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Sysco Corp  (NYSE:SYY)
Q3 2019 Earnings Call
May. 06, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Sysco's Third Quarter Fiscal Year 2019 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions.

I would like to turn the call over to Neil Russell, Vice President of Investor Relations, Communications and Treasurer. Please go ahead.

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

Good morning, everyone and welcome to Sysco's third Quarter fiscal 2019 earnings call. Joining me in Houston today are Tom Bene, our Chairman, President and Chief Executive Officer; and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the Company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner.

Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 30, 2018, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com or via Sysco's IR app.

Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliations of these non-GAAP measures to the corresponding GAAP measures are included at the end of the presentation slides and can also be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up.

At this time, I'd like to turn the call over to our Chairman, President and Chief Executive Officer, Tom Bene.

Thomas L. Bene -- President and Chief Executive Officer

Good morning, everyone and thank you all for joining us. I'd like to start off this morning with an overview of our third quarter performance and the discussion around our business segments, and the key highlights for the quarter. Following that, Joel will cover the financial results in further detail.

Overall, we are pleased by our overall operating and financial performance for the third quarter. We delivered improved year-over-year growth, in line with our expectations and managed cost well, including the ongoing cost savings associated with our business transformation initiatives.

The improved pace the performance for the second half of fiscal 2019, we previously spoke off is in fact taking shape. And while we still have work to do, we remain confident in our ability to deliver our adjusted operating income growth target and now expect that to be at the low end of the $650 million to $700 million range. Joel and I, will both elaborate on this further.

From a total Sysco perspective, our third quarter results include increased sales of 2.2% to $14.7 billion. Gross profit growth of 2.9% and adjusted operating expense decreased of 0.4%, which translated into an adjusted operating income increase of 16.6% to $620 million, and an adjusted earnings per share increase of 17.4% to $0.79.

Turning the US restaurant industry data, the overall sales trends remain mixed. According to Black Box and NAFTrack, saw some choppiness throughout the quarter, as March data was generally positive compared to February, in part due to weather, which negatively impacted February sales.

Additionally, same-store sales were positive for the quarter, although traffic once again declined. However, even with this recent choppy industry -- choppy industry performance, the overall macro trends remained generally favorable for our customers, as illustrated by continued low unemployment, which was at 3.8% for March and strong GDP growth for the first quarter at 3.2%. Economic growth in the international markets in which we operate was mostly positive. This includes modest growth in the food service sector, although we continue to see the impacts of Brexit on our UK business due to uncertainty and low consumer confidence.

In Canada, the consumer confidence index continues to rise, with March seeing the third consecutive monthly increase, with Technomic forecasting, the Canadian food service industry to grow 0.6% in real terms or 4.1% on a nominal basis for calendar year 2019. Additionally, we continue to see reasonable overall trends in the other international markets, where we do business.

As we discussed last quarter, we anticipated seeing an increased benefit from our transformation initiatives beginning in the second half of this year, and we began to see those benefits show up this quarter. Overall, our results included a bit softer top-line than expected, offset by good overall expense management, which delivered solid operating profit performance, that was in line with our expectations.

Examples of initiatives that are driving benefits from an expense management perspective include our field finance transformation and the corporate office administrative restructuring, which we implemented last quarter. As it relates to acquisitions, in April, we acquired J&M Wholesale Meats and Imperio Foods, two smaller Central California distributors. J&M Meats is a food service distributor that specializes in key center of the plate products, and Imperio Foods carries dry canned good products, which both are complementary to our existing broadline business in the Central California area. They also provide Sysco with the opportunity to further extend our reach to the important Hispanic customer segment. We will begin to see the impact to our business in the fourth quarter from both of these acquisitions.

Additionally in the quarter, we made the decision to sell our Iowa Premium cattle processing business. While our three-year plan forecast included positive operating income for this business, we believe the divestiture of this business is in alignment with our strategic priorities, and allows us to focus on our core strength as a distributor. The transaction will result in a reduction of planned operating income of approximately $25 million and is the reason for us now projecting to achieve the low end of our adjusted operating income growth range.

Now, I'd like to transition to our third quarter results by business segment, beginning with US Foodservice Operations. Sales for the third quarter were $10.1 billion, an increase of 4.1%. Gross profit grew 5.1%, including an improvement in gross margin of 18 basis points. Adjusted operating expenses grew 2.3%, and adjusted operating income increased 10%. Total case volume within US Broadline grew modestly at 2.1% for the quarter, of which 1.3% was organic. However, we delivered relatively solid growth in our local business, as local case growth was up 3.1% of which 2.2% was organic.

