Sysco Reports Second Quarter Fiscal 2019 Results

The Company delivered results in line with expectations

HOUSTON, Feb. 04, 2019 (GLOBE NEWSWIRE) — Sysco Corporation (NYSE: SYY) today announced financial results for its 13-week second fiscal quarter ended December 29, 2018.

Second Quarter Fiscal 2019 Highlights

• Sales increased 2.5% to $14.8 billion
• Gross profit increased 2.7% to $2.8 billion; gross margin increased 4 basis points
• Operating income decreased 14.5% to $451.9 million; adjusted¹ operating income increased 4.8% to $603.3 million
• EPS decreased $0.03 to $0.51; adjusted¹ EPS decreased $0.03 to $0.75

First Half Fiscal 2019 Highlights

• Sales increased 3.2% to $30.0 billion
• Gross profit increased 3.3% to $5.7 billion; gross margin increased 3 basis points
• Operating income decreased 5.9% to $1.1 billion; adjusted¹ operating income increased 5.0% to $1.3 billion
• EPS increased $0.10 to $1.33; adjusted¹ EPS increased $0.14 to $1.66

“Our second quarter results were in line with our expectations,” said Tom Bené, Sysco’s chairman, president and chief executive officer. “We saw solid topline growth, while we continue making investments in our business, particularly in our international segment. We remain focused on exceeding our customers’ expectations, while continuing to manage costs, and anticipate seeing additional benefit from our cost savings initiatives in the second half of this fiscal year.”

In order to drive continued growth and value creation, Sysco recently implemented organizational and executive leadership changes, which further align the company with its customer first operating model and streamline the business. This reorganization results in an approximate 10 percent reduction in salaried corporate support positions.

¹Earnings Per Share (EPS) are shown on a diluted basis unless otherwise specified. Adjusted financial results exclude certain items, which primarily include restructuring costs, acquisition-related costs, and transformational project costs. Reconciliations of all non-GAAP measures are included in this release.

Second Quarter Fiscal 2019 Results

U.S. Foodservice Operations

Sales for the second quarter were $10.1 billion, an increase of 4.2% compared to the same period last year. Local case volume within U.S. Broadline operations grew 3.3% for the second quarter, of which 2.4% was organic, while total case volume within U.S. Broadline operations grew 2.9%, of which 2.0% was organic.

Gross profit increased 4.5% to $2.0 billion, and gross margin increased 6 basis points to 19.8%, compared to the same period last year. Food cost inflation was 1.4% in U.S. Broadline, as measured by the estimated change in Sysco’s product costs, primarily in the frozen potato, meat, paper and produce categories.

Operating expenses increased $56.5 million, or 4.7%, compared to the same period last year, due mainly to supply chain costs in both warehouse and transportation.

Operating income was $737.5 million, an increase of $29.9 million, or 4.2%, compared to the same period last year.

International Foodservice Operations

Sales for the second quarter were $2.9 billion, an increase of 0.8% compared to the same period last year. The impact to total Sysco sales of foreign exchange during the quarter was negative 0.7%.

Gross profit decreased 1.6% to $589.9 million, and gross margin decreased 49 basis points to 20.4%, compared to the same period last year.

Operating expenses increased $57.8 million, or 10.6%, compared to the same period last year. Adjusted operating expenses decreased $13.8 million, or 2.6%, compared to the same period last year, due mainly to supply chain cost challenges.

Operating loss was $14.9 million, a decrease of $67.5 million, or 128.4%, compared to the same period last year. Adjusted operating income was $83.1 million, an increase of approximately $4.0 million, or 5.1%, compared to the same period last year. The impact to total Sysco operating income of foreign exchange during the quarter was negative 0.5%.

First Half Fiscal 2019 Results

U.S. Foodservice Operations

Sales for the first 26 weeks of fiscal 2019 were $20.5 billion, an increase of 4.9% compared to the same period last year. Local case volume within U.S. Broadline operations grew 4.2% for the first 26 weeks of fiscal 2019, of which 3.0% was organic, while total case volume within U.S. Broadline operations grew 4.3%, of which 3.2% was organic.

