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OFFON

SYSCO CORPORATION

(SYY)
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SYSCO CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/09/2021 | 05:37pm EST

This discussion should be read in conjunction with our consolidated financial statements as of July 3, 2021, and for the fiscal year then ended, and Management's Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year ended July 3, 2021 (our fiscal 2021 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.

Highlights

Our first quarter of fiscal 2022 results were strong due to substantial sales momentum surpassing first quarter of fiscal 2019 levels. Our results increased sequentially each month of the quarter, despite the presence of the Delta variant of COVID-19. Customers are responding positively to Sysco's relative supply chain strength, our new purpose platform and our improving capabilities driven by our Recipe for Growth strategy. Our financial results demonstrate our ability to gain market share in this business climate. See below for a comparison of our fiscal 2022 results to our fiscal 2021 results, both including and excluding Certain Items (as defined below).

Comparisons of results from the first quarter of fiscal 2022 to the first quarter of fiscal 2021 are presented below:

•Sales:

•increased 39.7%, or $4.7 billion, to $16.5 billion;
•Operating income:
•increased 50.6%, or $212.1 million, to $631.7 million;
•adjusted operating income increased 87.9%, or $320.4 million, to $685.1
million;
•Net earnings:
•increased 74.3%, or $161.1 million, to $378.0 million;
•adjusted net earnings increased 147.9%, or $256.5 million, to $429.9 million;
•Basic earnings per share:
•increased 72.1%, or $0.31, to $0.74 per share;
•Diluted earnings per share:
•increased 73.8%, or $0.31, to $0.73 per share;
•adjusted diluted earnings per share increased 144.1%, or $0.49, to $0.83 in
fiscal 2022;
•EBITDA:
•increased 40.2%, or $235.4 million, to $821.4 million; and
•adjusted EBITDA increased 62.5%, or $328.1 million, to $852.8 million.

The discussion of our results includes certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, 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 to remove the impact of restructuring and transformational project costs consisting of: (1) restructuring charges, (2) expenses associated with our various transformation initiatives and (3) facility closure and severance charges; and acquisition-related costs consisting of: (1) intangible amortization expense and (2) acquisition costs and due diligence costs related to our significant acquisitions. Our results for fiscal 2022 are also impacted by the increase in reserves for uncertain tax positions. Our results for the first quarter of fiscal 2021 were also impacted by 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, by a loss on the sale of a business and by a net benefit from remeasuring net deferred tax assets due to the changes in U.K. tax rates.

The fiscal 2022 and fiscal 2021 items discussed above are collectively referred to as "Certain Items." The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies to U.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis.


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Trends

Economic and Industry Trends

Despite the presence of the Delta variant of COVID-19, Sysco's sales improved sequentially through the first quarter of fiscal 2022 and have continued to grow through October 2022, showing our ability to gain market-share in this environment. There was a high volume of cases shipped within the restaurant sector during the first quarter of fiscal 2022, and additional growth is still expected to come in certain segments such as hospitality, business and industry and foodservice management. International travel restrictions are beginning to ease, which we expect will benefit our hospitality sector in specific regions of our business. Our International Foodservice Operations segment improved sequentially throughout the first quarter of fiscal 2022, as restrictions continued to ease across our international regions. The relative performance in the international sector still lags the U.S. sector; however, we believe that the international foodservice markets will experience further recovery as the global effects of the COVID-19 pandemic subside.

Sales and Gross Profit Trends

Our sales and gross profit performance can be influenced by multiple factors, including price, volume, customer mix and product mix. The most significant factor affecting performance in the first quarter of fiscal 2022 was volume growth, as we are experiencing strong results from both independent and chain customers, driven by a 23.8% improvement in local case volume and a 28.1% improvement in total case volume within our U.S. Broadline operations, in each case as compared to the first quarter of fiscal 2021. Sysco continues to lead the industry in how we are supporting our customers during this challenging supply chain period. This has enabled us to gain market share during the first quarter of fiscal 2022. We expect additional recovery to occur, as our volume is yet to fully recover in certain segments, such as hospitality, business and industry, and foodservice management. We are on track to deliver our stated goal of achieving growth at a rate of 1.2 times the industry in fiscal 2022, and we believe that our Recipe for Growth strategy will enable us to accelerate over the next three years and grow at 1.5 times the pace of the industry by the end of fiscal 2024.

