Sysco Reports Second Quarter Fiscal 2018 Results

HOUSTON, Feb. 05, 2018 (GLOBE NEWSWIRE) -- Sysco Corporation (NYSE:SYY) today announced financial results for its 13-week second fiscal quarter ended December 30, 2017.¹

Second Quarter Fiscal 2018 Highlights

• Sales increased 7.1% to $14.4 billion
• Gross profit increased 5.0% to $2.7 billion; gross margin decreased 38 basis points to 18.73%
• Operating income increased 8.1% to $532 million; adjusted operating income increased 3.9% to $579 million
• Earnings Per Share (EPS) increased $0.04 to $0.54; adjusted EPS increased $0.20 to $0.78; further adjusting to exclude a one-time benefit associated with the recent U.S. tax rate changes, adjusted EPS increased $0.08 to $0.66

First Half Fiscal 2018 Highlights

• Sales increased 6.0% to $29.1 billion
• Gross profit increased 4.4% to $5.5 billion; gross margin decreased 29 basis points to 18.90%
• Operating income increased 9.1% to $1.2 billion; adjusted operating income increased 4.8% to $1.2 billion
• Earnings Per Share (EPS) increased $0.15 to $1.23; adjusted EPS increased $0.27 to $1.52; further adjusting to exclude a one-time benefit associated with the recent U.S. tax rate changes, adjusted EPS increased $0.15 to $1.40

“We are pleased with the continued momentum in our business driven by strong local case growth and overall top-line results, while balancing some gross profit dollar and expense challenges associated with the second quarter,” said Tom Bené, Sysco’s president and chief executive officer. “We remain confident in our ability to deliver on our full-year fiscal 2018 financial targets.”

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

Second Quarter Fiscal 2018 Results 

U.S. Foodservice Operations

Sales for the second quarter were $9.7 billion, an increase of 6.6% compared to the same period last year. Local case volume within U.S. Broadline operations grew 4.8% for the second quarter and total case volume grew 3.5%.

Gross profit increased 5.1% to $1.9 billion and gross margin decreased 28 basis points to 19.79% compared to the prior year period. Food cost inflation was 3.3% in U.S. Broadline, as measured by the estimated change in Sysco's product costs, primarily in the meat, dairy and produce categories.

Operating expenses increased $67 million, or 5.9%, compared to the same period last year, due mainly to increased selling and transportation expenses. There were no certain items impacting U.S. Foodservice Operations during the quarter.

Operating income was $706 million, an increase of $25 million, or 3.7%, compared to the same period last year.

International Foodservice Operations

Our international segment has businesses in 12 different countries, with the largest located in Canada, the United Kingdom and France. During the quarter, we experienced mixed results across these various businesses. Our Canadian operations continued to deliver improved results over the prior year, resulting from case growth and better cost management. In Europe, the transition from calendar year to fiscal year unfavorably impacted our gross profit and expenses. In addition, we continue to invest in our transformation initiatives, which adds costs to the current period and positions the business for long-term success. Our operations in France and Ireland performed relatively well during the quarter.

Sales for the second quarter were $2.9 billion, an increase of 9.3% compared to the same period last year. Operating income across the international segment was $52 million, a decrease of $32 million, or 38.2%, compared to the same period last year.  Adjusted operating income was $79 million, a decrease of $32 million, or 28.8%, compared to the same period last year.

First Half Fiscal 2018 Results

U.S. Foodservice Operations

Sales for the first half of fiscal 2018 were $19.5 billion, an increase of 5.2% compared to the same period last year. Local case volume within U.S. Broadline operations grew 3.8% for the first half of fiscal 2018 and total case volume grew 1.8%.

Gross profit increased 4.4% to $3.9 billion; and gross margin decreased 14 basis points to 19.98%. Food cost inflation was 3.6% in U.S. Broadline, as measured by the estimated change in Sysco's product costs, primarily in the meat, dairy and produce categories.

Operating expenses increased $105 million, or 4.5%, compared to the same period last year. There were no certain items impacting U.S. Foodservice Operations during the first half of fiscal 2018.

Operating income was $1.5 billion, an increase of $61 million, or 4.3%, compared to the same period last year.

International Foodservice Operations

During the first half of fiscal 2018, we experienced mixed results across our various businesses. Our Canadian operations continued to deliver improved results over the prior year, resulting from case growth and better cost management. In Europe, the transition from calendar year to fiscal year unfavorably impacted our gross profit and expenses. In addition, we continue to invest in our transformation initiatives, which adds costs to the current period and positions the business for long-term success. Our operations in France and Ireland performed relatively well during the first half of fiscal 2018.

Sales for the first half of fiscal 2018 were $5.8 billion, an increase of 7.8% compared to the same period last year. Operating income was $129 million, a decrease of $35 million compared to the same period last year. Adjusted operating income was $174 million, a decrease of $40 million, or 18.9%, compared to the same period last year.

Impact of Tax Reform

Sysco recorded various estimates related to tax reform in its results, primarily U.S. tax reform, though additional law changes occurred in Europe. Income tax expense for U.S. tax reform included provisional estimates for transition tax expense of $115 million and a benefit from the impact of remeasuring accrued income taxes and deferred tax assets and liabilities to future applicable tax rates in the amount of $15 million. Both of these are considered certain items.  

Sysco’s fiscal 2018 ends June 30, 2018. Additionally, Sysco is at the mid-point of its fiscal year and will experience a blended reduced U.S. statutory tax rate of 28% in fiscal 2018. For the second quarter of fiscal 2018 and first 26 weeks of fiscal 2018, we have recorded a benefit for this reduced rate in the amount of $65 million. In fiscal 2019, our U.S. statutory tax rate will be 21%.