Gross profit increased 4.9% to $4.1 billion, and gross margin remained flat at 20.0%, compared to the same period last year. U.S. Broadline had slight food cost inflation at 0.8%, primarily in the frozen, paper and dry categories, which was partially offset by deflation in poultry.

Operating expenses increased $126.7 million, or 5.3%, compared to the same period last year, due mainly to increased supply chain and selling expenses.

Operating income was $1.6 billion, an increase of $63.6 million, or 4.3%, compared to the same period last year.

International Foodservice Operations

Sales for the first 26 weeks of fiscal 2019 were $5.8 billion, an increase of 0.7% compared to the same period last year. The impact to total Sysco sales of foreign exchange during the quarter was negative 0.6%.

Gross profit decreased 0.8% to $1.2 billion, and gross margin decreased 30 basis points to 20.7%, compared to the same period last year.

Operating expenses increased $68.2 million, or 6.3%, compared to the same period last year. Adjusted operating expenses decreased $13.5 million, or 1.3%, compared to the same period last year, due mainly to investments in supply chain transformation and business integration and supply chain cost challenges.

Operating income was $51.9 million, a decrease of $77.5 million, or 59.9%, compared to the same period last year. Adjusted operating income was $178.4 million, an increase of approximately $4.2 million, or 2.4%, compared to the same period last year. The impact to total Sysco operating income of foreign exchange during the first 26 weeks of fiscal 2019 was negative 0.4%.

Capital Spending and Cash Flow

Cash flow from operations was $917.8 million for the first 26 weeks of fiscal 2019, which was $15.4 million lower compared to the same period last year. Free cash flow for the first 26 weeks of fiscal 2019 was $700.9 million, which was $22.4 million higher compared to the prior year.

Capital expenditures, net of proceeds from sales of plant and equipment, totaled $216.9 million for the first 26 weeks of fiscal 2019, which was $37.8 million lower compared to the same period last year.

Conference Call & Webcast

Sysco will host a conference call to review the Company’s second quarter fiscal 2019 financial results on Monday, February 4, 2019, at 10:00 a.m. Eastern. A live webcast of the call, accompanying slide presentation and a copy of this news release will be available online at investors.sysco.com.

Key Highlights:

Note:

⁽¹⁾   A reconciliation of non-GAAP measures is included in this release.

Individual components in the table above may not sum to the totals due to the rounding.

About Sysco

Sysco is the global leader in selling, marketing and distributing food products to restaurants, healthcare and educational facilities, lodging establishments and other customers who prepare meals away from home. Its family of products also includes equipment and supplies for the foodservice and hospitality industries. With more than 69,000 associates, the company operates approximately 330 distribution facilities worldwide and serves more than 600,000 customer locations. For fiscal 2018 that ended June 30, 2018, the company generated sales of more than $58 billion.

For more information, visit www.sysco.com or connect with Sysco on Facebook at www.facebook.com/SyscoCorporation or Twitter at https://twitter.com/Sysco. For important news and information regarding Sysco, visit the Investor Relations section of the company’s Internet home page at investors.sysco.com, which Sysco plans to use as a primary channel for publishing key information to its investors, some of which may contain material and previously non-public information. Investors should also follow us at www.twitter.com/SyscoStock and download the Sysco IR App, available on the iTunes App Store and the Google Play Market. In addition, investors should continue to review our news releases and filings with the SEC. It is possible that the information we disclose through any of these channels of distribution could be deemed to be material information.

