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.

Thanks, Christina. Good morning, everyone. And welcome to Sysco's first quarter fiscal 2019 earnings call. Joining me in Houston today are Tom Bené, our President and Chief Executive Officer; and Joel Grade, our Chief Financial Officer. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended July 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. [Operator Instructions] At this time, I'd like to turn the call over to our President and Chief Executive Officer, Tom Bené. Tom Bené: 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 segment. I'll then turn the call over to Joel Grade, our Chief Financial Officer who will discuss our financial results in…

Thank you, Tom. Good morning, everyone. I would 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 24%. Gross profit in the first quarter increased 3.9% and gross margin increased two 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 increase 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 costs 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 result this quarter were primarily impacted by a lower tax rate, which I'll discuss more in a moment, driving an…

[Operator Instructions] Our first question comes from Christopher Mandeville from Jefferies. Your line is open.

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

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

Okay. Yes. My question I suppose would be thinking about trends on a two-year basis, you reference that you're looking for or expecting some moderation in Q2 on the top line of cases for that matter. How do you feel about maybe keeping things somewhat stable on a two-year stack basis?

Yes. Well, I think, look, I think - one of the things I would certainly reference you back to is the three-year plan that we talked about with an overall volume growth. Again that made some assumptions of some M&A about of some M&A about 1%, 0.5% or 1% in there. We talked about overall volume grow over 3% local about 3.5%. Again every quarter is going to look a little different and there's going to be some impact of some things that we've talked about here, but I think we broadly still feel good about the volume numbers we talked about as part of our three year plan. Those things are just going 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 a 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 referenced national accounts coming on that we're simply suggesting that we're seeing some of that moderation happening as we move forward.

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 savings programs going forward to help trying offset that to see some improved trends on overall even in the back half of the year. You also mentioned that you were 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's some near-term softness and gross profit dollars and we'll improve from here on out. Tom Bené: Yes, Hey, 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 they 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 are at. And so I think the headline here is that we still expect to see decent gross profit growth as 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.

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

Hey, good morning. Just to leverage off that a little I mean 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?

Yes. So, Bob, it's Joe. So I think the couple things on that. I'll start with the deflation point is obviously there was an anticipated level of inflation 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 the fact that again in a deflationary environment which you are a less inflationary environment you typically have some mathematical improvement in the margin percentage that 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 thing we talked about a little bit here was a bit of the mix and 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 will even I would call some of the pure independence that's part we're also referencing is something we're seeing as a somewhat of leveling off of our gross profits that's I think part what we're calling out here. So those are couple of -

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? Tom Bené: Yes. I think typically, Bob, the way we try to look at those hurricanes and the reason we've talked 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 right. We don't get the cases because outlets are shut down, the markets basically shut down, but we still have some of the costs. We still pay our people. We still and sometimes we try to recover. We are 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 is 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 hurricanes. So the real impact probably here is somewhat smaller in the first quarter and will be a little maybe larger in the second quarter.

Yes. And you're right, Bob, we didn't size it out. I mean some where the impact of the, let's say Florence itself it is pretty somewhere a little less than a penny I would call.

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

Yes, hi, guys. Good morning. I just wanted to dig a little bit further into the cost pressures that you're talking about in here and just I guess how they're impacting the P&L right because there's a part of the cogs that there's impact and there's part of OpEx as we think about and Bob started asked sort of along this lines, as we think about gross profit dollar growth this quarter relative to case growth, there clearly was a short fall 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? Tom Bené: I'll start and then Joe can jump in. I think it's probably more of you suggest. I think it's more of a mixed issue and somewhat of, look, it's a slowing down of the inflation that we had planned, but it is 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 and maybe we were experiencing last year. So I think that consistency enables us to manage through that a little bit better. It's still up obviously it still continues to be a challenge as all of the-- we'd say everything around drivers because it's 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 with within inbound is we're a little more stable than we were a year ago. We're cautiously optimistic but that will continue throughout the year but as we get to this holiday season, we do worry that that we see more pressure there as they're just more freight on the road.

Yes and I think this - just one thing I'd add to that, yes, it is just I think Tom's comment earlier about these the categories themselves that are actually in deflationary are important. We've always and 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 are. And in this case some of them, we've had in our FreshPoint business for example, we had a fairly significant deflation in the produce area and again on the center of the plate in the meats area. Those are large dollar cases you start experiencing some of the deflation and that has some more impact on per case number that you're referring to.