Capital Spending and Cash Flow

Cash flow from operations was $933 million for the first half of fiscal 2018, which was $294 million higher compared to the same period last year. Free cash flow for the first half of fiscal 2018 was $679 million, which was $313 million higher compared to the same period last year. The significant improvements in both cash flow from operations and free cash flow are largely driven by cash taxes that were not paid in the second quarter due to flood relief associated with Hurricane Harvey.

Capital expenditures, net of proceeds from sales of plant and equipment, totaled $255 million for the first half of fiscal 2018, which was $19 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 2018 financial results on Monday, February 5, 2018, 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:

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 over 65,000 associates, the company operates approximately 300 distribution facilities worldwide and serves more than 500,000 customer locations. For fiscal 2017 that ended July 1, 2017, the company generated sales of more than $55 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 news release or in our earnings call for the second quarter of fiscal 2018 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 the impact of general economic conditions on our business and our industry, including general macroeconomic conditions in the United States and abroad, our outlook for fiscal 2018 and the future, our expectations regarding future performance and growth, including further growth in Europe, Latin America, Costa Rica and Mexico, and cash flow performance, our plans and expectations related to our three-year financial objectives, and the key levers for realizing these goals, expectations regarding gross profit growth, expectations regarding our effective tax rate and benefits resulting from tax reform in the United States, including the anticipated positive impact on our three-year financial plan targets, our beliefs regarding opportunities and performance in our international business in Canada, Latin America and Europe, which includes our Brakes Group business, statements regarding progress on the Brakes Group’s transformational efforts, the impact of inflation on our U.K. business, the negative impact of inbound freight challenges on our gross profit dollars, the impact of our consultative approach to selling on local case growth and our customers’ experience, statements regarding SYGMA’s ability to deliver growth in fiscal 2018, expectations regarding improvements in operating expense growth relative to gross profit dollar growth, expectations regarding our capital allocation priorities, statements regarding Sysco brand growth, and expectations regarding our earnings per share for fiscal 2018. 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 regional and national customers, inflation risks, the impact of fuel prices, adverse publicity, and labor issues. 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. If sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, our gross margins may decline. Our ability to meet our long-term strategic objectives depends 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 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. 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 high inflation, 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 such expansion efforts, including our Brakes acquisition, may not be successful. Any business that we acquire, including the Brakes transaction, may not perform as expected, and we may not realize the anticipated benefits of our acquisitions. The Brakes Group acquisition will require a significant commitment of time and company resources, and realizing the anticipated benefits from the transaction may take longer than expected.  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. For a discussion of additional factors impacting Sysco’s business, see the company’s Annual Report on Form 10-K for the year ended July 1, 2017, as filed with the SEC, and the company’s subsequent filings with the SEC. Sysco does not undertake to update its forward-looking statements, except as required by applicable law.

Sysco Corporation and its Consolidated Subsidiaries
Non-GAAP Reconciliation (Unaudited)
Impact of Certain Items

Sysco’s results of operations for fiscal 2018 and 2017 are impacted by restructuring costs consisting of: (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we incurred costs to convert to a modernized version of our established platform as opposed to completing the implementation of an ERP; (2) professional fees related to our three-year strategic plan; (3) restructuring expenses within our Brakes Group operations; and (4) severance charges related to restructuring.  In addition, fiscal 2018 results of operations are impacted by business technology transformation initiative costs.  Our results of operations for fiscal 2018 and 2017 are also impacted by the following acquisition-related items: (1) intangible amortization expense and (2) integration costs.  All acquisition-related costs in fiscal 2018 and 2017 that have been excluded relate to the Brakes acquisition.  The Brakes acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs.  Sysco’s results of operations for fiscal 2018 are also impacted by reform measures from the Tax Act enacted on December 22, 2017.  The impact for fiscal 2018 includes: (1) a provisional estimate of a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and (2) a net benefit from remeasuring Sysco’s accrued income taxes, deferred tax liabilities and deferred tax assets due to the changes in tax rates.  These fiscal 2018 and fiscal 2017 items are collectively referred to as "Certain Items."

Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove these Certain Items, but not for the impact of the tax rate reduction, 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 is 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 2018 and fiscal 2017.

Sysco is also disclosing net earnings and diluted earnings per share that are further adjusted due to changes in the U.S. statutory tax rate that resulted from the Tax Act. The U.S. statutory tax rate changed to 21% effective January 1, 2018; however, because Sysco was at the midpoint of its fiscal year when the Tax Act became effective, the blended U.S. statutory tax rate applicable to Sysco for fiscal 2018 is 28%.  This produced an estimated, one-time net tax benefit of $64.7 million that was recorded in the second quarter of fiscal 2018 due to retroactive application of the 28% blended rate to our earnings for the first half of fiscal 2018, an adjustment addressing the fact that reported earnings in the first quarter were calculated based on the prior, higher statutory rate and that rate has been applied retroactively to all earnings from July 1, 2017 through the date of adoption of the Tax Act.

Management believes that further adjusting its adjusted net earnings and adjusted diluted earnings per share to remove the impact of the U.S. statutory tax rate change provides an important additional perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that better reflects the underlying performance of the company and provides for better comparability quarter to quarter, by excluding the impacts of not only the Certain Items described above, but also the impact of the reduction in the U.S. statutory tax rate, which will continue to impact our financial results, and which impacts would have been difficult for analysts or investors to anticipate, for purposes of their financial models or otherwise, with any degree of specificity.  Management also made this further adjustment to compare Sysco’s underlying financial performance to internal budgets and forecasts that did not include the impact of the U.S. statutory tax rate change that occurred as a result of the Tax Act.

Set forth below is a reconciliation of sales, operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented.  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.