Blackstone Inc (BX) 2002 Q3 法說會逐字稿

Good day 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'd like to turn the call over to Mr. Kevin Inda.

Go ahead, sir.

Thank you, Candace.

Welcome to the conference call to review the company's announcement earlier today of its financial results for the third quarter of 2002.

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

They involve risks and based occurrent expectations.

Actual results may differ materially.

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

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

Good morning.

I want to welcome everyone on the call, as well.

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

This call is intended to review results for the third quarter as well as our outlook for the remainder of 2002.

Our third quarter earnings release was issued this morning and a copy is available on our website, PFGC.com.

I will briefly address our overall third quarter operating highlights, performance of our business segments and John Austin, who is now handling investor relations, will review the financial results and outlook for the balance of the year.

Our gains during the third quarter are especially pleasing as they validate our growth strategies.

Our reported results, even with the higher expenses associated with the damage at our Springfield facility, marked record third quarter sales and earnings and for the second consecutive quarter, we surpassed $1 billion in quarterly sales.

Even though we see slight softness in restaurant sales in the third quarter, our sales growth for the first nine months of the year is 40%.

Our sequential sales growth was 9.5% and continues to be driven by contributions from acquisitions.

Our internal growth was 7% in spite of a slightly deflationary market during the quarter.

However, I'd like to point out that distribution real growth combining our Broadline and customizing divisions was 10%, net of 2% deflation.

Operating margins improved to 2.6% for the quarter from 2.5% in the third quarter of last year.

For the year, our profit margin increased 68 basis points to 2.85%.

Our 34 cents diluted earnings per share was a 17 cent increase on 36% more shares compared to 29 cents per share diluted in the year earlier quarter.

This is our 31st consecutive quarter of earnings gains versus the same quarter of last year.

The impact of the damage at the Springfield facility was $4.8 million before tax, which resulted in a decrease in earnings of approximately six cents per diluted share.

This cost related to the write-off of damaged inventory and the expense of being closed for nearly two weeks.

In addition to the costs we've identified, ammonia leak did impacted the ongoing operations and profitability of the facility.

Our Fresh Cut division sales increased by 222%, aided by our acquisition of Fresh Express.

Our internal growth rate was approximately 7%, which included approximately 1% deflation.

We are experiencing the expected synergies as a result of a successful integration process.

We're now focused on leveraging these synergies to generate even greater growth with existing and new customers.

Our focus on product and service innovation and a distinct freshness gap will differentiate us and lead to increased growth.

Revenue growth in retail continues in low double digits driven by growth in blends.

Revenue growth in food service continues to be sluggish due to the loss of food service distributor business and soft sales in the QSR segment.

Operating profit margins during the quarter of 8.93% were at expected levels, even though less than the second quarter, due to anticipated impacts of seasonality and the increased investment of product development.

These costs, as planned, will continue to ramp-up in the fourth quarter as we accelerate our Fresh Cut fruit initiative.

During the quarter, the company began a retail consumer test of this new product line, Real Fresh Fruit.

While the company is excited about the long-term potential for the product innovation, the product is in the developmental stages and we reiterate we expect no contribution to earnings through 2003.

Sales for our Customized division grew 11% to $347 million, which included approximately 4% deflation.

Operating profit margins improved 8 basis points to 1.25% and were driven by efficiencies throughout the system.

As a result of our focus on superior service, our Customized division expanded its relationship with two premiere customers, Ruby Tuesday and TGI Fridays.

We will begin serving an additional 200 Ruby Tuesday restaurants and an additional 265 TGI Fridays restaurants, which will generate an additional $320 million in sales when fully implemented.

To support the incremental business and other customized customers, we've leased two distribution centers and plan to substantially expand our Elkton, Maryland facility.

Let me briefly comment on our relationship with Avado Brands, which operates Hops and Don Pablo restaurants.

Our distribution agreement with Avado will terminate in the fourth quarter.

Avado represent approximately $110 million in annual sales and we expect to cease our relationship in December of this year.

