Blackstone Inc (BX) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the Performance Food Group Corporation conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions I would like to turn the call over to Mr. Kevin

please go ahead sir.

Thank you Cathy.

Good morning and welcome to this Performance Food Group conference call to review the company's announcement earlier today about the financial results for the second quarter 2002.

Before we start, let me express that certain of the statements made in this call may be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks and are based on current expectations.

Actual results may differ materially.

These risks are more fully described in the company's SEC filings.

I will now turn the call over to Michael Gray, President and Chief Executive Officer.

Good morning and welcome everyone.

With me this morning are Bob Sledd, our Chairman, Roger Boeve our CFO and John Austin our VP of Finance.

This call is intended to review results for the second quarter and as well as our outlook for 2002.

Our second quarter earnings release was issued this morning and a copy of information is also available on our website, pfgc.com.

I'll briefly address our overall second quarter operating highlights, the performance of our business, and outlook for the remainder of the year.

The second quarter gives us confidence that our growth strategy is proving very successful.

Our reported results marked record second quarter sales and earnings and we're especially pleased with our 47 cents diluted net earnings per share.

This is our 30th consecutive quarter of earnings gains versus the same quarter last year.

We're also very proud of the fact that for the first time in our company's history, we surpassed one billion in quarterly sales.

The food institute reported real growth in restaurant sales for the first half of the year was 2.75 percent.

Our growth for the quarter was 34 percent and was aided by contributions from acquisitions.

Our internal growth for the quarter was slightly over 7 percent and we had no inflation.

Operating profit margins improved 125 basis points to 3.77 percent for the quarter and up 101 basis points year-to-date to 2.99 percent.

Our 47 cents diluted earnings per share was 68 percent increase on 36 percent more shares compared to 28 cents per share diluted in the year-earlier quarter.

I'll now address the performance of our individual business segments, all of which are contributing to our improved performance.

Operation sales increased by 224 percent, aided by the acquisition of Fresh Express and continued strong demand for fresh-cut packaged produce.

The integration of Fresh Express is progressing as planned and the expected synergies are being achieved.

The 69 basis points to a 11.19 percent aided by the seasonality of the business and some expected cost for new product development not occurring as initially scheduled.

As mentioned in our earlier release, these costs for new product development will ramp up significantly in the third and fourth quarters impacting our operating margins.

Additionally the fourth quarter is a not a seasonally strong quarter for Fresh Express.

Sales for our customized division grew 12 percent to 350 million dollars; operating profit margins improved 5 basis points to 1.19 percent, driven by improved efficiencies in transportation and warehousing.

We completed the construction of the

square foot addition to our

Tennessee facility and began utilizing it in June.

The broadline division had a 20 percent sales growth to 500 million with internal sales growth of 5 percent, almost double the industry growth.

Operating profit margins improved a 11 basis points to 3.09 percent.

We announced to the acquisition of quality Foods, that their margins would negatively impact our broadline margins.

There was an 18 basis point improvement in operating margins in our base business without Quality Foods.

We are very excited with the addition of this high quality regional distributor and the integration process is proceeding as planned and we anticipate good up-side after they are fully integrated.

Our street sales grew 8 percent for the quarter and represent 45 percent of sales year-to-date versus 44 percent for the same period last year.

Sales of proprietary brands to street customers have grown 26 percent year-to-date and represent 19 percent of street sales, up from 16 percent for same period last year.

Our sales per delivery has increased 3 percent year-to-date.

We are very excited with the addition of Middendorf Meat in St. Louis; they have a high profile in this major market and have a custom cut meat operation to complement their broadline distribution.

We have began this integration which will be very smooth because of their 20 plus year affiliation with our Pocahontas Foods USA merchandizing and procurement group.

Last week we completed the acquisition of Thoms-Proestler Company, a high profile broadline distributor in Rock Island, Illinois.

This will add over 250 million in sales in the upper mid-west market including the major metropolitan area of Chicago.

TPC is a well-managed company and we expect an easy integration process.