All right. And 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? Tom Bené: 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 and our pricing in this quarter, and that is obviously creating some of this pressure we're 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.

And just last question when you think about the back half of the year, obviously you're expecting an improvement there. When you say that do you mean back to that 1% gap in GP versus SG&A growth? Tom Bené: 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.

Yes and again just as part of that three-year plan if you remember that that gap was targeted at for that three-year time period. So certainly there's a plan that has some acceleration.

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

So Tom and Joe, let me start with corporate overhead right or 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 these 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 line item can grow? You can hold the growth to 1% or 2% on a go-forward basis or is that too low?

Well, let me start and then Tom can chime if he wants. I mean-- I --first of all, no, the answer your original question is we did not actually that was not part of the cost acceleration that happened this quarter. So but 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 that, 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 in the operations side. These are areas that we need to continue accelerate even at a faster rate than we have today. And so I think as we always think about those type of cost them in there are pay increases and there's things and so each --there are going to be a couple 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 Tom referenced in terms of finance technology roadmap and smart spending categories.

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

In some cases, yes, but obviously there's some puts and takes and all that, but we're certainly making sure we're either stay on track or where we can't accelerate we're doing so.

All right. And then maybe just for Tom when you think about this question of pricing the flipside being obviously you've got a lot of data and you think about the position you're 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 when you look at elasticity that can lead to step up in share or not and I know what's account by account item by item but that's really not the path you want to go down? Tom Bené: 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 and kind of leading with pricing downward to drive market share. We need to earn that based on all the things we've talked about. We're very focused on all those I would call differentiators in the business to create a better experience for our customers.

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

Hi, thanks. So my question is I guess in early September you kind of indicated that you probably you loosely achieved a third of your three year goals and operating income in 2018 and you'd indicated that the remaining two-thirds would be pretty evenly distributed between fiscal 2019 and 2020. And obviously with what you have 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 2020. 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 guess I am still trying to understand really what changed from early September to today? Tom Bené: So, Karen, A couple is, I would say not just a year 2020. I think we're telling you is back half of 2019 and 2020 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 you're going to have some big balloon when you need to stall for. So as far as what's changed, I mean I think what we are --one big thing that we are feeling maybe more right now than we had anticipated or had been prior to that is this cost pressure on the a 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 that we all know are out there, but I think maybe we were feeling less of that than others in the last couple 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 we'll start to lap and we had some new some bigger customer acquisitions, but it's really about this supply chain cost and all we're saying is we're going to accelerate some things in some other areas knowing we've got to offset that.

Okay 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 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 cycle not leveraging supply chain but reducing admin costs to be a 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?

Karen, so I'll start I mean I think the bucket is broadly speaking, I wouldn't call it materially different. There's probably some shifting around a little bit there that that skews towards some more of the cost side. Again out of necessity, again - every - we --again express confidence in our goals and if it looks a little different than we'd 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 costs out of our system. So I think that's really the main message here. And I think - [Multiple Speakers] yes and on those specifics, Karen, again we haven't-- we're not going out and actually I guess assigning specific cost to those items just suffice it to say, and we talked about this in Investor Day. Those were certainly a sizeable portion when we talked about of their G&A savings, and yes we can accelerate some of that we're looking to do so.

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

Hey, great, good morning, guys. Thanks very much for taking my questions. Also of course just wanted to follow up with what the cost focus. So I guess Tom you said it's 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 talked 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 costs initiatives strictly to combat the headwinds that you ran through or by different geographies may there --may be just be more efficiencies that you should be realizing overall? Tom Bené: So, Vincent, there are a couple of things. So the cost challenges are, if you think about the various segments, 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 are not a big driver of our cost issue. So it's the supply chain North America, big focus, so that's number one. Second what 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're an international. We'll 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 you asked is are they in the plan or not some? Some are and some aren't. And so finance roadmap we talked about that 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 were seeing some cost headwinds today that we had not anticipated. And you should expect and we are focused on mitigating those by taking out other, by taking out cost in other areas. That's why we're not really saying we're shifting; 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 anticipated. And we are aggressively going after those so we feel comfortable we can deliver the numbers we've committed.

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

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?

