do that, they require things that are probably more similar to a national account both from how we manage their business but also the kind of programs that are getting from suppliers, et cetera. And so that's why we say that that segment is a little more margin pressure than an independent restaurant operator and but they vary in size and scope. There is not a -- they're not -- there's certainly not chains like you typically think of a chain, but they are starting to emerge and shift beyond kind of their traditional market.

Operator

And our next question is from Ajay Jain from Pivotal Research Group. Your line is open.

Ajay Jain -- Pivotal Research Group -- Analyst

Hi, good morning. I was wondering if you could maybe expand a little bit on general operating environment for independence, obviously your competitors have had some recent challenges with independent case growth and they've also been adding marketing associates to address that challenge. And on the last earnings call, I think you mentioned at the time that you are also hiring some marketing associates. So even though your top line for independent case growth has been really strong, I'm wondering if there is a more competitive backdrop to get that incremental case growth, this competition by itself, driving some of that increased cost pressure. So just wondering if you're seeing any combination of increased industry pricing and headcount expenses for drivers and for more salespeople?

Thomas L. Bene -- President and Chief Executive Officer

Yes Ajay, maybe the way I'd answer that is, if you recall, we actually probably led this nine months to or so ago by adding some marketing associates. We believe that we had now had the kind of the data analytics and tools to allow us to focus where we are going to add resources. So we started that kind of Q -- our Q2 of last year, and that carried on kind of through now. So we have seen some additional expense associated with our adding some marketing associates but we also believe that that's helping us drive our local customer and case growth. And so I would separate that as far as what we see is the strategy we put in place is working. Is the competitive environment changing as others now look to add marketing associates out there, sure, in certain markets we're seeing some of that. And as it gets more competitive obviously, we need to be there to compete. But I would separate those from the operating expense, other than to say that obviously long -- higher case growth drives higher operating expense. In general, if you're growing 5% plus in the cases and you should expect your operating expenses are going to grow. Our problem is our operating expenses, we're not getting leverage on that or they're growing faster than what, obviously we're just getting on the case growth. So that's our issue, and we've got that back in check, which is what we've really been talking about here this morning.

Ajay Jain -- Pivotal Research Group -- Analyst

Okay. And Tom, in your prepared comments you -- I think you cited improved economic data points and improved environment in the US for restaurant spending, but then based on the recent performance at Brakes and SYGMA. You mentioned a more moderate rate of earnings growth in Q2, but can you mention or can you confirm whether that operating income growth in Q2, is that supposed to be similar to this quarter, or could it be potentially worse than Q1?

Thomas L. Bene -- President and Chief Executive Officer

Yes, I think we are suggesting that where we sit today, we feel like we're just -- wanted to make you all aware of a couple of the lapping issues we've talked about. So we're not -- we're not sitting here calling down, anything. I think just to be clear, when you talk about Brakes or Europe, that's very different situation. And as I said in the remarks, I think in the UK, there are certainly some uncertainty in that market that continues because of this Brexit question that's out there and as quite honestly what we see in here as it gets closer to the day where they need to make some decisions that -- that's probably creating more dynamics in the market right now, but the rest of our international markets we feel pretty good about France and Sweden, Ireland, all doing well. And so we just are -- we are managing through what is a little bit of bumpy environment in some of our international markets.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Yes. AJay, this is Joel. I think, just to clarify, I think one of the things we are saying is that the Q2, we're anticipating looking somewhat more similar to what we have this quarter as opposed to something a lot worse than that. So I think what we're calling out is just a moderation a bit due to some of the lapping on some of the volume and then again, we talked about some of these expense acceleration kicking in, but we're anticipating some of that more in the second half of the year. So I think, just to clarify, more similar is the answer to your question. But this is -- really we are calling out there in the second quarter.

Ajay Jain -- Pivotal Research Group -- Analyst

Okay. Thanks, Joel. And just lastly for you, do you expect higher interest expense. Is that going to remain a headwind for the rest of the year or does that moderate at all?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

That I anticipate that remaining a bit of a headwind.

Ajay Jain -- Pivotal Research Group -- Analyst

Okay, thank you.

