In this file:

 

         Sysco Corp (SYY) Q1 2020 Earnings Call Transcript

         Sysco Misses Expectations for 1Q Sales

 

 

Sysco Corp (SYY) Q1 2020 Earnings Call Transcript

SYY earnings call for the period ending September 28, 2019.

 

Motley Fool Transcribers

Nov 4, 2019

 

Sysco Corp (NYSE:SYY)

Q1 2020 Earnings Call

Nov 4, 2019, 10:00 a.m. ET

 

Contents:

 

Prepared Remarks

Questions and Answers

Call Participants

 

Prepared Remarks:

 

Operator

 

Good morning and welcome to Sysco's First Quarter Fiscal 2020 Conference Call. [Operator Instructions]

 

I would like to turn the call over to Neil Russell, Vice President of Corporate Affairs. Please go ahead.

 

Neil A. Russell -- Vice President, Investor Relations and Communications

 

Good morning everyone and welcome to Sysco's first quarter fiscal 2020 earnings call. Joining me in Houston today are Tom Bene, our Chairman, President, and Chief Executive Officer; and Joel Grade, our Chief Financial Officer.

 

Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to risk factors contained in our annual report on Form 10-K for the year ended June 29, 2019, 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.

 

To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question and one follow-up.

 

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

 

Tom Bene -- Chairman, President, and Chief Executive Officer

 

Thanks, Neil. And good morning everyone. Thank you for joining us. This morning we announced financial results for the first quarter of fiscal year 2020, which reflect continued momentum in transforming our business and improved year-over-year performance. Our overall results were largely in line with our expectations.

 

From a top line perspective, we generated sales of $15.3 billion, a 0.6% increase compared to the same period last year. As we discussed during Q4 of fiscal 2019, we saw top line softness and difficult comparatives during that quarter, which we said would also carry into the first quarter of fiscal 2020. We did in fact see that continued softness at the beginning of the quarter, but as expected, we saw sequential improvement throughout the quarter, and therefore feel confident about the future trajectory based on the exit rate of the quarter. There were several things that contributed to our volume and sales growth rate for the quarter, including the continued growth of our local customers at a faster rate than our national customers, in part driven by the transition of certain large national customers both in US Broadline and SYGMA during the past year.

 

Secondly, the divestiture of Iowa Premium, our beef processing facility that was sold in the fourth quarter of fiscal 2019. This divestiture had an impact in the quarter of $114 million. And the negative impact of foreign exchange rates, which amounted to an additional $100 million for the quarter.

 

Gross profit for the quarter grew 1.4% to $2.9 billion. And gross margin expanded 15 basis points, driven by continued shift in our customer mix as we grew local cases at a faster pace than total case growth. And we continued growth in penetration of our Sysco brand portfolio across the various business units.

 

Turning to cost, adjusted operating expenses decreased 0.5% to $2.2 billion, driven by strong expense management during the quarter, including greater operational efficiencies and benefits from our transformation initiatives, such as the regionalization work in Canada and our finance transformation. As a result, for total Sysco we delivered solid adjusted operating income growth of 7.3%, which led to adjusted earnings-per-share growth of 8.6%.

 

Looking at the broader economic and industry trends in the US. GDP growth was 1.9% during the third quarter, and unemployment remains at an all-time low. Consumer spending, the main engine of growth rose a healthy 2.9%, but it was down from 4.6% in the spring. All signs of the economy is doing well, despite some broader global concerns. While some other economic indicators have recently been softer than expected, we haven't seen a meaningful impact to restaurant industry trends and therefore continue to feel good about what we're seeing in the food away from home market.

 

During the quarter, according to Black Box intelligence, restaurant same-store sales rose slightly, driven by average guest check increases. Although traffic in the foodservice industry continues to be mixed, it appears that market conditions are modestly favorable for foodservice operators in the United States.

 

Turning to international markets. Traffic and sales in the UK and Ireland continue to be soft, as uncertainty is around Brexit affect foodservice operators, as well as other economic activity. However, these trends are relatively stable compared to conditions in the prior quarter. In Canada, GDP and consumer spending are stable and unemployment continues to decline, which is reflected in positive broader restaurant industry performance. In France, GDP growth is expected to continue. Household spending has picked up and unemployment is trending down, boosted by labor market reforms.

 

I would like to now transition to our first quarter results by business segment, beginning with US Foodservice Operations. We were pleased with our top line results and strong expense management in the US Foodservice Operations segment in Q1. Specifically, sales for the first quarter were $10.7 billion, an increase of 2.5%. Gross profit grew 2.6%, adjusted operating expenses grew only 0.4%, and adjusted operating income increased 6.1%.