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 within a couple quarters is, I'd say somewhat modest inflation splash kind of deep-- this is kind of right around this flattish area over the next couple quarters. I think is probably the best view you can have right now. Tax rate, certainly at this point continued we talked about twenty bucks I think a 25% tax rate that we called out in our earnings call for our fourth-quarter and some guidance there. And while obviously, we certainly continue to drive traditional opportunities there. At this point that certainly though we're still looking at that 25% factor at this point.

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

Hi, guys. Thanks for taking the 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 micro change versus independence. So how much confidence do you have in continued top-line strength potentially offsetting elevated costs in the near term? Tom Bené: Hi, Judah. I'd say, look, I think we feel like the top line should continue to see solid growth, were, all of the, as you said the macro environment there is pretty positive and a lot of the things we're seeing across the food service segment continue to give us confidence there. I think the other thing you're raising and we've talked about this a little bit already this morning in the call is. There is some potential pressure on margin based on the mix of the customers and where some of that growth is 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 are 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 aren'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 areas because we don't see those costs increases mitigating anytime in the short-term.

Okay and then kind of beyond the broader expense pressures in the industry. I mean there are 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 amongst 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? Tom Bené: Yes, 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 there's 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'll continue to focus on managing your business that way.

Yes, and just to remember the size, the sheer size of the industry in terms of competitors. Again we often, the conversation is often around the three of us but really three of us maybe have 30% share at the top and so I think there's just a lot of competition in there, where share moves around.

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

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 growth you saw in the US? Was it more new business that you were bringing? Was it increased penetration? Are you seeing accelerated share gains and then any commentary on the quarter to date whether that's continued? Thank you. Tom Bené: 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 important for all of us in this segment of the industry. I think in addition, we are seeing improved penetration in certain geographies and with certain customers which is a good sign again kind of some of the robustness in the industry in certain segments of the industry I should probably say. And last I guess I'd say is we have like everybody we have markets that are performing better than others. And I say market, from our 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 regular basis. So I'd say the top line is nothing changed dramatically from what we've seen historically. Again, some of that growth that we talked about was still acquisitions and some non-organic but we feel really good about organic growth. And we are kind of right where we thought we would be from that top line perspective. Is it relates to - what was the second part of your question?

Just quarter-to-date if you have seen that momentum continues? Tom Bené: Yes. I think in general as we go into second quarter we talked about some of these things, some of the lapping issues. So I'd say in general, yes, understanding that we have some of these lapping things that we shared occurring as we speak.

Got it .And if could just quickly follow up on the cost side. Given that a lot of this is coming from wage pressures both in the warehouse and transpiration. Can you give us a little bit more detail on some of the productivity initiatives you have underway in both the warehouse and supply chain other opportunities for automation that you see that could help offset some of these pressures over the midterm? Just any more color there. Thank you. Tom Bené: Sure. And just on the pressure so it's wage to some extent. I think the important thing for everybody remember, I know we've talked about this is, we aren't --folks who are out there maybe increasing the minimum wage or coming out with higher wages for their associates. We generally aren't as impacted by that because we're already at or above those rates, but what we're finding is with the reduced availability of work force with the current levels of employment, we are just having a harder time attractive and retaining a certain associates. And I think that's we get into this little bit of churn situation where again we don't enough or paying overtime and that's driving our cost or we are having to spend money at 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 are experiencing there and everything around that. And that's when we talk about out trying to retain folks longer, we know just like customers or we can retain our associates, it helps our overall cost. As far as other things we are 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…

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

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 these supply chain costs which sounds like it's more drivers and warehouse labor versus maybe freight but I guess the question what are you assuming for those kind of supply chain costs over the next year and a half? Tom Bené: 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 initiative underway 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 necessary 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.

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 it would have thought gross margin would have been up a little bit more last time we 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?

Yes and 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 are actually experiencing some level 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 earlier comparison that 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 when we were talking about this couple years ago we're a couple points of deflation. And that obviously has certainly a much more significant margin percentage impact than what we are talking today.

Okay and can you help us understand how you're defining these micro chains? How big are they? Ad how close is the margin profile to more of a local independent restaurant versus a chain? And how we should think about that? Tom Bené: 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 there are concepts that usually have done well for a while as a local or independent customer and now we're at the stage where they feel like they're ready to expand. And so we're just seeing that segment of the market 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 they're 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 that they vary in size and scope. There not --they're not --they're certainly not changed like you typically think of a chain but they are starting to emerge and shift beyond kind of their traditional market.

