Sysco Reports Record Third Quarter Operating Income

HOUSTON, May 02, 2023 (GLOBE NEWSWIRE) -- Sysco Corporation (NYSE: SYY) (“Sysco” or the “company”) today announced financial results for its 13-week third fiscal quarter ended April 1, 2023.

Key financial results for the third quarter of fiscal year 2023 include:

• Sales increased 11.7% versus the same period in fiscal year 2022;
• U.S. Foodservice volume increased 6.1% versus the same period in fiscal year 2022;
• Gross profit increased 13.9% to $3.4 billion, as compared to the same period last year;
• Operating income increased 40.0% to $694.2 million, and adjusted¹ operating income increased 27.8% to $735.5 million, in each case as compared to the same period last year; Sysco delivered the highest Q3 adjusted¹ operating income on record, which was 18.6% higher than the prior peak;
• EBITDA increased 25.8% to $885.0 million, and adjusted EBITDA increased 19.0% to $899.7 million, in each case as compared to the same period last year²;
• EPS³ increased 42.4% to $0.84 and adjusted¹ EPS increased 26.8% to $0.90, in each case as compared to the same period last year; and
• Net Debt to adjusted EBITDA⁴ of 2.8 times; returned over $359 million of capital to shareholders via $110 million of share repurchases and $249 million of dividends.
  

“Sysco delivered another quarter of double-digit top- and bottom-line growth, inclusive of volume and market share gains. Our supply chain network delivered meaningful, sequential efficiency gains with improvements in retention, productivity, and operating expense leverage. We advanced our Recipe for Growth strategy with progress made with our digital tools and sales and merchandising initiatives. We are driving meaningful returns through our customer focused work with Sysco Your Way and Sysco Perks. We delivered strong sales growth throughout the quarter, despite some industry softness beginning in March. In an evolving environment, Sysco is best positioned to weather the potential impacts, given our fully diversified business model. We expect our efficiency actions to accelerate, as we continue to invest to win for the long-term health of our business,” said Kevin Hourican, Sysco’s President and Chief Executive Officer.

“Our solid financial results for the third quarter included gross profit growth outpacing operating expense growth, which drove meaningful operating leverage and allowed us to deliver another record quarter of adjusted operating income. Additionally, our free cash flow more than doubled to $980 million year-to-date. We also continued our balanced approach to capital allocation, returning cash back to our shareholders with share repurchases and dividends,” said Kenny Cheung, Sysco’s Chief Financial Officer.

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¹ Adjusted financial results, including adjusted operating expense, adjusted operating income (loss), adjusted other expense (income), adjusted earnings per share (EPS) and adjusted EBITDA, are non-GAAP financial measures that exclude certain items, which primarily include acquisition-related costs, restructuring costs, transformational project costs, adjustments to our bad debt reserve specific to aged receivables existing prior to the COVID-19 pandemic and adjustments to a product return allowance related to COVID-related personal protection equipment inventory. Specific to adjusted EPS, this year’s Certain Items include a pension settlement charge that resulted from the purchase of a nonparticipating single premium group annuity contract that transferred defined benefit plan obligations to an insurer. Last year’s Certain Items include the impact of a write-down of COVID-related personal protection equipment inventory due to the reduction in the net realizable value of inventory, losses on the extinguishment of long-term debt and an increase in reserves for uncertain tax positions.
² Earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted EBITDA are non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to the nearest corresponding GAAP financial measure are included at the end of this release.
³ Earnings per share (EPS) are shown on a diluted basis, unless otherwise specified.
⁴ Net debt to adjusted EBITDA is a non-GAAP financial measure frequently used by investors and credit rating agencies. Our net debt to adjusted EBITDA ratio is calculated using a numerator of our debt minus cash and cash equivalents, divided by the sum of the most recent four quarters of adjusted EBITDA.

Third Quarter Fiscal Year 2023 Results

Total Sysco

Sales for the third quarter were $18.9 billion, an increase of 11.7% compared to the same period last year.

Gross profit increased 13.9% to $3.4 billion, and gross margin increased 35 basis points to 18.2%, compared in each case to the same period last year. Product cost inflation was 4.9% at the total enterprise level, as measured by the estimated change in Sysco’s product costs, primarily in the dairy and frozen categories. The increase in gross profit for the third quarter was primarily driven by higher volumes, as well as continued progress with effective management of product cost inflation and our partnership growth management initiatives.

Operating expenses increased $219.5 million, or 8.7%, compared to the same period last year, driven by increased volumes, cost inflation, operational pressures from the operating environment and our planned investments to drive our transformation initiatives. Adjusted operating expenses increased $228.3 million, or 9.3%, compared to the same period last year.