We are pleased with the gross profit growth we delivered for the quarter, which was impacted by a number of factors, including continued positive momentum from category management as we continue to deepen our relationships with our strategic supplier partners. Year-over-year favorability from the impact of inbound freight and continued growth in our Sysco branded products, which increased by 28 basis points, with our local customers this quarter. In addition, the inflation rate for the quarter was 2.3% in US Broadline, up nearly a point in the second quarter of this fiscal year.

Technology continues to be one of our fundamental enablers of growth, as we transform our business to serve our customers in ways that best meet their needs. We are continuing to provide new capabilities and tools to enable an improved experience of doing business with Sysco, including new ordering tools, which has driven our e-commerce ordering utilization to more than 53% with our local customers.

From a cost perspective, within US Foodservice Operations, our expense management was solid, as adjusted operating expenses were 2.3% for the quarter. While we continue to see supply chain cost challenges in the warehouse and transportation areas, we are seeing positive momentum from our recruiting, on boarding and retention initiatives. These challenges were partially offset by continued improvement seen as a result of our routing optimization initiatives and ongoing process improvements. Furthermore, our finance transformation and smart spending initiative have also provided benefits in the quarter.

Moving on to International Foodservice Operations for the quarter, sales decreased 1.5%, gross profit decreased 3.1%, adjusted operating expenses decreased by 5.8%, and adjusted operating income grew 30%. We saw solid overall performance in Canada with strong top-line growth and solid gross profit dollar growth of more than 5%, driven in part by an inflation rate of 2.6%, along with strong expense management, partially benefiting from our ongoing regionalization efforts, which are progressing well.

In Europe, we continue to have mixed results. The UK continues to feel the effects of Brexit uncertainty, causing depressed consumer confidence; however, our Brakes UK business continues to stabilize operationally as a result of our multi-year initiatives to transform the business.

In France, social unrest continues to impact tourism and consequently food away from home consumption. Our sales performance during the third quarter was adversely impacted by this unrest and by some operational challenges associated with integrating Brakes France and Davigel into Sysco France. That said, the overall integration and supply chain transformation continues to be on track to deliver long-term benefits that are part of our multi-year plan.

As for our business in Latin America, we continue to see growth opportunities in this region, both with our chain restaurant customers and with our expansion of cash and carry locations to complement our broad line footprint in both Costa Rica and Panama.

Moving on to SYGMA, we continue to make disciplined choices in an effort to deliver improved profitability. In Q3, we saw expected softness in the top-line due to transition customers, while seeing gross margin increased by 28 basis points year-over-year.

Solid expense management drove adjusted operating expenses down 7.1% versus prior year, resulting in significantly improved operating performance. In an effort to improve overall profitability in this important segment of the business, we will continue to take a very disciplined approach to growth as we move forward.

Lastly, in our other business segment, we've recently announced the restructuring of gas supply. As the industry landscape evolves, we are focusing on optimizing our business model in creating a more focused and agile organization to better meet the changing needs of our customers.

The new operating structures created three distinct business units under the parent company Guest Worldwide. The business units include Gilchrist & Soames, our amenity manufacturing unit, Manchester Mills, one of the world's leading textile producers, and Guest Supply, which serves the world's top hotel chains and independent properties in over 100 countries as a full spectrum distribution solution provider.

In summary, we continue to feel good about the fundamentals of our business. Our customer and operational strategies are firmly aligned around enriching our customers' experience doing business with Sysco. And we remain focused on engaging our 67,000 dedicated associates around the world to deliver against our financial objectives associated with our three-year plan.

Let me now turn the call over to Joel Grade, our Chief Financial Officer.

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

Thank you, Tom, and good morning, everyone. I'd like to provide you with additional financial details surrounding our performance for the quarter. As Tom mentioned earlier, we saw improved year-over-year results for the third quarter. Although, we saw some softness in the top-line, our earnings reflect solid expense management and strong adjusted operating income growth, which are in line with what we previously stated and our results of our enterprise wide transformational initiatives. These initiatives which are designed to streamline efficiencies and allow us to reinvest in the business to facilitate continued growth, include our finance transformation roadmap, smart spending and the Canadian regionalization initiative.

For the third quarter of fiscal 2019, total Sysco sales grew 2.2%. Foreign exchange rates negatively affected total Sysco sales by approximately 1.1%. In our US Broadline business , we experienced 2.3% inflation, driven by a few categories, including the frozen potato, poultry and meat categories, and we are managing this modest increase in inflation well.

Gross profit in the third quarter increased 2.9% and gross margin increased 14 basis points, while adjusted operating expenses decreased by 0.4%, resulting in strong adjusted operating income growth of 16.6% to $620 million.

Changes in foreign exchange rates decreased adjusted operating income by 34 basis points. Although it will vary from quarter-to-quarter, we are focused on maintaining the 150 basis point gap between gross profit dollars and operating expense dollars that we committed to as part of our three-year plan in order to achieve our adjusted operating income growth target.