Looking at the remainder of the year, we expect continued strong performance from each of our operating segments, resulting in normalized earnings of $1.48 to $1.50 per share diluted.

However, we anticipate this could be reduced by eight to ten cents per share by the one time change, charge due to the damage at the Springfield facility reported yesterday. this is a significant improvement over our earnings of a dollar 3 per share diluted in 2001.

We will experience increased expenses in the third and fourth quarters associated with new product development and additionally, the fourth quarter is not a seasonally strong quarter for Fresh Express.

I will now turn the call over to Roger to review financials.

Thank you Michael and good morning.

Our sales for the quarter increased 34 percent toping the one billion dollar level for the first time in company history.

A complete segment breakdown on sales is included in the release.

A gross profit increased 68 percent and gross profit margins increased 340 basis points to 17.05 percent.

All of our segments reported increases in gross margins, especially fresh-cut, which accounted for most of this improvement.

Operating expenses in the quarter increased 215 basis points, primarily due to the inclusion of Fresh Express, which has a higher expense level than our distribution businesses.

Operating expenses for the 2002 quarter benefited by 1.8 million of goodwill amortization and result in company document statements number 142.

Operating profit increased 125 basis points to a margin of 3.77 percent.

Fresh-cut operating margins were especially strong at 11.2 percent representing an increase of a 169 basis points.

We expect the fresh-cut operating margins in the second half of the year to come in at around 7.5 to 8 percent, considering the investment spending that we plan to do for the launching of our fresh-cut fruit products.

Broadline margins increased to 11 basis points to 3.09 percent and customized margins include 5 basis points to 1.09 percent.

Interest expense including loss and sale of receivables amounted to 4.9 million due to the increase or to the issuance of 201 million of convertible notes in October of last year and the sale of 78 million dollars of accounts receivables.

Other income represents interest income on short-term investments and gains and losses on sale of miscellaneous assets.

Our income tax rate amounted to 37.5 percent and it is expected to remain at this level for the reminder of the year.

Net earnings increased to 107 percent and earnings per share diluted increased 68 percent to 47 cents per share versus 28 cents per share last year.

It should be noted that in the second quarter, the convertible notes were diluted and therefore 6.1 million shares were added to average shares outstanding.

Day sales outstanding in accounts receivable amounted to two days, inventory turn over amounted to 18 times, and vendor flows amounted to a 131 percent.

Our total debt amounted to 284 million dollars with the debt-to-capital ratio of 31 percent.

If we include 116 million dollars of our balance sheet debt, represented by accounts receivable securitization and leases, our debt-to-total capitalization amounts to 41 percent.

Depreciation for the quarter amounted to 8.7 million.

Amortization of intangible assets amounted to 2 million.

We expect depreciation and amortization for the year to amount to approximately 48 million.

Capital expenditures in the quarter amounted to 16.9 million.

We expect CAPEX to total 70 million for the year.

Cathy, we can take questions at this point.

Thank you.

Today's question and answer session will be conducted electronically, if you would like to ask a question you might do so by pressing the star key followed by the digit 1 on your touch-tone phone.

We do ask you may limit yourself to one question per participant and then you can come back in the queue to re-signal.

We will take our first question from John

with Wachovia Securities.

Thanks.

Couple of questions, first on the

roll out in California, are you still on track to begin shipping fresh cut fruit during August?

And then the second, I wonder if you could address some of the issues up in Spring Field relating to the ammonia incident and some of these specifics behind the 8 to 10 cents charge for example, do you see any environmental implications there?

You know, why isn't insurance covering more of the projected losses and is this type of incident possible at any of the other facilities?

This is Bob.

We are on a track to the rollout and excited about the possibilities although as we mentioned before, you know, we won't see, we are going to be investment spending in the second half of the year and we won't see any benefit probably for, you know, to probably about 2004, but we are excited about the prospects and the test as you know on track to rollout in a few weeks.

Regarding the Springfield incidents, there are no environmental issues that we were aware of.

Our people reacted quickly and the local authorities came in and dealt with the situations, so we are not aware of any environmental issues at this point.

As far as the insurance coverage, let me address that first.