While the termination of the relationship is unfortunate, we believe it will better position us for continued growth.

The Broadline division had 46% sales growth to $618 million with internal sales growth of 5%, including approximately 1% deflation.

Operating profit margins were 1.79%, primarily as a result of the Springfield incident and the addition of Quality Foods.

Adjusted for the impact of these, the operating margins of our base business showed a nice improvement.

Our street sales grew 11% for the quarter and represented 46% of Broadline sales.

Sales of Propriety brands to street customers grew 30% year-to-date and represent 20% of street sales, up from 16% for last year.

Our sales per delivery increased 4% year-to-date.

We are very pleased with the integration process of Quality Foods, Mittendorf Meats and TPC and expect positive contributions next year.

The management teams of the companies are intact and excited about the future.

We are happy with our quarterly results despite the challenges associated with the ammonia leak at SFC.

Our initial guidance was a worst case impact of 8 to 10 cents.

Including the cost of the ammonia leak, we believe our full-year results will be in the range of $1.41 to $1.43 per share diluted.

While we are still finalizing our 2003 plans are comfortable with our earnings in a range of $1.75 to $1.80 per share diluted.

I will now turn over to John for financial highlights.

Thank you, Michael.

Sales for the quarter increased 46% to $1.2 billion, 39% of which was from acquisitions and 7% internal growth.

A breakdown of sales by segment is included in your press release.

Gross profit increased 74% to $189 million and gross margins increased 258 basis points to 16.13%.

However, this includes the inventory loss associated with the Springfield ammonia leak of $3.3 million.

Adjusted for this write-off, gross margins were at 16.41%, an increase of 286 basis points.

Gross margins were also favorably impacted by the acquisition of Fresh Express and the addition of quality food service had an unfavorable impact in the segment.

Operating expenses increased 80% for the quarter to $158 million, which represents 13.52% of sales, an increase of 251 basis points.

Our operating expense ratio was negatively impacted by the addition of Fresh Express, which had a higher expense ratio than our other businesses.

Operating expenses also include an additional $1.5 million of incremental expenses related to the ammonia leak.

Operating expenses versus the prior year were also favorably impacted by approximately $1.8 million related to the adoption of FAS 142, with eliminating Goodwill Amortization.

As a result, operating profit increased 50% to $30 million and operating margins increased 7 basis points to 2.61%.

Adjusted for the direct costs of the ammonia leak, operating margins were 3.02%, an increase of 22 basis points compared to the prior year of 2.80% adjusted for the impact of Goodwill Amortization.

Interest expense and the loss on sale of receivables amounted to $5.1 million, due to the issuance of $201 million of convertible notes in October of 2001 and increased borrowings to fund the acquisitions of Quality Food Service, Mittendorf Meats and Thom-Proestler earlier this year.

Other income consists primarily of interest income.

Our effective tax rate remained at 37.5% and is expected maintain that level for the balance of the year.

Net earnings increased 42% to $16 million and earnings per share increased 17% to 34 cents per share diluted versus 29 cents last year.

With 36% more shares outstanding as a result of our combined stock and convertible note offering in 2001.

Our earnings do include the impact of the Springfield ammonia leak of $3 million or six cents per diluted share.

It should be noted the convertible notes were diluted for the quarter and year-to-date and therefore the $6.1 million convertible shares are included in our share base.

Balance sheet trends were consistent with the second quarter.

Our day sales outstanding remained at 23 days.

Inventory turnover was 18 times and accounts payable float was 132%.

At quarter end, total debt amounted to $372 million and our debt-to-capital ratio was 35%.

However, including our off-balance sheet debt of $134 million, our debt-to-capital ratio was 42%.

Depreciation amounted to approximately $10 million for the quarter and amortization was approximately $2 million.

We expect DNA for the full year to be approximately $45 million.

Capital expenditures during the quarter were approximately $16 million and we expect Cap Ex to be approximately $65 to $70 million for the full year.

With that, I will turn back over to Michael for closing comments.