Turning to earnings per share. Our adjusted earnings per share for the quarter increased $0.12 to $0.79 per share. Our EPS results this quarter were impacted by our strong operating income, adjusted tax rate, foreign exchange impact and stock option exercises.

I'd now like to discuss our tax rate for the quarter. The GAAP effective tax rate of negative 2% for the third quarter of fiscal 2019 is primarily attributable to the determination made during the quarter to recognize the favorable impact of $95 million of foreign tax credits generated as a result of distributions to Sysco from our foreign operations at the end of fiscal 2018.

Our adjusted tax rate for the quarter was 21%. Looking to our fourth quarter, we would expect our effective tax rate to be in the 23% to 25% range .

Now, turning to cash flow. Cash flow from operations was $1.4 billion for the first 39 weeks of fiscal 2019, which is $244 million higher compared to the prior year period. Pre-cash flow for the first 39 weeks of fiscal 2019 was $1 billion, which was $233 million higher compared to the prior year. The improvement in free cash flow was primarily due to last year's pension contribution, partially offset by cash taxes and the impact to working capital from an increase in day sales outstanding.

Net capital expenditures totaled $367 million for the first 39 weeks of fiscal 2019, which was $10.8 million higher compared to the prior year period. For the full year fiscal 2019, we now expect the capital expenditure forecast of approximately 1.1% of sales, down slightly from our previously stated 1.2%. That said, there are no changes to the prioritize order of capital allocation, which is as follows. Investing in the business, consistently growing our dividend, participating in M&A and a balanced approach to share buybacks, and paying down debt.

As Tom mentioned earlier, with the anticipated sale of Iowa Premium, we expect to achieve our target at the low end with $650 million to $700 million range, as a result of our planned operating income being decreased by $25 million.

In summary, we saw improved year-over-year results for the third quarter, led by a continued momentum from improved underlying business performance, solid local case growth and good cost management. That said, we have more work to do in order to achieve the financial objectives of our three-year plan, although we remain confident in our ability to achieve these objectives. We are committed to serving our customers and delivering at a high level of execution in all areas of our business, that will improve our financial performance in both the near and long term.

Operator, we are now ready for Q&A .

Questions and Answers:

Operator

(Operator Instructions). Your first question is from Christopher Mandeville from Jefferies. Your line is open.

Christopher Mandeville -- Jefferies -- Analyst

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

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

Yes. Sure, Chris. Good morning. It's Joel. Yes. I think the way I'll think about that -- again, it's truly balanced across some of the levers outside. But I mean, certainly our continued opportunities in our Sysco brand certainly are a strong driver, as well as continuing category management efforts, and we continue this. Again, obviously, this is not one when it was five years ago when we had this giant year-over-year jump. But the reality of it is, we continue to enhance our relationships with our suppliers and we continue to drive our category management, as well across our -- again our business. And so I think those are some of the areas that's certainly are driving -- again, (inaudible) the margin percentage, but yeah, I'm really talking about what we think about most and that is our gross profit dollars.

We obviously also have some favorable (inaudible) inflation. In our world, clearly it's something that ultimately -- certainly in the moderate range it's at today is a good driver of opportunities, again to move -- to continue to push cost of goods through -- to our customers, and so that's certainly beneficial in terms of the dollars and gross profit.

And I would say, it's not necessarily at the levels of that detrimental, really. Again it's the composite that I think we manage -- we're managing this cost of goods inflation well. And I think that's really, really going to be a factor. This is -- yes, this comp inflation (inaudible) in our warehouse in terms where this thing now functions best. So I don't really say those are still the main drivers of what we're looking at here. And just in general, some of the tools that you heard about in the past in terms of -- again, revenue management continue to help us to drive our margins in a positive way.

Thomas L. Bene -- President and Chief Executive Officer

Hey, Chris, this is Thomas. Just maybe two other things that I reinforce as well. We didn't get some positive year-over-year benefit on the inbound freight side, which is we've talked in the past, doesn't impact gross margin. And then your specific question around Sysco brand, and we look at 28 basis point improvement is a very positive number still as long as that continues to move in the right direction. That's a reflection for us, so -- but a couple of things. One, our customers still reacting positively to all Sysco brand, and two, we continue to bring innovative ideas and solutions to the market. So we have to view that to be a solid number. Well, it might be a little less on the growth than you've seen in a couple of other quarters, it's still early good number.

Christopher Mandeville -- Jefferies -- Analyst

Okay. And then just my final question would be, as you brought it up your inflation, what should we'll be expecting in the coming quarter? And if there's a willingness, would you guys be able to disclose organic case growth quarter-to-date?