Our company's policy limits for this coverage was substantially higher than the loss as experience, but there is some sub limits in the policy relating to damage to inventory.

As is our common practice, we wanted to get the information out early and we wanted to give you the highest anticipated charge that we would have.

As we discovered later, there are some possibilities of salvaging a lot of the inventory.

We are not really sure about the extent of damage in the dry warehouse.

This was inside the freezer and cooler, so we are doing everything we can to mitigate this amount, but we felt like we needed to give you, you know, what the upside might be.

Our other facilities have the piping for refrigeration outside the actual freezer.

This facility had the piping inside the freezer.

It has been usual practice in construction in recent years to put the piping upside.

So, we don't see all that.

WE have a lot of risk of this occurring. and we could certainly have leaks occurring but not with the contamination to the inventory like we experienced here.

We do have maintenance contracts in place with outside contractors and facilities where we don't have our own maintenance team on staff.

We are very very astute in our preventive maintenance and inspections of these and this was an unusual circumstance and we are getting more information continually.

We, at this point, have not been able to get inside the building.

They are still trying to reduce the parts per million ammonia level inside.

So, the information that we have is a little bit sketchy, but I hope that answers your question.

Yeah, and do you expect the charge to be segmented as a one-time or unusual or extraordinary type item in your third quarter release?

Our outside auditors and how we should present that.

Again we are still just getting our arms around the overall issue and we will certainly give you guidance on how we expect to account for that once we have a better handle of what the actual number is.

Jeff with regards to insurance, we tried to get as much insurance from this particular area as we could and it was not available.

And so, that's why we didn't have more than we did, but I guess we felt like that, we were, because we were, because of the definitive maintenance that Michael referred to, we thought that we were in pretty good shape.

And plus this is the only facility we have really had any real exposure as it relates to that particular incident, possible incident.

We did have an outside company that maintained the facility and in our opinion obviously it should have prevented this, anyway.

Thank you.

Our next question comes from Grieg Badishkanian from Salomon Smith Barney.

Hi.

I may have missed this, but what would the impact, if any, be on service levels to your existing customers in that area?

Well fortunately we have additional facilities in Maine and Northern New Jersey and they have begun servicing many of our customers yesterday.

If the damage is not prevalent in the dry distribution center, we expect to be delivering dry products within a very short period of time.

The frozen refrigerated inventory will probably all have to be replaced and that will take us

in that area, to repair the refrigeration systems and replenish the inventory.

So I can't give an exact state on that but it won't be extended.

But your customers are receiving delivery and there is not a major I guess interruption in the service that they are receiving?

Our sister company Jason

are not able to fulfill all the needs of the customer.

We are doing what we can.

But our customers are being very understanding.

Our sales team is still on the streets selling and communicating with customers and typically customers, in the crisis situation, are very understanding and we are doing everything we can to keep them supplied with products.

Great.

OK.

What percentage of, say, of your sales in this division, you know, come from the affected area?

Are you talking about product segments?

Yes, of your, of the broadline division.

For the broadline division?

Yeah.

From a magnitude, is it 50 percent, 10 percent?

No, less than 5 percent.

Okay, so even if you do lose a little bit of business, it is not a major it is less than 5 percent of your overall business.

Total of broadline.

That total company's sales is less than 5 percent.

So, we lost a little bit more than what we want, but if we did it, it wouldn't be a big impact.

Okay, good.

On a separate note,

my one question, but the margin improvement that you received in the fresh-cut was, you know, pretty substantial.

Can you give us a little bit of color on what was driving that and what if any may be lettuce and certain mix had to do with that as well?

We are putting in emphasis one, well as we mentioned earlier in the year there are several things.

First of all our sales in existing customers are flat in the fresh-cut side of the business and that is because we have some major customers whose sales are off.

But we lost a little bit of the business as a result of the merger from some competitive situations.

But what we have done is we've swapped in our

business.

In

service we have swapped some lower margin products such as, you know, some of the commodity items with higher margin things such as sliced tomatoes and that has helped our margin quite.