Forward-Looking Statements

Statements made in this presentation or in our earnings call for the second quarter of fiscal 2019 that look forward in time or that express management’s beliefs, expectations or hopes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the views of management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from current expectations. These statements include: our expectations regarding our ability to strategically acquire companies in existing markets, including our ability to grow our share with local operators, achieve supply chain synergies and fill potential gaps in our product offerings and capabilities; our expectations that our recently implemented organizational and executive leadership changes will increase agility, reduce costs and accelerate decision making; our expectations that our investments in technology and our business will allow for future growth and exceptional customer service; our expectations regarding softer local case volume over the next quarter; our expectations regarding initiatives that will drive cost improvement and enhance customer service, including (i) the Finance Transformation Roadmap and our expectation that we will receive financial benefits from this initiative in the second half of fiscal 2019, (ii) Smart Spending and our expectation that we will receive financial benefits from this initiative in the second half of fiscal 2019, (iii) Canadian Regionalization and our expectation that this initiative will contribute to increased cost savings and that we will receive financial benefits from this initiative in the second half of fiscal 2019, and (iv) Administrative Expenses and our expectation that this initiative, which includes our new streamlined organizational and business unit structure, will drive costs out of the business and that we will receive financial benefits from this initiative in the second half of fiscal 2019; our expectations regarding our ability to increase profitability for SYGMA; our expectations regarding our ability to leverage operating expense growth to gross profit growth; our expectations regarding our Cutting Edge Solutions innovation platform, including the launch of new products; our expectations regarding our investments across Europe, including, but not limited to, the strengthening of our existing product portfolio in our Ireland business and the integration of Brake France and Davigel to Sysco France, including our ability to continue to succeed in the French marketplace and our expectation that we will see benefit from this integration in our France business beginning in fiscal 2020; our ability to deliver against our strategic priorities, which we believe will provide excellent customer service and improve our overall performance; statements regarding economic trends in the United States and abroad; our expectations regarding the long-term potential for our hospitality segment; our expectations regarding our ability to accelerate emphasis on administrative cost reductions, including pulling forward some of our multi-year cost savings opportunities and finding new ways to achieve incremental administrative cost savings; our expectation regarding our effective tax rate for fiscal 2019; and our expectations with respect to achieving our three-year financial targets through fiscal 2020, including our expectation that our three-year plan gap will be approximately 150 basis points.

The success of our plans and expectations regarding our operating performance, including expectations regarding our three-year financial objectives, are subject to the general risks associated with our business, including the risks of interruption of supplies due to lack of long-term contracts, severe weather, crop conditions, work stoppages, intense competition, technology disruptions, dependence on large, long-term regional and national customers, inflation risks, the impact of fuel prices, adverse publicity, labor issues, political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade, any or all of which could delay our receipt of product or increase our input costs. Risks and uncertainties also include risks impacting the economy generally, including the risks that the current general economic conditions will deteriorate, or consumer confidence in the economy or consumer spending, particularly on food-away-from-home, may decline. Market conditions may not improve. Competition and the impact of GPOs may reduce our margins and make it difficult for us to maintain our market share, growth rate and profitability. We may not be able to fully compensate for increases in fuel costs, and fuel hedging arrangements intended to contain fuel costs could result in above market fuel costs. Our ability to meet our long-term strategic objectives depends on our ability to grow gross profit, leverage our supply chain costs and reduce administrative costs. This will depend largely on the success of our various business initiatives, including efforts related to revenue management, expense management, our digital e-commerce strategy and any efforts related to restructuring or the reduction of administrative costs. There are various risks related to these efforts, including the risk that if sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, or if we are unable to continue to accelerate local case growth, our gross margins may decline; the risk that we are unlikely to be able to predict inflation over the long term, and lower inflation is likely to produce lower gross profit; the risk that our efforts to modify truck routing, including our small truck initiative, in order to reduce outbound transportation costs may not be effective; the risk that our efforts to mitigate increases in warehouse costs may be unsuccessful; the risk that we may not be able to accelerate and/or identify additional administrative cost savings in order to compensate for any gross profit or supply chain cost leverage challenges; the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. Our plans related to and the timing of any initiatives are subject to change at any time based on management’s subjective evaluation of our overall business needs. If we are unable to realize the anticipated benefits from our efforts, we could become cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease. Adverse publicity about us or lack of confidence in our products could negatively impact our reputation and reduce earnings. Capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending. Periods of significant or prolonged inflation or deflation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profit, operating income and earnings, and periods of deflation can be difficult to manage effectively. Fluctuations in inflation and deflation, as well as fluctuations in the value of foreign currencies, are beyond our control and subject to broader market forces. Expanding into international markets presents unique challenges and risks, including compliance with local laws, regulations and customs and the impact of local political and economic conditions, including the impact of Brexit and the “yellow vest” protests in France against a fuel tax increase and the French government, and such expansion efforts may not be successful. Any business that we acquire may not perform as expected, and we may not realize the anticipated benefits of our acquisitions. Expectations regarding the financial statement impact of any acquisitions may change based on management’s subjective evaluation. Meeting our dividend target objectives depends on our level of earnings, available cash and the success of our various strategic initiatives. Changes in applicable tax laws or regulations and the resolution of tax disputes could negatively affect our financial results. We rely on technology in our business and any cybersecurity incident, other technology disruption or delay in implementing new technology could negatively affect our business and our relationships with customers. For a discussion of additional factors impacting Sysco’s business, see our Annual Report on Form 10-K for the year ended June 30, 2018, as filed with the SEC, and our subsequent filings with the SEC, including our Quarterly Report on Form 10-Q for the second quarter of fiscal 2019. We do not undertake to update our forward-looking statements, except as required by applicable law.