Operating income was $694.2 million, an increase of $198.4 million, or 40.0%, compared to the same period last year. Adjusted operating income was $735.5 million, an increase of $160.1 million compared to the same period last year.

Other expense (income), net was $5.2 million. Adjusted other expense (income), net was $4.8 million, an increase of $18.5 million, compared to the same period last year, primarily due to increased pension expenses.

U.S. Foodservice Operations

The U.S. Foodservice Operations segment generated strong volume and sales growth, continued share gains and improved profitability.

Sales for the third quarter were $13.3 billion, an increase of 10.4% compared to the same period last year. Local case volume within U.S. Foodservice grew 4.2% for the third quarter, while total case volume within U.S. Foodservice grew 6.1%, in each case as compared to the same period last year.

Gross profit increased 12.2% to $2.5 billion, and gross margin increased 29 basis points to 19.2%, compared in each case to the same period last year.

Operating expenses increased $166.5 million, or 10.9%, compared to the same period last year. Adjusted operating expenses increased $157.7 million, or 10.4%, compared to the same period last year.

Operating income increased 14.6% to $855.8 million, an increase of $109.3 million compared to the same period last year. Adjusted operating income increased 15.8% to $867.5 million, an increase of $118.1 million compared to the same period last year.

International Foodservice Operations

The International Foodservice Operations segment again delivered positive results, with strong sales and significant profit growth.

Sales for the third quarter were $3.3 billion, an increase of 18.0% compared to the same period last year. On a constant currency basis⁵, sales for the third quarter were $3.6 billion, an increase of 25.3% compared to the same period last year. Foreign exchange rates decreased both International Foodservice Operations sales by 7.3% and total Sysco sales by 1.2% during the quarter.

Gross profit increased 12.7% to $642.8 million, and gross margin decreased 90 basis points to 19.2%, compared in each case to the same period last year. On a constant currency basis⁵, gross profit increased 19.8% to $683.0 million. Foreign exchange rates decreased both International Foodservice Operations gross profit by 7.1% and total Sysco gross profit by 1.3% during the quarter.

Operating expenses increased $31.9 million, or 5.7%, compared to the same period last year. Adjusted operating expenses increased $40.1 million, or 7.5%, compared to the same period last year. On a constant currency basis⁵, adjusted operating expenses increased $77.2 million, or 14.4%, compared to the same period last year. Foreign exchange rates decreased both International Foodservice Operations operating expenses by 6.9% and total Sysco operating expenses by 1.6% during the quarter.

Operating income was $48.4 million, an improvement of $40.6 million compared to the same period last year. Adjusted operating income increased $32.4 million compared to the same period last year. On a constant currency basis⁵, adjusted operating income was $70.2 million, an increase of $35.6 million compared to the same period last year. Foreign exchange rates decreased both International Foodservice Operations operating income by $3.2 million and total Sysco operating income by $0.2 million during the quarter.

Balance Sheet, Cash Flow and Capital Spending

As of the end of the quarter, the company had a cash balance of $757.9 million.

During the first 39 weeks of fiscal 2023, Sysco returned $1.1 billion to shareholders via $377.8 million of share repurchases and $747.4 million of dividends.

Cash flow from operations was $1.4 billion for the first 39 weeks of fiscal 2023, which was an increase of $679.9 million over the prior year period.

Capital expenditures, net of proceeds from sales of plant and equipment, for the first 39 weeks of fiscal 2023 were $446.1 million.

Free cash flow⁶ for the first 39 weeks of fiscal 2023 was $979.6 million, which was an increase of $545.4 million over the prior year period, driven by positive change in working capital.

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⁵ Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results. These adjusted measures are non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to the nearest corresponding GAAP financial measure are included at the end of this release.
⁶ Free cash flow is a non-GAAP financial measure that represents net cash provided from operating activities less purchases of plant and equipment and includes proceeds from sales of plant and equipment. Reconciliations for all non-GAAP financial measures are included at the end of this release.

Conference Call & Webcast

Sysco will host a conference call to review the company’s third quarter fiscal 2023 financial results on Tuesday, May 2, 2023, at 10:00 a.m. Eastern Daylight Time. A live webcast of the call, accompanying slide presentation and a copy of this news release will be available online at investors.sysco.com.