Secondly, it is that Fresh Express was just accreted to begin with and that has been very attractive for us and thirdly is that we have done some, you know, worked on higher pushing and selling higher margin products in the

of the business as well and had some very good success with that which has helped their margins.

And their sales grew about around 10 percent in the quarter.

So that was really helpful.

That we had told you that told you that we though we are there, we are actually doing maybe even a little better than we had originally budgeted.

So, all of these things have helped us, you know, in achieving the profit margins that we have achieved now.

Going into the third and fourth quarter those will be somewhat less than we have already indicated as we do more fruit spending and this seasonally, its a little bit slower time to be here and our transportation costs are higher as we go into different growing areas.

Great.

But still we would be at good margins.

Yeah, you did a good job on improving margins there.

So thank you very much.

Thank you.

Yeah, our folks had done a great job.

Our next question comes from Mark Husson with Merrill Lynch.

Yeah just following on the Fresh Express bit, just a mind-blowing expansion in this business for you.

But I am somewhat concerned that the mix appears to be moving perhaps to more to higher priced items in the category, and doesn't that offer a bit of a gap here for lower price

private brands coming in

with the margin expansion that we are seeing, would it be fair to say on the growth that you put less time and money in promoting this product rather than just letting it sell at full price.

You might assume that, but reality is that we haven't done that.

We are not raising prices.

We are promoting all of the products, but we are spending more money promoting, you know, the blends and things of that nature.

So, you know, we really haven't done anything that would invite competition and we are still very very competitive in the market place, you know, we go head-to-head with every competitor every day and so, and that's a good question mark, we are very comfortable but we are not opening ourselves for other competition.

It's just a mix issue.

Product mix issue.

Okay.

The second question is a marketing question.

I mean, you acquired a national brand without any of attractiveness of the national brand in this and there were no real appetizing expend, so on, and given the first

about the unhealthiness of national diet and that's true,

as well by the way

an opportunity to be here with you know, looks like fast food nation out there, cannot be racy in your portfolio and advertising expenditure in trying to educate people on what this kind of stuff is.

You know that, we have been exploring those different opportunities but I mean you are absolutely right, and you know fast food operations I guess we have really been giving a lot of bad

, you know, may be that will encourage them to do more products of this nature, which actually, I do know that they are looking at different things of this nature, so that may help us in the food service status business as well.

Okay.

One final question is that can you just talk about the accounts, selling of the accounts receivable and partly interest expense was an increase and it sounded like write-offs on some of the accounts receivable which weren't receivables.

Can you just talk about your experience there right now?

Your question relating to our experience with accounts receivable?

Yeah.

Or

for the loss and sale of accounts receivable.

The item on the P&L that is loss on sale of account receivables is really an interest expense, but the accounting rules require us to describe the it is as such.

It is not a loss of receivable.

So, it is not related to increased bad debt expense.

Well okay that's great.

Well I was just concerned that there would be an increase, which you might to expect to say this time of

but there is none of that happening.

Okay.

Right, thank you very much.

Thank you.

Our next question comes from Jack Murphy with Credit Suisse First Boston.

Thanks good morning.

One of you can talk a little bit about inflation in the business, you know, food services talking about a pretty significant issue with deflation and, you know, you seem to be saying that you are not really seeing that.

Has there been any kind of incremental change over the quarter and since the quarter close with regard to cost of product, price of product?

Well that would certainly be a mixed issue.

We have deflation in some product categories but because our mix is so heavy in produce and the problems with the supply of lettuce carried over into the very beginning of the second quarter that had an impact on, that tells you not to have negative inflation.

It was, but what's most of this, there was some deflation, it was primarily in mix, but that did really didn't have a negative impact on us because most of our pricing

need is

put down any way.

Thanks a lot Robert.

Have you tried to adjust for some of the mixed issues especially, I guess, you know, a kind of disproportionate impact from the lettuce business.

Would you have seen kind of 2 percent type of deflation?

Probably not that.

Probably not quite much but...

Yeah in distribution we did have a little bit of deflation.

Okay and has it progressed or you know has it kind of progressed over last several months or any meaningful trends here.