 

Local case volume was solid within US Broadline operations, growing 1.5% and has now grown for 22 consecutive quarters. As previously mentioned, this performance reflects solid growth at local restaurant customers, especially as we cycled one of our largest growth quarters last year, which was partially offset by the loss of some less profitable traditional bid-type business, such as local schools. Total case volume within US Broadline operations grew 0.5%, reflecting our ongoing disciplined approach in managing our national account business. We expect to continue to see the impact of certain customer transitions in US Foodservice Operations into the second quarter as well.

 

Gross profit grew by 2.6%, driven by higher inflation, the positive mix of local cases to total cases, continued growth in Sysco Brand, up 36 basis points, and continued category management efforts. Food cost inflation was 2.9% in US Broadline, driven primarily by the meat, produce, dairy and poultry categories. From an expense perspective, adjusted operating expense for the quarter grew only 0.4%, driven by strong expense management throughout the business, including the impact of some of the transformational initiatives mentioned earlier, which drove down cost during the quarter. This was partially offset by higher labor and operational costs.

 

Similar to the discussion we had in the second half of fiscal 2019, our labor costs were slightly higher due to our decision to retain driver and warehouse personnel in a tight labor market. And while we do see some signs of improvement in the overall labor market, we will continue to evaluate this practice as the right one for our business over the next couple of quarters.

 

Moving to International Foodservice Operations. We had mixed results for the quarter. Our International results were impacted by changes in foreign exchange and Joel will provide more details on that to you in just a few minutes. However, on a constant currency basis, sales increased 3%. Gross profit increased 2.1%, adjusted operating expenses increased 1.3%, and adjusted operating income increased 6.2%.

 

Canada and Latin America had improved performance for the quarter, driven by a combination of positive business environments driving the top line with positive synergies coming from programs, such as the regionalization effort in Canada. In Europe, performance in our UK business remained stable, although uncertainties around Brexit certainly remained in the market. However, challenges with our operational and supply chain integration in France continue to negatively impact our overall performance there, and will most likely continue through the remainder of our fiscal year. Relatively soft gross profit performance was offset somewhat by solid expense management throughout our International segment, as we continue to see benefits from the various integrations and other expense management initiatives. [Technical Issues] have improved operating income growth for the quarter.

 

Moving on to SYGMA. As mentioned previously, we remain disciplined and focused on improving overall profitability of our portfolio of customers in this segment, which included a gross margin expansion of 73 basis points, as we saw total gross profit reduced by roughly 3%. In addition, strong expense management and the closure of a distribution location drove adjusted operating expenses down 8.8% versus the same period last year, resulting in significantly improved operating performance. We continue to feel very good about the progress we're making within this segment, and look forward to continuing to improve our operating performance throughout the year.

 

In summary, we feel good about the trajectory of our business for fiscal 2020. We continue to increase profitability through growth at local customers, our disciplined approach in managing our national customer portfolio, managing our expenses and making progress in the various initiatives we have discussed to transform our business. As we look ahead, we are excited to celebrate our 50th anniversary this fiscal year. For half-century, our company has been at the forefront of the Foodservice distribution industry, passionate about our customers, dedicated to service, and committed to being socially responsible.

 

Our team is enthusiastic about the changes we're making in our business model to ensure we remain the market leader and fulfill our vision to be our customers' most valued and trusted business partner for the next 50 years.

 

And finally, I'd like to thank our dedicated associates across the company for all their efforts to make Sysco the distributor of choice for so many customers, they are truly all-in.

 

Now, I'll turn the call over to Joel Grade, our Chief Financial Officer.

 

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

 

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Sysco Misses Expectations for 1Q Sales

 

By Micah Maidenberg, Dow Jones

via Morningstar - Nov 4, 2019

 

 Sales at Sysco Corp. (SYY) missed Wall Street forecasts for the food distributor's latest quarter.

 

Sysco on Monday reported sales for its fiscal first quarter of $15.3 billion, up from $15.22 billion last year. Analysts polled by FactSet forecast $15.51 billion.

 

Profit rose to $453.8 million, or 87 cents a share, from $431 million, or 81 cents a share, last year.

 

Excluding restructuring costs and after other adjustments, Sysco reported 98 cents a share in profit. Analysts predicted 97 cents a share.

 

Gross margins in the quarter that ended Sept. 28 rose to 19.23% from 19.08%, Sysco said.

 

Operating expenses rose 0.7%...

 

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https://www.morningstar.com/news/dow-jones/201911043851/sysco-misses-expectations-for-1q-sales