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|Sysco Corp. |(SYY-NYSE) |$63.48 |

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 3Q18 Earnings Release

Prev. Ed.: Apr 18, 2018; 2Q17 Earnings Update

Flash Update [Earnings update in progress; to follow]

On May 07, 2018, Sysco Corporation reported third-quarter fiscal 2018 results, wherein both top and bottom lines grew year over year and the latter surpassed the Zacks Consensus Estimate for the fourth consecutive quarter.

Quarter in Detail

Adjusted earnings of 67 cents per share jumped 31.4% year over year and beat the Zacks Consensus Estimate of 64 cents. Including one-time items, earnings increased 43.2% to 63 cents per share. Earnings gained from reduced taxes.

This global food products maker and distributor’s sales of $14,349.5 million advanced 6.1% year over year. However, the figure fell short of the Zacks Consensus Estimate of $14,382 million.

Gross profit improved 5.6% to $2,675.6 million in the quarter, courtesy of higher sales. However, gross margin fell 9 basis points (bps) to 18.65%. Adjusted operating income rose 7.1% to $535.8 million, while the adjusted operating margin improved 3 bps to 3.73%.

Segment Details

U.S. Foodservice Operations

Segment sales advanced 5.1% to $9,704.5 million, where local case volume within U.S. Broadline operations climbed 2.6% (including organic sales growth of 1.8%) and total case volume ascended 2.4% (wherein organic sales inched higher by 1.7%). Gross profit expanded 4.1% to $1,911.7 million, while the gross margin contracted 19 bps to 19.7%. This can be attributed to food cost inflation in U.S. Broadline, particularly in produce, dairy and meat categories.

Adjusted operating expenses escalated 5.9% to $1,214.5 million, on account of higher selling and supply chain costs. Nonetheless, the adjusted operating income climbed 1.2% to $697.2 million.

International Foodservice Operations

Segment sales increased 10.7% to roughly $2,799.3 million. Gross profit jumped 12.9% to $583.2 million, whereas the gross margin rose 40 bps to 20.84%.

Adjusted operating income surged 11.6% to $44.5 million, despite a 13% rise in adjusted operating costs that came in at $583.7 million. The rise in operating costs was a result of higher transportation and integration costs.

SYGMA

Sales at this segment improved 4.6% to $1,605.8 million. Gross profit rose 6.4% to $127.1 million and gross margin increased 13 bps to 7.9%. Operating income fell 39% to $4.5 million, as operating costs escalated 9.3% to $122.6 million.

Other Financial Updates

Sysco ended the quarter with cash and cash equivalents of $901.6 million, long-term debt of $8,835.2 million and total shareholders’ equity of $2,351.2 million.

During the first three quarters of fiscal 2018, the company generated cash flow from operations of $1,124.2 million and incurred net capital expenditure of $356 million. The company’s total free cash flow for the same period amounted to $768 million, marking a considerably improvement from the year-ago period – courtesy of lower taxes and improved earnings.

Outlook

Management remains pleased with its performance which was backed by greater sales and improvement in gross profit. However, the company marked its first sales miss after delivering four straight beats. Nevertheless, management remains confident of achieving its goals that form part of its three-year plan.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON SYY.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Sysco Corporation is the global leader in selling, marketing and distribution of food products to restaurants, health care 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.

Of the 10 firms covering Sysco Corporation, five provided a positive rating and five rendered a neutral rating. No firms provided a negative rating on the stock.

Positive or equivalent outlook (5/10 firms): The firms with a positive stance believe that Sysco has a strong business portfolio and it takes different initiatives to reduce costs. Firms also remain encouraged about Sysco’s efforts to improve pricing, accelerate tech-laden investments to enhance customers experience, curtail expenses and continue with its M&A practice. Also, some bullish firms remain optimistic about the return of inflation, which should benefit the company. Moreover, its strategic progress with the business, has been aiding it to provide sufficient returns to shareholders. Notably the company has been increasing dividends every year, over the past 46 years. The company’s strong cash position aids it to continue reinvesting in business.