Forward-Looking Statements

Statements made in this press release or in our earnings call for the third quarter of fiscal year 2023 that look forward in time or that express management’s beliefs, expectations or hopes are forward-looking statements under 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 statements concerning: the effect, impact, potential duration or other implications of the COVID-19 pandemic and any expectations we may have with respect thereto; our expectations regarding future improvements in productivity; our belief that improvements in our organizational capabilities will deliver compelling outcomes in future periods; our expectations regarding improvements in international volume; our expectations that our transformational agenda will drive long-term growth; our expectations regarding the continuation of an inflationary environment; our expectations regarding improvements in the efficiency of our supply chain; our expectations regarding the impact of our Recipe for Growth strategy and the pace of progress in implementing the initiatives under that strategy; our expectations regarding Sysco’s ability to outperform the market in future periods; our expectations that our strategic priorities will enable us to grow faster than the market; our expectations regarding our efforts to reduce overtime rates and the incremental investments in hiring; our expectations regarding the expansion of our driver academy and our belief that the academy will enable us to provide upward career path mobility for our warehouse colleagues and improve colleague retention; our expectations regarding the benefits of the six-day delivery and last mile distribution models; our plans to improve the capabilities of our sales team; our expectations regarding the impact of our growth initiatives and their ability to enable Sysco to consistently outperform the market; our expectations regarding the impact of the Concord Foods acquisition on our business; our expectations regarding our ability to grow faster than the total market in fiscal 2023 and to exceed our growth target by the end of fiscal 2024; our ability to deliver against our strategic priorities; economic trends in the United States and abroad; our belief that there is further opportunity for profit in the future; our future growth, including growth in sales and earnings per share; our expectations regarding profits and sales in fiscal 2023; the pace of implementation of our business transformation initiatives; our expectations regarding our balanced approach to capital allocation and rewarding our shareholders; our plans to improve colleague retention, training and productivity; our belief that our Recipe for Growth transformation is creating capabilities that will help us profitably grow for the long term; our expectations regarding our long-term financial outlook; our expectations of the effects labor harmony will have on sales and case volume, as well as mitigation expenses; our expectations for customer acquisition in the local/street space; our expectations regarding the effectiveness of our Global Support Center expense control measures; our expectations regarding the growth and resilience of our food away from home market; and our expectations regarding additional improvements from snap-back costs and productivity expenses during the fiscal third quarter.

It is important to note that actual results could differ materially from those projected in such forward-looking statements based on numerous factors, including those outside of Sysco’s control. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see our Annual Report on Form 10-K for the year ended July 2, 2022, as filed with the SEC, and our subsequent filings with the SEC. We do not undertake to update our forward-looking statements, except as required by applicable law.

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 71,000 colleagues, the company operates 333 distribution facilities worldwide and serves approximately 700,000 customer locations. For fiscal year 2022 that ended July 2, 2022, the company generated sales of more than $68 billion. Information about our Sustainability program, including Sysco’s 2022 Sustainability Report and 2022 Diversity, Equity & Inclusion Report, can be found at www.sysco.com.

For more information, visit www.sysco.com or connect with Sysco on Facebook at www.facebook.com/SyscoFoods. 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. 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.

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

Our discussion of our results includes certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, which we believe provide important perspective with respect to underlying business trends. Other than free cash flow and EBITDA, any non-GAAP financial measures will be denoted as adjusted measures to remove the impact of: (1) restructuring and transformational project costs consisting of: (a) restructuring charges, (b) expenses associated with our various transformation initiatives and (c) facility closure and severance charges; (2) acquisition-related costs consisting of: (a) intangible amortization expense and (b) acquisition costs and due diligence costs related to our acquisitions; and (3) the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. Our results for fiscal 2023 were also impacted by adjustments to a product return allowance related to COVID-related personal protection equipment inventory and a pension settlement charge that resulted from the purchase of a nonparticipating single premium group annuity contract that transferred defined benefit plan obligations to an insurer. Our results for fiscal 2022 were also impacted by a write-down of COVID-related personal protection equipment inventory due to the reduction in the net realizable value of inventory, losses on the extinguishment of long-term debt and an increase in reserves for uncertain tax positions.

The results of our operations can be impacted due to changes in exchange rates applicable in converting local currencies to U.S. dollars. We measure our results on a constant currency basis. Constant currency operating results are calculated by translating current-period local currency operating results with the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period.

Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove these Certain Items and presenting its results on a constant currency basis, 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 and (2) facilitates comparisons on a year-over-year basis.

Sysco has a history of growth through acquisitions and excludes from its non-GAAP financial measures the impact of acquisition-related intangible amortization, acquisition costs and due-diligence costs for those acquisitions. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2023 and fiscal 2022.

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 up 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 financial 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.