In terms of customer mix, the first quarter of fiscal 2022 represented another period of strong net new business wins for Sysco, as we continued our strong momentum and posted compelling wins at the national and local level in the U.S. In Europe, our business is skewed towards the business, industry and travel segments, which remain constrained due to the continuing effects of the COVID-19 pandemic. We expect that our Recipe for Growth strategy will enable our International Foodservice Operations segment to improve how we serve local customers over time and will create a better balance in our customer mix to the more profitable local sector over our current three-year plan.

Although our gross margin decreased 79 points in the first quarter of fiscal 2022, as compared to the prior year period, largely due to the impact of inflation on our sales, we believe we managed our profitability well in the inflationary environment. We passed along this inflation to our customers, and we are successfully growing gross profit dollars. In terms of the impact on pricing, we experienced inflation at a rate of 12.8% combined for the U.S. and Canada during the first quarter of fiscal 2022, primarily in the meat, poultry and canned and dry foods categories. While challenging to predict, we expect inflation to moderate by the fourth quarter of fiscal 2022. The gross margin dilution at the enterprise level was also driven by margin changes at our higher-margin businesses, with the larger U.S. Foodservice Operations segment business growing volume at lower-margin rates. Across our enterprise, each business segment experienced an increase in gross profit dollars per case, despite the decline in the gross margin rate.

Operating Expense Trends

Total operating expenses increased 30.0% during the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, driven by the variable costs associated with significantly increased volumes, one-time and short-term transitory expenses associated with the business recovery and transformation investments towards our Recipe for Growth strategy. The largest contributor to the increase was the higher associate-related expenses associated with elevated overtime rates and intentional expenditures to improve our staffing in preparation for additional growth and for increased throughput capacity. We have continued to improve our staffing levels in the second quarter of fiscal 2022, adding 1,000 new supply chain associates, consisting primarily of transportation and warehouse staff. Additionally, we had an unfavorable comparison of bad debt expense, as we recognized a $98.6 million benefit in the first quarter of fiscal 2021 from reducing our reserves on pre-pandemic receivables. In the first quarter of fiscal 2022, we recognized a benefit of $7.1 million from the reversal of pre-pandemic receivable allowances.


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Our operating results in the first quarter of fiscal 2022 included $57.0 million of one-time and short-term transitory expenses related to the business recovery, including investments in incremental marketing to advertise open positions, sign-on bonuses for new associates, and referral and retention bonuses for existing staff, and more than $24.4 million of operating expense investments for our Recipe for Growth strategy. We are making these necessary investments to ensure that we can serve our customers to enable us to continue winning market share, profitably, at the national and local level; however, the higher operating expenses had a negative impact on our results for the quarter, and we expect these investments to have a similar impact on our results for the second quarter of fiscal 2022. We anticipate making progress on reducing overtime and on the incremental investments in hiring during the remainder of fiscal 2022; however, we expect investments in transformation to remain elevated early in the transformation process.

Income Tax Trends

Our provision for income taxes primarily reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Tax law changes, increases or decreases in book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

Our effective tax rate has been influenced by discrete events, such as tax law changes and excess tax benefits attributable to equity compensation exercises as discussed in Note 11, "Income Taxes," in the Notes to Consolidated Financial Statements in Item 1 of Part I.

Comparisons to Fiscal 2019

In assessing our financial performance through the business recovery, Sysco's management compared our results in the first quarter of fiscal 2022 against the first quarter of fiscal 2019. These results include:

•Sales:

•increased 8.2%, or $1.2 billion, as compared to fiscal 2019;
•Operating income:
•increased 0.6%, or $3.5 million, as compared to fiscal 2019;
•adjusted operating income decreased 1.0%, or $6.6 million, as compared to
fiscal 2019;
•EBITDA:
•increased 0.8%, or $6.8 million, as compared to fiscal 2019;
•adjusted EBITDA decreased 0.6%, or $4.8 million, as compared to fiscal 2019;
•Diluted earnings per share:
•decreased 9.9%, or $0.08, as compared to fiscal 2019; and
•adjusted diluted earnings per share decreased 8.8%, or $0.08, as compared to
fiscal 2019.