Neutral or equivalent outlook (5/10 firms): The firms believe that Sysco has a strong brand image, efficient management team and a solid financial position. The company also remains positive on the acquisition front. However, headwinds such as an aggressive promotional environment and stiff competition from larger grocery rivals, as well as players like Amazon, are formidable headwinds. Firms are also concerned regarding rising input costs and industry wide hurdles like elevated freight expenses, which are a threat to margins.

April 18, 2018

Overview [Note: only highlighted material has been changed]

Headquartered in Houston, TX, Sysco Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry. The company provides products and related services to approximately 425,000 customers, including restaurants, health care and educational facilities, lodging establishments and other foodservice customers. The company’s distribution facilities are located throughout the United States, Bahamas, Canada, Republic of Ireland and Northern Ireland. For fiscal year 2017 that ended July 1, 2017, the company generated sales of $55.4 billion.

Owing to the completion of the Brakes acquisition in July, Sysco has aggregated its operating companies into these reportable segments. "Other" financial information is attributable to the company's other operating segments that have not been aggregated into one of the three reporting segments as follows:

• U.S. Foodservice Operations primarily includes U.S. Broadline operations, Specialty Meat and FreshPoint (the specialty produce companies).

• International Foodservice Operations which includes Canada, Europe, Bahamas, International Food Group, and the joint ventures in Mexico and Costa Rica.

• SYGMA - the chain restaurant distribution subsidiary.

• Other - primarily the hotel supply operations and the Sysco Ventures platform, which includes the suite of technology solutions help to support the business needs of the customers.

The firms identified the following factors for evaluating the investment merits of Sysco:

|Key Positive Arguments |Key Negative Arguments |

|Sysco is the largest North American distributor of food and food-related |Increasing competition and an aggressive promotional environment is likely|

|products in the eating-away-from-home industry. |to impact top line. |

|Sysco’s acquisition environment remains favorable and the company has |Rising operating expenses, food price volatility and escalated freight |

|potential opportunities in the pipeline. |costs remain a threat to margins. |

|The company’s expense management initiative is expected to reduce |Macroeconomic headwinds related to consumer spending, unemployment and |

|administrative costs and thus result in annual operating income in the |currency fluctuations may hurt Sysco’s performance. |

|range of $600-650 million by fiscal 2018. | |

More information is available at Sysco Corporation’s website:

Sysco Corporation’s fiscal year ends on Jun 30.

April 18, 2018

Long-Term Growth [Note: only highlighted material has been changed]

Sysco, which flaunts a solid brand portfolio believes in growing through acquisitions since the company operates in a highly fragmented industry. Notably, the company has been carrying out various acquisitions over the years to grow its distribution network and customer base and boost long-term growth. In fact, Sysco expects to achieve 0.5–1% sales growth through acquisitions in the long term.

Other than sales growth, these acquisitions also enhance its presence in international markets and its product portfolio. In this regard, Sysco recently inked a deal to buy Kent Foods (a leading foodservice provider in the United Kingdom), which is expected to bolster its U.K. and European business bandwagon. In an earlier development, the company acquired Hawaii-based HFM FoodService to add it to its U.S. Foodservice segment. Sysco also bought the remaining 50% stake in Mayca Distribuidores of Costa Rica, which should enhance its international business. Apart from this, Sysco’s acquisition of London-based Brakes Group in July 2016 has been benefiting the company significantly. The combined companies are expected to generate sales of approximately $55 billion annually.

Also, Sysco has been impressively managing expenses since the past few years. The company is making progress in both SG&A and supply chain. In the supply chain area, the company is witnessing positive momentum from its productivity initiatives and ongoing process improvements, which are driving efficiencies specifically in the warehouse. The company remains on track to achieve the recently raised three-year adjusted operating income growth target to approximately $600 million to $650 million through the end of FY18. The company stated that this operating income growth will come from reducing administrative costs.