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

Yes, hi, good morning. I was wondering if you could maybe expand a little bit on the 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 were also hiring some marketing associates. And even though your top line for independent case growth has been really strong, I'm wondering if there's 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 are seeing any combination of increased industry pricing and headcount expenses for drivers and for more salespeople? Tom Bené: Yes, Ajay, maybe the way I'd answer that is if you recall we actually probably led these nine months to or so ago by adding some marketing associates. We believed that we had now had the kind of the data analytics and tools to allow us to focus where we were 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'd 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, I'm 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 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 them or they're growing faster than what obviously we're just getting on the case grow. So that's our issue and we've got to get that back in check which is what we've really been talking about here this morning.

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 it breaks 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? Tom Bené: Yes. I think we're suggesting that where we sit today we feel like we just want to make you all aware of a couple of the lapping issues we've talked about. So we're not sitting here calling down for anything. I think just to be clear when you talk about breaks or Europe that's very different situation. And as I said in the remarks, I think in the UK there's certainly some uncertainty in that market continues because of this Brexit question that's out there. And quite honestly what we see in here as it gets closer to the date where they need to make some decisions 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 sort --we are managing through what is a little bit of a bumpy environment in some of our international markets.

Yes, Ajay, I just, this is Joel. I think just to clarify I think what I think we're saying is that the Q2 we are 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 our is just some moderation a bit due to some of the lapping and 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 is more similar is the answer to your questions is we really we're calling out there in a second quarter.

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

No, that's - I anticipate that remaining a bit of a headwind.

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

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 if there a level of inflation or 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 addressed?

Well, you are right, couple things. Again I just like to just make one slight comment like that Tom made. I would not characterize this as wage inflation per se. It is demand for labor particularly on the transportation side and again with a pretty low unemployment obviously that impacts our ability to try to 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, Karen, your other question, how much of that's going to happen before it just blows out the course of the three-year plan. I mean the reality of it is, again, we've been 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've talked about here. I'm certainly not ready to make the call though that, it's again unemployment is pretty low, driver shortage has been there. And so I don't, I certainly don't know whether we're contemplating a scenario where that somehow gets just exponentially worse and it just blows this plan out yet. We're certainly-- we've talked about a couple times today. We've --it's a headland, 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 costs that we need to accelerate to deal with that. We will do so and we're certainly again at this point we should we certainly have continued to express our confidence in achieving our three year plan numbers. Tom Bené: 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. Will we have to make some continued adjustments? No doubt. And that's what we've been talking about mostly this morning.

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

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 we're 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 backdoor price is? And it might just be a function of some of these contracts kind of rolling over or for you to set up a new whether cost-plus percent or cost plus your dollar per case basis whatever it is for you to capture the true cost to deliver to these customers? Tom Bené: Hey, 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's some of that for sure but I wouldn't characterize that as something that's a major impact or you should see some big switch swing because of it.

And at least from what I remember historically it was at 50% contract and 50% locally managed. I mean is that still the breakout within your Broadline or has that not?

That's right, John. Tom Bené: Yes, that's right.

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

Hi, good morning. I just want to drill down on some of this 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 want to --one of you guys referenced started over talking your answer but maybe can do two at once. One of you guys referenced increasing over time and that sounds more like a warehouse issue or is it also a driver issue? Tom Bené: 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 those are relative expense. The driver and the transportation cost associated in our business are significantly higher than the warehouse. So both are being impacted but if you have heavy impact on transportation and the drivers that plays a disproportionate role in the overall expense load. And that's the really the point.

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 you --these cost pressures mitigate? In other words it's just-- is there just a lot of turnover and it's sort of unpredictable and that's when you're caught short or is it generally just more of a general process and you're just short labor most of the time? Tom Bené: Yes. 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.

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

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?

Sure, well. So, yes, so fuel has continued to increase, obviously we continue to use some forward derivatives to hedge some of that but nonetheless those are on a rolling 12 that as fuel costs 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 you can 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 and on the contract side most of those are negotiated in. We have contract customers and those do move up and down based on some type of grid. On the street side, yes, that's something we're certainly continuing to evaluate and again as the markets move those do tend to move some as well but aren't nearly as big an impact.

Okay. And Joel just on the reclassification and the other income. It was pretty big swing this quarter especially without any other income this quarter and a year ago going up. Is that a pattern or we're going to or you guys going to go back to having sort of a decent other income line going forward? Otherwise it's like-- if we annualized this quarter so adverse swing it's like a $0.05 a share.

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

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