Or Q&A, I'm sorry.

Operator, we're now available to take questions.

Thank you, the question and answer session will be conducted electronically.

If you wish to ask a question, please press star followed by the digit one on your touch-tone phone.

We will proceed in the order you signal us and take as many questions as time permits.

Once again, press star one if you do have a question or a comment.

Our first question comes from Bill Leach with Bank of America Securities.

Good morning, guys.

Good morning.

There seems to be confusion about your full-year guidance, if you take the mid-point, $1.42 and add back nine cents for the ammonia leak, so we get to like $1.51 from operations?

Bill, really our initial guidance earlier in the year was for $1.48 to $1.50 and if you take off 8 to 10 cents related to ammonia leak, that leaves you in the, you come up a pretty big range there, but $1.39 to $1.42 probably and we are comfortable with the guidance of $1.41 to $1.43 for the full year at this point.

And in that you're including an ammonia leak charge of about nine cents?

It is difficult to quantify the ammonia leak.

As we've disclosed in the press release, we've identified specific costs related to that of six cents per share.

However, as Michael mentioned, you know, there is an impact in operations related to business interruption, which is harder to quantify, so, the specific costs that we've attributed to that issue are six cents per share and we think, you know, our 8 to 10 cent guidance, again, is worst case scenario.

Right, but when you giving the $1.41 to $1.43, what is included in that number?

It includes the six cents and a very difficult to quantify impact on business interruptions which I can't be specific about that.

Part of the problem is, you know, the facility was shut down for a week and a half to two weeks and we had to replace all of the temperature-sensitive inventory and so we expensed lag time and servicing customers and sales have not ramped back up to the pre-problem level and we've -- we also have an insurance recovery of some lost business that could or could not hit in the fourth quarter.

So, that whole issue is not resolved.

If we do the insurance recovery, we will be at the top of the range.

If we don't, we will be at the bottom of the range.

We hate to be wishy-washy on the subject, but that's about what we know.

Let me phrase another way, if we leave aside the Springfield charge altogether, what's your range of guidance?

I mean what operating base should we use for the year if we assume Springfield is a non-recurring event?

Would it be $1.50 roughly?

I think it would still in that original guidance we gave of $1.48 to $1.50.

So basically there is no change to your guidance?

But you do expect a couple of cents a share in the fourth quarter from Springfield?

We think it's possible.

It depends on whether or not we're able to get the insurance recovery.

I don't see how you can give a full year number if you don't know what's included in there?.

It just seem you include it or don't include it?

Again, as Michael mentioned, we're still negotiated with our insurance company on our business interruption claim and we have not finalized that and at this point are not comfortable saying what that will be and even when we will end up recovering that.

So, you know, based on the forecast that we've done, we're comfortable with $1.41 to $1.43, which is inclusive of the impact of the ammonia leak.

Does that clear it up, Bill?

In other words, the $1.49 -- in other words, we're comfortable with the consensus less the -- you know, less the cost related to SFC.

Right, but what is the cost, is it six cents or nine cents?

The issue, as Michael said, Bill, is we -- we expect another, you know, couple two or three cents in the fourth quarter.

Okay.

But we don't know about whether we're going to collect the business interruption insurance in the fourth quarter or not.

It's very difficult to quantify the specific business interruption impact.

In other words, the business -- we're still negotiate that with the insurance company.

I understand that.

That's really the difference.

I understand all that, if we justice assume the whole thing is an extraordinary event that has no bearing on the future and want to add it back, I mean --

You're back to the $1.49, $1.50 for the year.

That's what I'm driving at.

So, we're looking at the same operating guidance we had before.

You're exactly right.

Okay.

It's just a little confusing.

Sorry.

I know.

That was really our concern when this was put together was that it was confusing.

That was why they tried to, you know, tried to clear it up as much as possible, but, yeah, we understand.

And the guidance next year doesn't include anything in terms of problems from Springfield, right?

That's assuming it is all over by then?