Well, I mean again it was a primarily in the area of meat and things like that which you know, it may continue but it also might improve then, and I guess our point again is that it really does not hurt our profitability if you can tell we had very good profit it affects, you know because we sell on cents per pound it just, it is a sales number does not really effect our earnings.

Right thanks.

Okay thanks.

Thank you.

Our next question comes from Bill Leach from Banc of America Securities.

Good morning.

Good morning.

Good morning.

Good morning Bill.

I am sorry I missed the beginning of the call and I am out of the office but I am little behind right here but, what was the internal

us, for the businesses in the quarter?

Internal growth was 7 slightly over 7 percent.

and the pricing was what ?

No inflation.

No, there are, Okay and on the Springfield situation you just said that would be entirely recognized in the third quarter.

We would expect the bulk of that to be recognized in the third quarter.

We are still getting our arms around what that ultimate impact would be, obviously it is very early in, in that process so the guidance we have given you is what we hope is the worst case and we will look at ways mitigate that cost as we get our arms around the issue.

And, and you said the cost was about 8 cents a share.

The guidance we gave was 8 to 10 cents that is right.

Again we think that is, that is the worst-case scenario.

It may be significantly better than that you know whether how much of this we can mitigate through other means, which we mentioned in the press release.

How much of that would be asset write off versus lost business?

At this moment we just do not have enough information to give you.

Certain lines of insurance coverage with our business interruptions and things like that some of the exposure is asset related so, we will give you more guidance as we get our arms around that.

But, but the vast majority will probably be inventory and, so, would you expect that this

that would have any effect on 2003?

I'm sorry.

Would you expect this to have any impact on 2003 prospects?

No.

No.

And your guidance before this is....

Those are non-recurring, and as we mentioned earlier, you know, it's really our own facility that has this kind of exposure.

Okay.

Thank you, thanks a lot.

It's like Murphy's Law you know

.

We will go now to Bob Cummins with Shields & Company.

Good morning.

You mentioned in your discussion that the acquisition of Quality foods diluted your profit margins somewhat in this quarter.

Since that is a big acquisition for you, I wonder if you could give us some more details of, how do their margins compare with your overall margins in broadline, and are there ways that you can bring their margins back up.

At the same time, may be if you could cover the other two recent acquisitions in that position.

Same question.

Bob, our, the margins in quality are less than what we have experienced in our broadline division, you know, Quality is a great company and is really focused on sales growth, possibly at the expense of profit growth.

We think that there is a lot of opportunity to go in and improve operating margins there, as we continue to focus on that and still some of our philosophies and disciplines that relates to that.

You know, specific guidance, we don't generally give specific guidance on profit margins by company, but I will tell you that they are less than our operating margins in our broadline segment.

One of the main reasons for that Bob, is that they just not too longer, opened a new facility.

And any time you open a new facility, you pull volume out of the existing facility, it reduces the profit

.

You have a period of time where you are breaking even or losing a little money in the new facility and, you know, they have still gone through that curve, although they are making steady progress there.

So that's going to, as they go up that curve that should help their profits quite a bit as well.

Right, right.

When do they reach the anniversary, was that quite recent?

Quality, we closed June first.

No, I mean the new facility that they...

I'm sorry.

September, I believe was, of last year.

So, the anniversary of that would be just a couple of months away.

Right.

Okay.

Thank you.

with US Bancorp.

Hello everyone, can you hear me?

Yes.

Sorry about that.

Good morning.

Could you go back, just quickly review in your broadline division?

I've got lot of percentage written down, nothing attached to it, on the growth in your street sales.

I just couldn't, not quick enough on that.

Yeah, street sales grew 8 percent representing 45 percent of sales year-to-date.

Okay and then the privately...your private label, I guess 19 percent of sales was that up in line with more of you're.... is acquisition driving or from the private label business?

No its not.

In fact its typically diluted.

Okay.

And private label sales in the quarter were up how much?

26 percent year to date.

26 percent year-to-date, okay.