Further, we commend the key growth strategies unveiled by Sysco at its New York Investor Day event, wherein it also highlighted its three-year financial goals. Sysco’s four core strategies include enhancing consumers’ experience; optimizing business; stimulating power of its people and achieving operational efficacy. In this regard, the company remains focused on enhancing assortments, making constant innovations, ensuring food safety and revitalizing brands.

Further, to evolve with the changing consumer preferences, Sysco remains committed toward investing in technology and enhancing e-commerce operations. This is well evident from the recent launch of its redesigned website, which is aimed at enhancing consumers overall experience. Moreover, it plans to improve supply chain, increase transparency, enhance deliveries and attain operational efficiency. Driven by these strategies, Sysco expects gross profit to rise in a band of 55% to 65%, while it anticipates reducing administrative expenses by 20-25% by 2020. Earnings per share is envisioned to grow at a double-digit rate on an average, by 2020.

Moreover, the company’s solid balance sheet and free cash flow augmenting ability will help it make business investments, continue with merger and acquisitions, make share buybacks, repay debt and attain a preferred dividend payout ratio of 50-60% over time.

April 18, 2018

Target Price/Valuation [Note: only highlighted material has been changed]

|Rating Distribution |

|Positive |50.0% |

|Neutral |50.0% |

|Negative |0.0% |

|Avg. Target Price |$63.36↑ |

|Digest High |$70.00 |

|Digest Low |$50.00 |

|No. of Analysts with Target Price/Total |10/10 |

Risks to the price objective include: rising commodity costs and inflation, unfavorable impact from currency above current expectations, and increased competition leading to an irrational pricing environment.

Recent Events [Note: only highlighted material has been changed]

On Apr 3, 2018, Sysco concluded the previously announced buyout of Kent Frozen Foods which will form part of the company’s international operations, thereby being an addition to its existing Brakes, Fresh Direct and M&J Seafood businesses. Following the approval of the Competition and Markets Authority, the deal was concluded in an all-cash basis.

On Feb 20, 2018, Sysco acquired Doerle Food Services — a Louisiana-based food service distributor — to widen its US distribution network. This buyout is expected to capitalize on Sysco’s growth opportunities, thus strengthening its core business and maximizing customers’ value. However, the financial terms of the deal remained under covers.

On Feb 5, 2018, Sysco reported 2Q18 results, wherein adjusted earnings of 66 cents per share jumped 13.8% year over year. Including a one-time benefit associated with the recent tax reforms, adjusted earnings increased 34.5% to 78 cents per share. The Zacks Consensus Estimate stood at 65 cents. Sysco’s sales of $14,411.5 million exceeded the Zacks Consensus Estimate of $14,186 million and advanced 7.1% on a year-over-year basis.

Revenues [Note: only highlighted material has been changed]

Per the Zacks Digest Average, Sysco's 2Q18 sales of $14,411.5 million increased 7.1% on a year-over-year basis, though it slipped 1.6% sequentially. The year-over-year upside was backed by strength across both U.S. and international segments.

Segment Details

U.S. Foodservice Operations

Segment sales advanced 6.6% to $9,681.2 million, where local case volume within U.S. Broadline operations climbed 4.8% and total case volume ascended 3.5%.

International Foodservice Operations

Segment sales increased 9.3% to roughly $2,869 million. Adjusted operating income tanked 28.8% to $79 million. While results in Canada gained strength from surge in local cases and efficient expense management, the company’s European business remained difficult. This stemmed from the amendment from calendar year to fiscal, which weighed on costs and gross profit.

SYGMA

Segment sales came in at $1,633.1 million in the quarter versus $1,520.2 million in the year-ago quarter.

Other

Segment sales came in at $228.3 million in the quarter versus $225.6 million in the year-ago quarter.

The table below is a summary of segment revenue as compiled by Zacks Research Digest:

|Revenue ($M) |2Q17A |

|Copy Editor |Subhojoy Ghosh |

|Content Ed. |Vrishali Bagree |

|Lead Analyst |Vrishali Bagree |

|QCA |Sumit Singh |

|No. of brokers reported/Total| |

|brokers | |

|Reason for Update |Flash |

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May 07, 2018

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