Again, we're very early in our business planning process with the numbers, the preliminary numbers that we've pulled together at this point, we are comfortable in that $1.75 to $1.80 range.

And to answer your question, yes, Springfield -- assuming Springfield is behind us at that point in time.

Okay.

Congratulations for a good quarter!

Thanks.

Thank you.

Once again, if you have a question or a comment, please press star one at this time and please remember to initially limit yourself for one question -- our first question is from Jonathan Finick

Hi, guys, good quarter!

Wanted to just -- one question, can you give us any update on how trials are actually going on the west coast with the as far as the you know, the new Fresh Fruit is going?

Any timing on extensions and -- or possibly, you know, further developing the project?

We're in about 173 stores as of last week.

Safe Marts and Albertson's out on the west coast, we're gradually expanding the test, but it is a test.

They're working through, you know, a lot of things, but we're very, very pleased with the tests at this point in time.

The product is holding up, shelf life on the product is what we expected it to be.

The sales are right on target and in some stores above target and, you know, we're working on all areas of the sourcing.

I mean everything is -- I mean there are always going to be challenges when you introduce new products, but we're very please we did it at this point.

And just to follow up, assuming everything goes according to plan, do you have -- according to plan, as well as it sounds like it's going, do you have a ballpark time frame when you would expend from the 173 stores to perhaps other regions?

I would guess -- we're going stay on the west coast for a while.

We're going to continue to ramp-up stores.

It will be 800 stores and 1,000 stores, probably, I mean -- don't hold me to a timetable.

I guess it would be at least 800 stores by early next year.

But as we -- we have yet to determine a rollout schedule because again it is still a test, we need to take this to the board for final approval before we rollout to the next center.

Excellent.

Thank you.

I told you it would be premature.

Thank you.

Thank you.

Next we have Jack Murphy with CS First Boston.

Good morning.

Good morning.

Just a couple of questions.

First of all, following up on the Fresh Cut business, could you give us a sense where you think the margins on that business will be over the next few quarters?

There's obviously a lot of kind of puts and takes given the rollout of the Fresh Cut fruit.

Are we looking at, you know, kind of a different seasonal pattern on margins?

Can you give us some sense there?

Jack, I don't think -- it's difficult in this test phase and the rollout phase to figure out where the margins are going to be.

Obviously we don't expect any profit contribution, as Michael said, in all of '03.

But longer-term, we do expect the margins to be similar to our Fresh Cut business.

Are you talking about fruit or Fresh Cut overall?

I'm talking about Fresh Cut overall.

The guidance we've given we will increase operating margins 50 basis points and I think you can probably -- at this point in time, you know, we have not got next year's budgets finalizes but I think we would be comfortable in telling you to add 50 basis points to next year in Fresh Cut, quarter-to-quarter.

And kind of in each quarter?

I guess that's what I'm driving at sort of.

You know, we haven't finalized that yet.

We hate to give you quarter-by-quarter guidance until we figure out the actual rollout of the fruit.

So, it is a little premature.

I think we would have to tell you at this point in time, for the year in balance.

Yes, at this point, Jack, we have not finished our plans for '03 and because of the rollout, you know that, is probably not going to be a normal ongoing trend associated with the margins in that segment.

We will come back to you with guidance for all of '03 once we're finished the planning process.

Fair enough.

Another thing related to guidance, but a little more vague is just on the trends for real sales growth in the coming quarters,are you pretty comfortable with the trend you had in third quarter as something to be looking at over the next three or four and kind of where is that coming from if -- the kind of sales per drop increasing 4%; is that sustainable?

Could you give a sense of how you're getting that?

I think upper single digits real sales growth is sustainable for the next several quarters.

We hope it would ramp-up a little bit as restaurant sales continue to get back to more normal levels.

Our drop size increase of 4% is a little bit slower than we had in the past, but, you know, keep in mind during that period we were increasing our Broadline sales at double what we are now and the restaurant industry was blasting along at 5% better or better growth.

So, we think that the drop size is sustainable and think we can probably ramps that growth level back up a little bit as we've brought in some acquisitions, that's been diluted down a little bit.