Thank you and one other final question, on annualized basis what percentage of profits should we see fresh, your fresh-cut produce business contribute to the corporation, you're running I think about 54-55 percent year-to-date and I suspect it goes on a little bit in your second half but is it going to be roughly 50 percent of your earnings this year or next?

Slightly less than 50.

Yeah it will be less than 50 in the second half of the year.

Again that's just stock, seasonal sort of things.

Transportation so forth and also the expenditures on fruit.

Okay.

Thank you.

Thank you.

We go now to Adam Feinstein with Lehman Brothers.

Thanks very much.

Good morning.

The internal sales growth number for fresh-cut I believe you may have said flat, just want to get that number and perhaps some of the accounts that might be causing the softness in the internal sales of fresh-cut.

And then one follow up question.

Okay.

The sales actually was 4 percent, but we had about that same amount of inflation for the quarter in produce, as Michael mentioned in the first couple of weeks of the quarter and so for the quarter it was about flat and we expected it as I mentioned it in the first conference call first quarter we expect that to continue pretty much for the balance of the year for two reasons.

One is that when we merge with Redi-Cut last year we held on to some customers for a while, but they eventually went elsewhere that, were kind of competitors with our distribution farm and so they decided to go elsewhere and that impacted the sum.

Secondly is just in the quick service the sales have just been soft there for the last several months and you know, we have got some new products such as sliced tomatoes, which have helped from product mix standpoint to improve our profitability nicely, but our commodity products are a little bit soft.

So from a profit standpoint we've been able to show some nice improvements from a new sales standpoint, it has been pretty flat this year.

As we will add to that next year and we picked up some new business we have tested with a couple of companies we mentioned Domino's last time which has gone real well and we're expanding that test and we have one other major customer we've been running a test

which has gone very well and we're expanding with some new restaurants there as well.

So things are looking up and in terms of new business and we are real optimistic about food service side of business as well as retail.

Great, and just the internal sales growth target for full year and what that implies for the second half of the year for the company.

Thank you?

Real growth in fresh-cut, you talked about real growth, in the

service side, we anticipate that much of that would be flat for the year, but we think next year we may have goal long-term to grow, you know, in double digits and we think we will be able to get back to that, but, you know, we have got customers that are struggling a little bit that does have some impact on us.

So, our primary growth right now is coming from new customers.

Bob, for the entire company, the full year internal sales growth target in the second half of the year?

That was just fresh cut, internal, Michael mentioned 10 percent growth in Fresh Express.

That's not internal, but we expect them to continue a good growth.

Michael, do you want to give

.

We are still expecting high single digits for the entire company.

Thank you.

The customized has continued to do very well as you see in the year-end.

The next question comes from Andrew P. Wolf of UB&T.

Thank you.

Give the internal numbers for, you gave it as five percent for broadline, could you fill it in also or customized fresh-cut and I will follow on on internal sales growth?

The customized is 12 and that is all the internal growth.

Fresh-cut is four percent.

And you know, looking at in total or just on broadline sequentially and you know, doing it on real sales basis, it looks like there was roughly above one percent slippage in the growth rate of real sales.

Nothing terrible but, you know my question is, what was the trend during the quarter, was it U shaped, turning us accelerating or is there another reason why you expect like, a return of inflation?

So, you know, why wouldn't you have a high single digit expectation?

Well, our customized division is continuing to do very well, you know, we are continuing to have to have talks with customers which potentially could add some new business, we don't know about that.

And, you know, just the general outlook for restaurant industry is that, it is going to continue to accelerate.

I think, we didn't see a major impact during the quarter, as it was fairly steady for the entire quarter in terms of broadline sales.

But, you know, Mick point out that we, broadline still grew almost twice what restaurant sales were for the quarter, which I consider that to be very very healthy.

of the manufacture, you did indicate there was deflation in broadline specifically, sort of estimated at a percent, it was up 6 percent.

I am just wondering, it was still probably down a little from the first quarter, what the shape of the second quarter is, a sort of the weekly, you know, your weekly broadline sales?

We are one down four percentages from the first quarter.

I think, you know adjusted for inflation, we were slightly over six percent growth from the growth in the first quarter.