Operator

Our next question comes from Karen Holthouse from Goldman Sachs. Your line is open.

Karen Holthouse -- Goldman Sachs Group -- Analyst

Hey thanks for taking the question. Just another way to ask the question on the cost side of things. It sounds like you're pulling forward some cost savings, but is there a level of inflation or are we at the point or how much worse would wage inflation have to get before that sort of 150 basis point gap between gross profit and operating expenses in the three-year plan would be at risk?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Well, couple of things here. I'd just like to just make one slight common like -- that Tom made, I would not characterize this as a wage inflation, per se. It is demand for labor, particularly on the transportation side and again with pretty low unemployment obviously that impacts our ability to attract and retain on the warehouse side as well. So it's really that as opposed to just wage inflation itself that's causing that impact. And I guess, what I'd say to that here in the other question, how much of that's going to happen to before it just blows out the course of the three-year plan. I mean the reality of it is, again, we've been in an environment for a while now, where we've had these -- some of these driver challenges. We've navigated through that for a while now, it's starting to pinch us a bit more, which is what we talked about here. I'm certainly not ready to make the call though that, again, our unemployment is pretty low, driver shortages have been there. And so, I certainly don't know that we're contemplating a scenario where that somehow gets just exponentially worse and it just blows this plan out. Yes, we're certainly, we've talked about a couple of times today. It's a headwind, we've got to deal with it, both from how we become more productive on our supply chain as well as some of the other cost that we need to accelerate. To deal with that we will do so. And we certainly, again, at this point, we certainly have continued to express our confidence in achieving our three-year plan numbers.

Thomas L. Bene -- President and Chief Executive Officer

I think that's the important thing, Karen, is where we sit today, we still feel like we will deliver the three-year plan we committed. Well, we have to make some continued adjustments, no doubt, and that's what we've been talking about mostly this morning.

Karen Holthouse -- Goldman Sachs Group -- Analyst

Great. Thank you.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question is from John Ivankoe from JPMorgan. Your line is open.

John Ivankoe -- JPMorgan Chase & Co. -- Analyst

Hi, thank you. The question is on pricing, but pricing not to your local accounts, but to your contract accounts, and I was just wondering, whether some of the cost pressures that you're seeing internally, in particularly this quarter, were allowed to be passed on in general to your current contract accounts. In other words, are you selling them, products at one delivered price, it's different than what your own back door price is? It might just be a function of some of these contracts, kind of rolling over for you to set up a new whether cost plus percent or cost plus, dollar per case basis, whatever it is, for you to capture the true cost to deliver to these customers.

Thomas L. Bene -- President and Chief Executive Officer

Hi, John. It's a good question. There are certainly some contracts that have longer periods of time for adjustments of cost increases for us to pass them along, but I wouldn't say that's a big driver here, but there is some of that for sure, but I wouldn't characterize that is something that's a major impact or you should see some big swing because of it.

John Ivankoe -- JPMorgan Chase & Co. -- Analyst

And at least from what I remember, historically, it was at 50% contract and 50% locally managed, I mean, is that still to breakout within your broad liners, has that? (multiple speakers).

Thomas L. Bene -- President and Chief Executive Officer

Yes that's roughly, I would say.

John Ivankoe -- JPMorgan Chase & Co. -- Analyst

All right. Thank you.

Operator

And our last question comes from Andrew Wolf from Loop Capital Markets. Your line is open.

Andrew Wolf -- Loop Capital Markets -- Analyst

Hi, good morning. Just wanted to drill down on some of the -- maybe into some of the line items on the cost pressure. So it sounds like you're saying it's still, the change was still more on the driver side than in the warehouse side. I just want to confirm that and change in terms of where more pressure came? And then I wanted to -- one of you guys referenced, sorry to overtalk your answer, but maybe you can do two at once? When you guys referenced increasing overtime, and that sounds more like a warehouse issue or is it also a driver issue?