And as we get our drop size into longer numbers it gets harder and harder to continue the percentage growth rate, but we're very focused on account penetration as a growth strategies.

And in Fresh Cut, the -- the internal growth should be in the 6, 7% range next quarter and probably at least that in 2003.

Okay.

Thanks.

Next, we will hear from Greg Badishkinian with Salomon Smith Barney.

Hi.

Just a -- I'm sorry, a quick question related to the ammonia impact.

I think I may have misheard you, but I think you said $1.5 million impact in addition to the six cent impact this quarter, was that correct?

Or did I mishear you?

Let me clarify that, Greg it was $3.3 million that was in gross profit that, was the inventory write-off.

And $1.5 million of incremental expenses associated with, you know, labor to clean up the facility and restock the facility, additional mileage we were driving to service customers from other warehouses, so, that's a total direct cost associated with that ammonia leak of $4.8 million, which, after-tax, relates to six cents per share.

Is there anything else in there that might have impacted you, you know, in terms of lost business or anything like that's not in that number?

Correct, that number does not include any business interruption impact associated with the leak.

Again, that's the part that's very difficult to quantify.

So, without the business -- without the business interruption your earnings this quarter would have been a little bit higher, I mean -- is that right?

Yeah, I think it is fair to say, yes, there was an impact.

It is fair --

You had a six cent impact which is included, that brings you up to 40 cents which is consensus and more from a business disruption standpoint, so you would have had more than the 40 cent number.

That's fair to say, yes.

You can't quantify that penny, two pennies?

I prefer not to!

We've tried.

It's very difficult.

Okay.

Alright.

Second question is just related to this solid opportunities at McDonald's, if you could discuss where you're at there and what maybe some of the opportunities are over the next few quarters?

Well, your--you're talking about the new salad that they're rolling out and so forth?

Yeah.

I, you know, we've included in our estimates for next year and we've talked about these things, but it is a good opportunity, you know, until we roll it out, it is hard to quantify it.

However.

They're doing a 99-cent promotion now.

And that's helped, if you look at internal growth this quarter versus last quarter, the new menus and things like that did helped sales in the third quarter and hopefully that will continue into the fourth quarter and the rollout of the new salad should help some, too.

But, you know, that's one of the things that's going to help our internal sales growth be hopefully at least in the 6 to 7% range for the fourth quarter.

Good.

I'm talking about in Fresh Cut.

Right.

Right.

We will be supplying the ingredients for those salads in the distribution centers that we service for McDonald's.

And that's in the number -- what would they have to do to get upside to that number?

What would -- that's a good question.

I'm not sure I've got a good answer for you!

We wouldn't want to raise our expectations, let's put it that way.

Okay.

Good.

Well, very good quarter.

Just a little bit confusing.

Thanks.

Thank you.

Eric Larson with -- I'm sorry, US Bancorp has our next question.

Hi, everyone.

Hi, Eric.

Two questions, one, isn't it fair to assume you mentioned in your prepared comments, Michael, that fresh fruit would not make a contribution in 2003.

Isn't it fair to assume that it is probably going to have a negative contribution to your numbers, given the stage of the rollout and the growth and the investment you need for that?

Yes, but that's already factored into the numbers.

But, we should think of it as having a negative contribution.

I realize it's in your numbers, but probably won't be a break-even operation next year, I assume?

It will probably be the same impact of the number next year as it was this year.

Okay.

An then I want to follow up a little bit with your Control Brand numbering it was 20%, I believe, of our Broadline sales in the quarter.

With some of your new initiatives, you know, that you're putting on your Control Brand product lines, what could that number be next year and, you know, are you -- could you see that ramp-up very quickly with some of the new initiatives there?

We're looking for 30% of street sales within four years.

Within four years, okay.

And as I mentioned, it's been growing at 30% comparatively this year, so far.

So, it's ramping up quickly.

Okay.

Okay.

Thank you.

Thank you.