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

Yes. And -- so I mean I think the -- just on your question on inflation, I mean I think certainly our forecast is we continue to see I'll say moderate levels of inflation as we -- as we move forward certainly over the next couple of quarters. There's nothing that jumps out necessarily that would be really significant in terms of the overall inflation numbers. So I don't think we expect certainly additional -- again, moderate levels of inflation over the next couple of quarters. Organic case growth, but I think that was part of the US Foodservice sales 2.2% was the overall number, that was organic.

Thomas L. Bene -- President and Chief Executive Officer

But you're asking year-to-date, right, Chris, and that's...

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

Yes.

Christopher Mandeville -- Jefferies -- Analyst

Quarter-to-date.

Thomas L. Bene -- President and Chief Executive Officer

Quarter-to-date numbers, OK.

Christopher Mandeville -- Jefferies -- Analyst

Yes. Just...

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

Yes. So...

Christopher Mandeville -- Jefferies -- Analyst

...if I strip out some of the noise from weather and what have you and maybe expect the calendar shift for Easter as well.

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

Yes. So I think -- so when you talk about there is local -- our local case volume for the quarter was the question I was answering was 2.2%. It was organic. Total case volume organically was 1.3%. (inaudible)

Christopher Mandeville -- Jefferies -- Analyst

But is there any real comment for April?

Thomas L. Bene -- President and Chief Executive Officer

Not really. I mean we continue to were off. I think we feel good about the continued momentum of the business and I don't use anything necessarily. Easter, there was a bit of an Easter shift, but not a big shift, given the timing of when it fell last year in the quarter versus this year.

Christopher Mandeville -- Jefferies -- Analyst

Okay. Thanks, guys.

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

Yes.

Operator

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

Edward Kelly -- Wells Fargo -- Analyst

Yes. Hi, guys. Good morning.

Thomas L. Bene -- President and Chief Executive Officer

Good morning.

Edward Kelly -- Wells Fargo -- Analyst

Can I -- I want to start with OpEx and I was hoping that you could give us a little bit of help here. I mean obviously you had a big quarter from a cost perspective; maybe just dig in a little bit more related to the drivers. And I'm asking this question, because I think a lot of the accelerated efforts that you guys have been talking about weren't supposed to be at a full run rate this quarter. So I'm just trying to figure out, how we think about OpEx going forward? And then as part of this, Q4's comparison looks pretty hard, I think at workers' comp benefit last year at the lap, (ph) can you get to that 1.5% spread in Q4?

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

Well, I'll start. Ed, I mean, -- I think a couple of things I would say to that. Number one, I'll maybe take the last point first. 1.5 point spread obviously in -- and I think it's in my prepared comments is, it's something we looked at over the course of the three-year plan. That doesn't mean that necessarily every quarter is going to look the same; some actually higher, some actually -- possibly will be more as obviously we've seen in both here.

I think the way I would look at it though, I mean, again, as we did signal, we do anticipate some improved performances in the second of the year. Obviously some of these plans have started kick in from our finance technology roadmap, smart spending work, the Canadian regionalization, some of the other administrative class work that we did around some of our corporate office transitions. I think the -- again, we feel good about our -- those things kicking in, as we said in the second half, this year as we head into the next year as well.

I would also call out just -- again overall, our operating performance continues to be pretty strong and the expense line. That's a good face of actually we had some -- a little bit of a few headwinds this particular quarter and that was about $0.03 a case. So I mean, we had -- I think question is, do you expect this to continue in these areas, I do. To your point, there are some headwinds that we're anticipating that we're going up against in the fourth quarter. But certainly, as we've talked about here for a little while, we certainly anticipated our leverage in the second half of the year to be better than first half. And I think we certainly start to see that.

Edward Kelly -- Wells Fargo -- Analyst

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

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

Well, I mean I -- again, I -- the way I always look at that, I mean number one, it's not bad (inaudible) forecast. But I mean, in reality if it is, we spend our CapEx, make our investments based truly underneath of the business. There's been absolutely no change in terms of our perspective on our capital allocation priorities that always start with investing in our business. We're obviously very committed to doing that. We've got a lot of change programs and if things transitioning, our organization will continue to require investment.

I would just tell you from a timing perspective, some of those things happened, again at -- things do move around in the businesses in some ways, so some of that, probably timing versus anything. But I will definitely not take away that there is some change in terms of the way we're looking at forecasting our CapEx. We just -- yes, we just adjust spending an investment in terms of the needs of business.

Edward Kelly -- Wells Fargo -- Analyst

Great. Thanks, guys.

Thomas L. Bene -- President and Chief Executive Officer

Thanks, Ed.

Operator

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

Karen Short -- Barclays Capital -- Analyst

Hi. Thanks. First thing I do want to ask was, in terms of the composition of the -- now, I guess kind of $650 million, is there any change to this -- the breakout between gross profit and then the supply chain versus the admin?