Thomas L. Bene -- President and Chief Executive Officer

So let's start there Andrew. So I think it's both. And so we obviously have hours of service types of things we have to manage on the driver side, but it's both. And I would say that costs are both as well. If you think about though the relative expense, the driver in the transportation cost associating our business are significantly higher than the warehouse. So, both are being impacted, but if you have heavy impact on transportation than the drivers that plays a disproportionate role in the overall expense load and that's really the point.

Andrew Wolf -- Loop Capital Markets -- Analyst

And in terms of the labor shortage, and I think the turnover that's very central to that, if you could perfectly match up the supply of labor with demand, would these cost pressures mitigate, in other words, is there just a lot of turnover, that sort of unpredictable, and that's when you're caught short or is it generally just more of a general process and you're short labor most of the time?

Thomas L. Bene -- President and Chief Executive Officer

We historically have not been short labor most of the time. So this is clearly a new phenomenon. And I think it's driven by all of the factors we've talked about, certainly just the unemployment levels are a lot lower, there is a shortage of what we would call skilled drivers, these drivers that have the CDL licenses and there's just a high demand for them in lots of industries right now, and as long as they remain short, we're going to have to do everything we can to retain the ones we have and attract the ones we need, and so that's where a lot of this is happening.

Joel T. Grade -- Executive Vice President and Chief Financial Officer

And you can imagine, Andrew. I mean, it's the more your -- the issues you're having with retention, there's more training costs, there's more churn, there's more -- people take some time to ramp up productivity, the accuracy and all those things. I mean, all that stuff just exacerbates when you're having some of the issues with the retention, so that's just really a -- both on the warehouse and the transportation side.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay, and if I could just ask kind of housekeeping. I think you called out fuel for the first time in a while. I don't know if you'd be willing to give us a swing in fuel and just sort of comment on whether this future surcharges, what degree that mitigates things?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Sure. Well, so yes. So fuel has continued to increase, obviously, we continue to use them for derivatives to hedge some of that but nonetheless those are on a rolling 12 months (ph), that as fuel cost continue to go up, those also go up, and so we certainly had say about $0.03 a case in terms of our fuel impact this quarter, so it's pretty significant. And certainly, anticipate that coming -- continuing fuel surcharges, I think the way ours -- the way those work, I mean, again, that's not a dollar for dollar offset to be clear, we have had some increase in our surcharges those on the current contract side, most of those are negotiated in where contract customers and those do move up and down based on some type of grid, on the street side, again, that's something we're certainly continuing to evaluate, as I think, as the markets move those, those do tend to move some as well but aren't nearly as big an impact.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. And Joel, just on the reclassification on the other income, it was pretty big swing this quarter especially without any other income this quarter and year ago going up. Is that a pattern or are you guys going to go back to having sort of a decent other income line going forward? Otherwise, it's -- if we annualize this quarter for adverse swing, it's like a nickel a share?

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Well, so again, that was related to an accounting change related to the pension accounting works that used to be up above the line, and so that is a reclassification from up above the down below. That is something you're going to see becasue again that's just simply a classification issue, that's really the main impact on the other income this quarter and that you'll see for this year and beyond.

Andrew Wolf -- Loop Capital Markets -- Analyst

All right, thank you.

Operator

Thank you everyone for joining us today. This concludes today's conference call and you may now disconnect. Have a great day.

Duration: 69 minutes

Call participants:

Neil Russell -- Vice President of Investor Relations and Communications

Thomas L. Bene -- President and Chief Executive Officer

Joel T. Grade -- Executive Vice President and Chief Financial Officer

Chris Mandeville -- Jefferies -- Analyst

Bob Summers -- Buckingham -- Analyst

Edward Kelly -- Wells Fargo Securities -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Karen Short -- Barclays Bank -- Analyst

Vincent Sinisi -- Morgan Stanley -- Analyst

Judah Frommer -- Crédit Suisse -- Analyst

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

Kelly Bania -- BMO Capital Markets -- Analyst

Ajay Jain -- Pivotal Research Group -- Analyst

Karen Holthouse -- Goldman Sachs Group -- Analyst

John Ivankoe -- JPMorgan Chase & Co. -- Analyst

Andrew Wolf -- Loop Capital Markets -- Analyst

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