So, as you

inflation in for the second quarter, we're just a few basis points less in the second than the first quarter.

I should have asked the question that way, that's really what I wanted to know.

But I also do want to know, so really, there was no sequential volume

.

And further, do you have any, what is the shape of the weekly sales, sort of sticking around that 6 to 6.5 percent volume level in broadline or was there an up-trend, a slow up-trend or is it same flat?

I think it is going to stick in at mid category right now, but we do have a very strong emphasis on building our street sales to independent restaurants versus chain accounts.

We are not going to pass up any opportunities to add good chain business, but we do have a very strong emphasis on building our street sales and that has, you know, we have grown that a full 100 basis points over the same period last year.

So, we feel very good, the best going to continue

I use a lot more of our value added services and more about project brands.

Historically, Andy, we have intentionally added some, some more chain sales than we've added this year and if we had done that this year, our overall broadline sales would have increased more than they have, but you know, because of the emphasis on the street, we have, we have just downplayed same business on this year and that's why as Michael said, you know, the streets up eight percent but our overall sales are only up five because we haven't been pushing the chain sales.

We've actually had opportunities to add chain business with multiple locations, distribution centers that we have declined because it didn't in our strategic targets and didn't provide the return that we thought that was necessary.

We are continuing to be much more selective as we are trying to build profitable business not just build business.

Okay.

And just want another line of questioning if I could.

On the Fresh Express, the margin I look in the second half being down a bit, what in EBIT percentage points, basis points, what is the impact on that, from the fresh food initiative, like you got to 7.5 to 8 without the solution from fresh fruit, what would that have been?

And really the follow on there is, you know, its a little, I know you haven't viewed your 2003 budget set yet, but you know, what type of you know, what are you looking at for the year and particularly the first half of 2003, is there, to give us some visibility on, you know, whether there will or will not be dilution or ,you know, accretion as 2003 progresses?

Well Andy, our plan is to spent about 10 million dollars in investment spending to launch the food project and you know, that that spending you know, will continue probably not at that rate but you know, we will continue to spend to launch that project and we think that project has a great deal of potential and you know, that obviously will affect our margins some line.

You shouldn't see any great profits from or returns from the food project themselves as Bob indicated in 2004.

So we expect our margins and price cut to be obviously, I don't know, suppressed is the word, but at least reduced because of the food spending that likewise, we got some synergies that you know, we are still cultivating and we think will bear fruit and so we are not going to be too specific on margins, on margin guidance for next year at this point.

But next year, Andy, we don't see this thing you know, that diluted mixture, I mean we still expect to have good strong earnings growth in the fresh-cut division next year, I mean you know, our goal is always been you know, 15 to 20 percent.

We were very comfortable what we will be able to achieve that next year, as hopefully we will start to reap some of the investment that we spent this year at least in point where you know, instead of having to invest 10 million dollars in food next year, it will be a much lower number may be even you know, over the year and total may be even neutral but to our earnings.

infact to have for some time towards the second half.

It will turn up to be a contributor if it goes well?

Hopefully.

It will at least offset some of the investments.

Right.

We do not expect that we will have a contribution to the bottom line in 2003.

Right.

But we would not hope, you know, as I said before, what we contribute in this, hopefully we would not be spending the 10 million dollars what we are this year.

So in that way I guess you could

some contribution.

Thank you.

Thank you.

Thank you.

We will go now to Jeff Alan with

Hi good morning.

Could you please repeat the amount of accounts receivables that were sold in the quarter and also what was the operating cash flow for the quarter?

Jeff I guess the receivables program, you know the receivables continue to turn over so we still have 78 million dollars worth of receivables that have been sold.

Okay.

Those are just continually refreshed.

Right.

As far as operating cash flow was quite looking at free cash flow.

Operating cash flow was about 65 million for the first half.

For the first half, okay and could you remind me what it was in the first quarter?

Yes.

It may take me a few minutes to find that.

It is okay

I mean we can talk of

.

That is fine.

Thank you.

Okay thank you.

Thank you.

Dena Walker with Commor

.

good morning.