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

No, Karen, so there is not. That was just -- we only shifted that was related to the demonstrated sales of business. But no, there is no bucketing difference, if you will.

Karen Short -- Barclays Capital -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Yes. Good morning, Karen. This is Tom. I mean, look, I think we've seen certainly some choppiness this quarter particular, and I think there are probably a bunch of different things driving that. But it depends really on what source you look at. I mean, NPD would call out that -- well, overall spend is up, traffic is up in some areas as well, and down in others. And Black Box and NAFTrack as they're probably more -- a little bit more consistent and they called traffic down really across most of the segments. So I think it's driven by everything from some weather choppiness in Q3 -- our Q3 and mostly in February, and then I think again kind of consumer efforts during that time.

The small chains seem to be doing a little bit better, so that's going to be kind of micro chains. And then the pure independents, at least in this quarter according to NPD tend to be a little bit softer. But I wouldn't say from our perspective, we have seen necessarily any major difference in trend line that we've experienced over the last couple of quarters. So we continue to feel like this independent growth that we've had in that sector is doing well. And then we continue to feel pretty confident in our ability to continue to grow and take share in that space

Karen Short -- Barclays Capital -- Analyst

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

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

I mean when you're talking about the last, kind of the -- specifically corporate layoffs (inaudible) again part of we're talking in total new administrative cost.

Karen Short -- Barclays Capital -- Analyst

Yes.

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

Obviously there's a lot of things that are part of what we say our finance psychology roadmap that are very much fueled focused. And so, in fact, one of the things we talked about in the first half year is that there were -- again, why don't we feel confident about this (inaudible) by notification, the sizable number of our field personnel. And so I would tell you, I think the majority which you're seeing is pretty -- is probably even more fuel focused than the corporate franchise balanced between the two.

Karen Short -- Barclays Capital -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Andrew Wolf from Loop Capital Markets. Your line is open.

Andrew Wolf -- Loop Capital Markets -- Analyst

Good morning. Wanted to follow up on the cadence of sales question that people asked about. You guys said, January was strong on a good weather comparison February a bit -- not good. Should we take away from there sort of March and April of somewhat normalized? I mean, people trying to get -- were obviously trying to get sense of whether the industry has slowed or not year-over-yea sort of and on a normalized basis.

Thomas L. Bene -- President and Chief Executive Officer

Yes. I think we would say, that -- that's, we feel like certainly things since the weather impacts in the early part of the quarter, things have stabilized.

Andrew Wolf -- Loop Capital Markets -- Analyst

And I noticed, you gave us -- I may have missed this, but I heard a Technomic's forecast for Canada; do you have one for the US that you might be able to share with us?

Thomas L. Bene -- President and Chief Executive Officer

As you know, Technomic kind of gets out ahead off and they do it by quarter, kind of by -- sorry, by some segment. I may have that information, which should I -- I have, but I can get it to you. We maybe need to get back to you on that. But we generally do have that information.

Andrew Wolf -- Loop Capital Markets -- Analyst

Okay. And I just had one other question unrelated sales. So in the -- you took a $35 million charge that was related to the -- a change in the business technology strategy. So could you expand a little upon that, what the changes in your business expand -- business technology strategy?

Thomas L. Bene -- President and Chief Executive Officer

So just -- can you clearer (inaudible) -- excuse me, ask the question little more clearly?

Andrew Wolf -- Loop Capital Markets -- Analyst

Of the $72 million charges you excluded out of operating expense, and $35 million was allocated for what you call the change in business technology strategy. Is that basically go into the cloud, and could you expand on so we can understand a little better?

Thomas L. Bene -- President and Chief Executive Officer

Yes. And some of that is also got kind of a variety of things when there was actually an accelerated position we took in Europe that was related also to a technology change. So -- I mean, yeah, there's been a few things that -- again, and that number also it just accelerated our G&A a little bit. But I wouldn't say there's one thing that is fell into. There are a number of things that are just parts of our technology strategy they are included in that number. And there's not necessarily one big thing there and there is not. One thing I would (inaudible) to take away would not be that we somehow have a significant change in technology, because we do not. There's just a variety of things going on.

Andrew Wolf -- Loop Capital Markets -- Analyst

And that was what I was trying to get to so, appreciate it.

Thomas L. Bene -- President and Chief Executive Officer

Yes.

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

Yes. Think of it is more specifically around the finance transformation, which is the technology component of it and then the European work we've been doing , where we had and ERP in France that we've been updating. And so those are the two main drivers of it.

Andrew Wolf -- Loop Capital Markets -- Analyst

Thank you.

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

Yes.

Operator

Your next question comes from the line of Marisa Sullivan from Bank of America Merrill Lynch. Your line is open.