Now we will go to Mitch Spicer with Lehman Brothers.

Thanks very much.

Good morning.

Good morning.

Just a couple of questions.

First, in the release you said 7% internal sales, that's with 2% deflation.

So, the real internal sales number in the third quarter was in fact 9%?

Yes.

Okay.

Just wanted to clear that up.

Secondly, on the Springfield acquisition, I think you eluded to it is hard to quantify, but if you were to try and flush out perhaps what happened at Springfield, you know, where do you think that 9% real number would have come in at in the third quarter?

Again, that's a very difficult thing to quantify.

Real sales growth, you know, Springfield is such a small part of overall sales, it wouldn't have had overall impact.

They're less than 5% of Broadline sales and much less in total sales.

Okay.

Guys, it wouldn't have been material to the overall number?

Right.

Affected earnings more happen sales.

Obviously.

Got it.

And lastly, just on the salad rollout in McDonald's, you do do the McSalad Shakers, I take it, upon the rollout of the premium salad line it wouldn't be just purely incremental, I'm sure there would be cannibalization of the older product line, is that safe to say?

Yes, when the Shaker was rolled out there was an interest in the Shaker.

So we had some short-term bump in salad, but it kind of settled back down to not being a huge deal.

And so hopefully the same thing will happen with the premium, at least there will be initial interest and that should bump sales at least for, hopefully for a short time.

How significant?

It's difficult for us to even make a best guess.

You might ask McDonald's that question.

Will do.

Thanks very much.

Thank you.

Thanks, Mitch.

Next we will hear from Monica Agrall with Merrill Lynch.

Good morning.

Two questions.

First of all on the internal sales trends, did they improve as you went through the quarter?

And are the trends currently running higher than that for the total company?

I'm assuming that the September 11th wasn't a huge favorable impact for you because it didn't hurt sales as much last year as it did for some of the other competitors.

And secondly, do you expect to pick-up any new business from the shakeout in [INAUDIBLE] as in [INAUDIBLE] lined business?

Sales were strengthening through the quarter and obviously we will continue I think in the fourth quarter and strengthen internal growth a little bit in distribution.

We have continued to take advantage of opportunities that exist because of the consolidation that they're doing and believe that that will continue to provide opportunities for us into the fourth quarter.

Okay.

Thank you.

Next we will go to Andrew Wolf with BB&T.

Hi, good morning.

Just on Broadline, you know, if you throw the $4.8 million in there, year-over-year, the margin was about flat.

Which means that the Quality acquisition, you know, as you eluded to, diluted margin, could you just give us a little more quantification than you did in your preamble?

Well, Andy, yes, Quality did have a negative impact on overall margin.

You know, we don't disclose profitability by operating company, but adjusted for the impact of Quality as well as the ammonia leak it would have been a fairly nice improvement, even compared to a number last year adjusted for Goodwill.

If I could --

And we have told you, when we announced the Quality acquisition it was going to dilute margins in the Broadline division.

And, you know, part of our initiative there, as we saw a tremendous upside as we worked to put synergies in place and, you know it was a company that was focused growth and we're putting a lot more discipline in the business and focusing on margin improvements.

So, we see a lot of upside with Quality.

Okay, well that helps, so it would have been up even on an apples-to-apples without the amortization help.

And just a -- just the last thing on Springfield, looks like you're expecting two to three cents of one-time costs there or something like one-time, in the fourth quarter.

What are the costs going to be?

Well, there's operating inefficiencies because we've, you know, we've had replaced the entire product line, all the refrigerated and frozen product line.

We went through a period where we had limited service to our customers.

We focused on really trying to provide what service we could and keep the relationship going with our better customers and we think we did that.

We have not seen a lot of fallout from customers.

We've, you know, held on to the sales force that's intact.

And just sales -- the sales force is not producing the level of sales that it was prior to the problem and it's -- that causes inefficiencies in the warehouse, inefficiencies in transportation, the cost per piece, you know.

And we still got to run the same amount of routes and the same amount of drivers even though the trucks aren't as full as they were before.