Good morning.

Are you going to take the opportunity when you get the parts per million down to revamp the piping in Springfield?

I think it is a little bit early to answer that question.

Is it something you would Mike?

You know we have our risk management and engineering people on staff there and we will do whatever is necessary to ensure that we don't have this potential problem again.

But is that the defensive possibility again we certainly will be exploring that.

Do you have any thoughts as to how long that would take to do or if you would choose to do that?

On another topic in fresh-cut, if we were to exclude Fresh Express from this question, what would you suppose your operating profit growth was from the same store business, given the mix upgrade that you talked about?

You know that's a good question and I'm, what would be this from the mix, you know that's really difficult for us to pinpoint Dane, it's difficult for me to give you a specific answer on that.

But your belief is that if your fresh-cut internal growth was 4 percent mostly, that 4 percent mostly from inflation.

You believe your profits were growing faster than that because of this mix upgrade?

Oh yeah, significantly, higher than that and we would attribute that to the mix, significant amount of that to the mix.

Final question on the most recent acquisition announced that Thoms-Proestler, was that a Pocahontas' company?

No.

They were a member of the Premier Group which is affiliated with Unipro.

Was that an auction?

Of course it was.

Sounds like a nice company.

Good luck.

It's a great company.

We are extremely excited about it.

Good.

Thank you Gentlemen.

Thank you.

We will go now to Mr. Sizer with Lehman Brothers.

Thanks.

A couple of more questions.

The Fresh Express operating margin in the second quarter, can you give us a sense of what that was and if you can give us a sense of what the category, the supermarket category for fresh-cut salads grew at in the second quarter?

Thank you.

Our percentage on the margins, we don't disclose margins by company, so we can't give you that, but Bob you want to address the other issue?

.

Supermarket salad sales growth.

Supermarket salad sales growth was about the same as ours.

It is 10 percent or slightly better, so it's been, it was good.

We had the challenge of, actually historically ours has been a little better than 10 percent but we have the challenge of kind of recovering a little bit of lost ground as a result of the shortage, last time on a couple of basic commodity items, so our sales growth in our higher margin items was very good but we had a lost a little of ground in a couple of basic items, and we had to work to get that back during the quarter and we've made some very good progress in fact the second, you know, June month, we made significant progress in getting that market share back, so we are optimistic about the balance of the year that we should be at industry growth

.

Great and just a follow-up to that, can you just us a sense of what is limiting supermarkets from doing their own fresh-cut lettuce and I guess you know, private label fresh-cut from supermarkets, what is limiting their, them from doing that and why you feel confident that you could sustain good margins and healthy salads going forward.

Yeah, we will have to......

In our facilities sometime, as you can see that there is just huge amounts of product to go through and we are just incredibly efficient.

There is no way that a supermarket could be nearly as efficient as we do.

I mean, we did millions of pounds of lettuce of different types and blends and so forth and there is just absolutely no way that a supermarket can do it as efficiently, cost effectively as we can do it.

And, so are not concerned about that in terms of private label, you know, we could put more money in promoting the product, but that kind of opens the door of private label, because we don't put as much money into marketing of the product, but put primarily into promoting the product.

There is really precious little difference between the cost of private label and national brand in the case of salads and in fact, I would venture to guess that supermarkets, if they have private label, don't make as much on private label as they do on national brands.

So you know, we just need to keep bringing that point to the attention of the supermarkets and driving that home and that's really why private label has not made a lot of inroads in the sector.

Thanks.

Thank you.

Gentlemen at this time there are no further questions.

I would like to turn the conference back over to you for any additional or closing remarks.

Okay.

Let me conclude by first thanking you for your time this morning.

We appreciate your interest in PFG and hope you are pleased with our second quarter results.

We believe the second quarter end results thus far this year are demonstrating that the numerous growth strategies we have initiated are proving successful.

We are excited about our business.

We love what we do and are continually striving to bring more value to our customers and in turn to order shareholders.

Have a great day and we look forward to you joining us again in 3 months.

Thank you.

That does conclude today's conference call and you may disconnect at this time.