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

Great. Good morning. Thanks for taking the question. I just wanted to touch on fuel quickly, and you call it that there was a slight headwind in the third quarter. How should we think about fuel in the fourth quarter as it impacts your expense?

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

Yes. I can. On fuel side, I'd anticipate some of those continued headwinds as we headed into the fourth quarter, and probably a little bit in as we head into the next year as well.

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

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

Thomas L. Bene -- President and Chief Executive Officer

Hey, Marisa, it's Tom. No, I wouldn't say anything unique. I think what we're just trying to highlight is we continue to -- it's an ongoing process. It has been now for years. And we're starting to do some deeper work with some of our more strategic supplier partners. And think about (inaudible) is some potentially long-term benefits as we began to partner more deeply with some suppliers.

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

Got you. And are you seeing any impacts, or any customer feedback on category management? Are they liking what you're doing or is it -- are they having to adjust through assortment changes?

Thomas L. Bene -- President and Chief Executive Officer

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

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

Got you. Thank you so much.

Operator

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

Judah Frommer -- Credit Suisse -- Analyst

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

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

Yeah. So I think -- and here's they way I would think about that, Judah. I think what we talked about really (inaudible) really around the midpoint of the range. And so if you do $650 million to $700 million, that will be $675 million. Really we're talking about here is a $25 million related Iowa Premium, and yes, that is the only adjustment to our guidance at this point, which takes us from that midpoint down to that lower end of the range.

Judah Frommer -- Credit Suisse -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Sure. Just remember we have separated a couple of things here. So inbound is our gross margin and I did mention that we had some year-over-year positive impact of that, again because later year ago we were still dealing with quite a few challenges related inbound freight. So how to think about it is, it has gotten better. We're not feeling that kind of impact. And there was a piece of that gross margin improvement that was driven by that this year.

As it relates to outbound, we continue to have -- certainly we'll be managing now I think better than we were a year ago as well. But we still have challenges from a transportation perspective. Although albeit I think the work that we're doing around recruiting and retention is much improved, and we are seeing positive impacts across our operations versus a year ago in that regard.

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

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

Judah Frommer -- Credit Suisse -- Analyst

Great. Thanks.

Operator

Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is open.

John Heinbockel -- Guggenheim Securities -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Hey, good morning, John. Appreciate the question. So I would say -- first of all, well feel really good about the work we did around MAs a little over year ago. And if you recall when talked about it back then when we have really focused on was a few tools that enabled us to do a better job of understanding where biggest opportunities were and then applying those resources to those specific geographies or areas. And so we continue to believe that, that targeted approach.

And -- because I think over time it's -- so it's not as much just about adding MAs for the sake of adding MAs. It's about adding them where we now know we have the biggest opportunity to succeed. And so we'll continue to selectively do that. And we're candidly, all the time evaluating our territories in each of our opportunity areas. And that may yet encourage us to shift in certain areas versus others.

But I would say just outright adding a bunch more MAs for the sake of that is not really our strategy. We continue to see our territory size, get a little bit larger as we are able to provide the marketing associates with more tools and support. We talk a lot about the tools and support that we offer our customers on that side of the business. And we continue to do, I think, a really nice job of building out those capabilities, whether that be things like menu planning analysis for our business review process, where we have our chefs engaged. So I think we're continuing to focus those total resources on the local side of the business, not just the marketing associate, but leveraging the MAs to bring these other kind of tools and capabilities that we build behind them to the market.

John Heinbockel -- Guggenheim Securities -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

I don't think. We haven't made a call on that yet, John. And so we're -- I think we're still working through ourselves to what's the best approach. And so I'd say kind of more to come, we'll certainly talk with you all on where place we want to do that.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay. Thank you.

Thomas L. Bene -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Ajay Jain from Pivotal Research Group. Your line is open.

Ajay Jain -- Pivotal Research Group -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Honestly Ajay, I think its part of the challenge for us in certain areas, the way we are still I would say managing through that transition, the cases that we talked about in the US and the consistency that we can provide you guys does not exist in that business yet. And so potentially over time, we might be in a place to do that, but today the way we still account for the sales and the way we think about the cases of the pounds, of the units that we sell in different parts of the world are not on a -- kind of on a consistent basis.

What I did say, and I will reinforce here, we did have a strong top-line growth in Canada. And what we said in Europe is, look we had a couple of things going on in Europe that are impacting us, certainly that the UK and everything with Brexit has created some choppiness over there. Our sales are positive. It's just that they're not -- they're not growing at the rate we would like them to or we want them to at this point.

And then in France, look, I think we all thought the unrest that was going on, the social unrest of France would have by now certainly clear and it just has not. And while that's -- it's not a huge impact as that's a big country, there are certainly still some things going on there that are creating issues for our customers, and there for us getting products to them.