Key items impacting the comparability of Sysco's results in the first quarter of fiscal 2022 to the first quarter of fiscal 2019 included the one-time and short-term transitory expenses associated with the business recovery and the operating expense investments towards our Recipe for Growth strategy. Additionally, in the first quarter of fiscal 2022, Sysco incurred $50.9 million of on-going interest expense related to senior notes issued in April 2020 as a precautionary measure in response to the COVID-19 pandemic, as the company sought to preserve its available liquidity. Some of the senior notes issued in April 2020 remain outstanding as part of our capital structure.

Mergers and Acquisitions

We continue to focus on mergers and acquisitions as a part of our growth strategy, where we plan to cultivate new channels, new segments and new capabilities. We have completed the following acquisitions thus far in fiscal 2022.

•In the first quarter of 2022, we acquired Greco and Sons, a leading independent specialty Italian distributor in the United States. We expect this acquisition to deliver over $1 billion in incremental sales to Sysco in fiscal 2022. •In the first quarter of fiscal 2022, we acquired a specialty food distributor in the United Kingdom. •In the second quarter of 2022, we acquired a regional broadline fresh produce distributor. The acquisition will operate as part of Sysco's U.S. specialty produce business.


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Strategy

Our purpose is "Connecting the World to Share Food and Care for One Another," which we believe will allow us to grow substantially faster than the foodservice distribution industry and deliver profitable growth through our "Recipe for Growth" transformation. This growth transformation is supported by strategic pillars that we believe will allow us to better serve our customers, including our digital, products and solutions, supply chain, customer teams, and future horizons strategies.

Our various business transformation initiatives remain on track, such as the centralized pricing tool project, which is substantially complete for local customers, and which enables Sysco to strategically manage the high levels of inflation that we are currently experiencing. Other initiatives, such as our personalization engine, continue to expand, while the sales transformation is helping our sales teams continue to win new business. Additionally, we are continuing to improve the efficiency of our organization, such as regionalizing the leadership structure of our specialty business, as we reduce our structural expenses to fund our capital investments. We are in the early stages of our Recipe for Growth, but we can already see the benefits of our developing capabilities in the new customers we are winning and in the progress we are making towards gaining market share. We expect that, as our Recipe for Growth matures, the impact on our top line growth will continue to accelerate. We are committed to profitably growing 1.2 times the market for fiscal 2022 and 1.5 times the market by the end of fiscal 2024, the third year of our three-year strategic plan.

Results of Operations

The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:

                                         13-Week Period Ended
                                   Oct. 2, 2021          Sep. 26, 2020
Sales                                       100.0  %           100.0  %
Cost of sales                                81.9               81.2
Gross profit                                 18.1               18.8
Operating expenses                           14.2               15.3
Operating income                              3.8                3.5
Interest expense                              0.8                1.2
Other (income) expense, net                     -                0.1
Earnings before income taxes                  3.1                2.2
Income taxes                                  0.8                0.4
Net earnings                                  2.3  %             1.8  %



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The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:

                                       13-Week Period Ended
                                           Oct. 2, 2021
Sales                                                39.7  %
Cost of sales                                        41.1
Gross profit                                         33.9
Operating expenses                                   30.0
Operating income                                     50.6
Interest expense                                     12.6
Other (income) expense, net (1) (2)                 123.0
Earnings before income taxes                        (95.8)
Income taxes                                        207.6
Net earnings                                         74.3  %
Basic earnings per share                             72.1  %
Diluted earnings per share                           73.8
Average shares outstanding                            0.7
Diluted shares outstanding                            1.0


(1)Other (income) expense, net was income of $3.3 million and expense of $14.1 million in the first quarter of fiscal 2022 and fiscal 2021, respectively.

The following tables represent our results by reportable segments:

© Edgar Online, source Glimpses

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