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands, Except for Share Data)

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In Thousands)

(1) Change includes cash paid for shares withheld to cover taxes, debt issuance costs and other financing activities.
(2) Change includes restricted cash included within other assets in the Consolidated Balance Sheet.

Sysco Corporation and its Consolidated Subsidiaries                                                  
Non-GAAP Reconciliation (Unaudited)                                                                                                                 
Impact of Certain Items                                                                                                                                                                                                                                                                                              
Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends.  Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures and exclude the impact from restructuring and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and (3) restructuring charges.

The non-GAAP financial measures presented in this report also exclude the impact of the following acquisition-related items: (1) intangible amortization expense and (2) integration costs.

The second quarter fiscal 2019 and fiscal 2018 items described above and excluded from our non-GAAP measures are collectively referred to as “Certain Items.” All acquisition-related costs in fiscal 2019 and 2018 that have been excluded relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition). In addition, with respect to the adjusted return on invested capital targets, our invested capital is adjusted for the accumulation of debt incurred for the Brakes Acquisition that would not have been borrowed absent this acquisition.

Management believes that adjusting its operating expenses, operating income, interest expense, net earnings and diluted earnings per share to remove these Certain Items, provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations, facilitating comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated and that, as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity.

Although Sysco has a history of growth through acquisitions, the Brakes Group was significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements.  Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant period solely those acquisition costs specific to the Brakes acquisition.  We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2019 and fiscal 2018.

The company uses these non-GAAP measures when evaluating its financial results, as well as for internal planning and forecasting purposes.  These financial measures should not be used as a substitute for GAAP measures in assessing the company’s results of operations for periods presented.  An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.  As a result, in the table below, each period presented is adjusted for the impact described above.  In the table below, individual components of diluted earnings per share may not add to the total presented due to rounding.  Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. 

Sysco Corporation and its Consolidated Subsidiaries
Non-GAAP Reconciliation  (Unaudited)
Free Cash Flow
(In Thousands)

Free cash flow represents net cash provided from operating activities less purchases of plant and equipment and includes proceeds from sales of plant and equipment.  Sysco considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases and sales of buildings, fleet, equipment and technology, which may potentially be used to pay for, among other things, strategic uses of cash including dividend payments, share repurchases and acquisitions.  However, free cash flow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments.  Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented.  An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.  In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities.

For more information contact:

Camilla Zuckero
Media and Investor Contact
T 281-899-1839