So long way of saying, I think we still feel generally good about those businesses. We would have like to see a little more top-line growth in Europe in this last quarter. And that's kind of built into my prepared comments, driving that overall numbers, we feel good about the US numbers, and certainly about Canada. We just don't have the information in a way that we feel like it's easily providable to you guys.

Ajay Jain -- Pivotal Research Group -- Analyst

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

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

Ajay, there's volumes to that -- I mean, they're non-GAAP rest. I mean, we do have a fair amount of details that is probably the best I'd be able to give you here in terms of spilling that out. Again obviously if you think about the areas, certainly really across our business, we've had a little bit finance technology roadmaps, certainly we talked about at corporate here in the US side, obviously the Canada regionalization, some of the work being done freight in terms of those programs. I mean obviously -- again some of that I think you'll see fallout in some of our non-GAAP direct, but I think that's (inaudible) the best to view that.

And the only thing I would say is, obviously, there's some pretty sizable numbers in there, particularly last quarter as it relates to Europe, obviously, that was -- well, not all inclusive, if I would say that was obviously the biggest majority what's going to come there in -- at least in that part of the world.

Ajay Jain -- Pivotal Research Group -- Analyst

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

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

Yes. I mean I think the majority -- again the majority of that is actually going to be in -- within Q2, but then also here in Q3, so I wouldn't expect that -- a lot of that which reflected in Q4. Obviously the benefits we were starting to realize here as we talked about in the second half of the year as we head into next year.

Ajay Jain -- Pivotal Research Group -- Analyst

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

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

Yes. I wouldn't think about it that way. I mean, we actually had some D&A, -- in particularly on D side volume increased this quarter, that was related to I would call accelerated depreciation in Europe for the most part. There's some -- as Tom referred to this earlier, there are some of the technology changes we're making over there that -- again, allowed us to actually accelerate some depreciation there. And so the majority of the depreciation increase you're seeing is related to some technology transitions in Europe. But it's not related to what you're talking about before in terms of the (inaudible) here in the US.

Ajay Jain -- Pivotal Research Group -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of 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. Wanted to just go back to the choppiness in the top-line in the domestic business. Obviously, as you said a few times, it seems like more kind of February and weather specifically. But just wondering was there a lot of variability that you could see by region? Another way of asking, was it basically the weather and largely February the way to think of it or were there any other factors that might just be worth us knowing?

Thomas L. Bene -- President and Chief Executive Officer

Yes. I would say nothing that was inconsistent with what you just said. I mean I think we just -- when I talked about weather, we saw certain parts of the country where there were more impacts than others, so I wouldn't say nothing else beyond that, that we saw.

Vincent Sinisi -- Morgan Stanley -- Analyst

Okay. And then just on -- I appreciate the color on the Iowa Premium versus the three-year plan. But as you had this quarter very nice expense control, just kind of curious more from like a high level perspective like with the buckets that you are getting, more the -- kind of cost cuts efforts pulled to date, how much kind of lead time or planning is there with some of the levers that you had to pull? Kind of said in another way like, kind of how much quarter-by-quarter planning or impact or not, is there any kind of way to think about that?

Thomas L. Bene -- President and Chief Executive Officer

Maybe I'll start and then let Joel chime in. If you think about the way our business operates, we have regular operating expense, which is generally built into the businesses that is going to have probably a pretty consistent cadence depending on volume and our top-line being a big driver, right. So there's -- a lot of that's driven by cost per unit.

In addition, we've talked about big strategic initiatives like finance transformation, like Canada regionalization, like smart spending that we have planned out, and we believe we have a good use to win those impacts will be happening. And then we have things like our last quarter when we announced the corporate restructuring, that's more of a one-time event where we would see that coming into the business. So a long way of saying it I think generally speaking, our operating expense moves with our business performance meeting our volume.

And then -- and certainly any headwinds or tailwinds we see in the business, fuel being a great example of headwind we're feeling right now, certainly things like driver and warehouse turnover in the past and just a low employment rates driving higher cost of some of those roles in the Company. But everything else is generally planned out and we have visibility to that, except for these one timers. Does that get what you're asking?

Vincent Sinisi -- Morgan Stanley -- Analyst

Yes. No, that was very helpful and did get out of it. Thank you, Tom.

Thomas L. Bene -- President and Chief Executive Officer

Okay.

Operator

Your next question comes from the line of John Ivankoe from JPMorgan. Your line is open.

John Ivankoe -- JPMorgan -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Hey, John, good morning. Look, I wouldn't say anything that's unique that's happened there. I mean as you -- we all know, in this industry you've got a lot of new business coming online all the time and you also have folks that are closing. I don't wouldn't say we have seen any dramatic shift in that area. As I mentioned the different data sources have some mixed information, but all of them generally talk about positive spend dollars being up in that kind of 2.5% to 3.5% range, and then you have traffic generally down with the exception of NPD, which is showing slight increase in traffic. So I don't think there's anything unique or anything in this quarter that we've seen that is highly different than what we've seen in the past quarters.

John Ivankoe -- JPMorgan -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

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

John Ivankoe -- JPMorgan -- Analyst

Understood. Thank you.

Thomas L. Bene -- President and Chief Executive Officer

Thank you.

Operator

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

Kelly Bania -- BMO Capital -- Analyst

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

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

Yes. Kelly, I'll start. And I think the answer to that is, I mean obviously we're continuing to do a lot of work there as to streamline and make our operations more efficient. I guess I'd say there is some run rate consistency there, but-right, I would also tell you is that, I mean, there is (inaudible) a lot of moving parts right now in some of our international business. What I would not necessarily tie it to one of the things we talked about in the past is, the sizable transformation we're doing in France. I think the majority of that benefit really we start to see next year, so I would not tie a lot of that necessarily to the -- sort of that -- the restructuring that we're doing in our French business. But I would say generally speaking, I think it's -- I mean, it's fair to continue to see that as a relative run rate, realizing again we just got a lot of moving parts over there that in terms of transformation we're doing.

So, I guess my answer is generally is yes, but again, there is -- just realize things are not going to move around quarter-to-quarter based on the amount of stuffs we got moving around in that business.

Kelly Bania -- BMO Capital -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Sure. This is Tom. Kelly, good morning. I think we continue to feel really good about our specialty company strategy. As we've talked for a few years, we know that our customers truly value Broadline, but they also have these -- oftentimes they can be better met by some specialty companies. And in our case, meat, seafood, poultry, and that side, and then the produced FreshPoint.

And so I think we continue to feel really good about overall what we bring to the market and the value proposition we have there. We've been working on ways of even helping our customers to make that easier for them to procure products both from Sysco and from the Sysco specialty companies. And we're seeing benefits of that as well. And so, creating the environment where it's easier for them to kind of do business with both of those entities as they need to and as they feel like they want to and so -- versus the feeling, maybe like two or three different companies with they're doing business with the idea that they can do business with one Sysco, and then get the value out of that. So we continue to believe that's an important part of the market and we continue to feel really good about the work we're doing there.

Kelly Bania -- BMO Capital -- Analyst

Thank you.

Thomas L. Bene -- President and Chief Executive Officer

Yes.

Operator

Your final question comes from the line of Bob Summers at Buckingham. Your line is open.

Bob Summers -- Buckingham -- Analyst

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

Thomas L. Bene -- President and Chief Executive Officer

Hey, Bob. Again getting back to this conversation about transportation and cost, the piece you're really referring to is the inbound freight part for us, which does hit our gross margin. And we called out in the prepared comments and we've talked a bit here this morning about that we are seeing some year-over-year improvement benefit there. It's not huge and it's not something that is a major driver for us. But the market has come down certainly from where it was a year ago and obviously everybody benefits from that.

We, obviously, try to minimize the spot market, because when that -- that's the one that gets the most out of whack the fastest and that's what happened a year ago, so we continue to manage that side of our business mostly with contracts. But yes, it certainly as that whole market comes down that affects both sides, the spot and contract side. And as it relates to our drivers, as we said, I think, we've done a lot of work around both recruiting and retention, and the way we're operating our business to improve as much as we can our driver retention. And so, we feel better about where we're at than we were year ago, but it continues to be a challenging part of the business, and I think will be as long as of the markets the way it is, meaning unemployment's low and there's a lot of freight on the road. So we feel a much better where we are now than we were a year ago. But that doesn't mean that we don't still have ongoing challenges associated with hiring and retention of drivers.

Bob Summers -- Buckingham -- Analyst

Okay. Thanks.

Thomas L. Bene -- President and Chief Executive Officer

Good day.

Operator

That concludes today's conference call. You may now disconnect.

Duration: 58 minutes

Call participants:

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

Thomas L. Bene -- President and Chief Executive Officer

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

Christopher Mandeville -- Jefferies -- Analyst

Edward Kelly -- Wells Fargo -- Analyst

Karen Short -- Barclays Capital -- Analyst

Andrew Wolf -- Loop Capital Markets -- Analyst

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

Judah Frommer -- Credit Suisse -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Ajay Jain -- Pivotal Research Group -- Analyst

Vincent Sinisi -- Morgan Stanley -- Analyst

John Ivankoe -- JPMorgan -- Analyst

Kelly Bania -- BMO Capital -- Analyst

Bob Summers -- Buckingham -- Analyst

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