So, you know, until we get that business ramped back up to where it was, we will continue to have those extra costs and hopefully we will recover that cost from insurance in the fourth quarter, but we're just not positive about that.

The recovery may come in the first or second quarter.

So, you're saying if you don't get the insurance recovery resolved in I guess and paid or at least resolved in the fourth quarter so you can book it, there is going to be a two cent impact or something like that, just because Springfield -- because of the lost sales at Springfield?

That would put us to the bottom of that range, $1.41.

The range -- the range does not include the recovery of insurance.

The bottom of the range certainly doesn't.

If we recover it, we will be at the top end.

And right back where we were with earlier guidance.

I guess just to close up that, in the fourth quarter, though, are you still experiencing some like net incremental costs, not because of, you know, lower sales, but, because, you know, you're working harder to get the sales back or having inefficient truck routes from other parts of your network?

Or is it all just basically sort of lower productivity based?

It is productivity, I mean there are extra costs and inefficiencies associated with that, Andy, the six cents we've quantityified this quarter were specific costs attributable to the clean-up and restocking the warehouse and extra miles we were driving.

So, you know it will be -- next quarter I wouldn't expect there to be a specific quantification of "one-time costs," it is really the whole business interruption of that and the inefficiencies associated with.

But, you know, they will be two cents or better below where we expected them to be before the problem occurred and that is operational inefficiencies and less sales.

You know, we have not gone in there and slashed the sales force and driver force.

We feel like that's a very important business to us.

It was a strategic acquisition to fill a market void between NorthCenter and AFI and New Jersey and, you know, we've got a lot of people from other operating companies and from here in Richmond going in there to provide support for those people and help them get the business back to par.

And just to reiterate, Andy that, still takes us comfortably within the 8 to 10 cent range we told everybody it was going to be.

In terms of the --

Okay.

And if we get the insurance, it will be, you know, less -- or when we -- I don't think there's a question of if we get the insurance, it is when we will get it and how much.

And how much.

Exactly how much.

Great, thanks.

Sounded like I wasn't the only one with still some residual confusion.

That clears it up for me.

Thank you.

We understand it is confusing.

Very challenging issue.

Next we will go to Forrest Temple with Flyline Partners.

Hi, guys.

I think most of my questions have now been clarified and quantityified.

If you could talk a little bit about the process you all went through with the Hops/Don Pablos restaurant chains and how that ended up where it was, can you give me the background how we ended up where we did?

I can't give you a whole lot of background.

I can tell you that Avado came to us and requested some change to our distribution agreement and we weren't willing to make those changes.

And they chose to leave us.

Do you know who picked up that business?

It was an independent company.

We can't really comment on that.

We don't comment on our customers.

Okay, thanks, you guys.

Next we will go to Bob Cummins with Shields & Company.

Good morning, everybody.

Just wanted to follow-up on an earlier question about real sales growth going forward.

It seems to me that you're comparisons from a sales point of view get easier because this quarter, a year ago, included two weeks after September 11th, when obviously the whole food industry was decimated for some extended period.

And am I correct in feeling that your challenge so far in making year-over-year sales gains becomes greatly alleviated because the prior year's numbers aren't so hard to beat?

Are you talking distribution now?

Well, across the whole -- the whole breast of the business, really.

You know, we are lapping Fresh Express and that will factor into the whole equation going forward for the entire company.

Distribution comparatives will be somewhat easier, but we didn't suffer horribly in the fourth quarter because of our business being focused on family dining, neighborhood cafes, casual theme, full-service restaurants.

We didn't suffer as bad as some because we weren't focused on the travel and leisure industry.

So, was I say, yeah, it will be a little bit easier because we will have better comparatives, but it's not a slam-dunk.

We still got to -- our associates have to bust their humps to get us sales growth.

You're saying basically you weren't affected as much by September 11th as some of the other distributors were?

That's correct.

Okay.

Thank you.

Freda Smith wit William Blair & Company has our next question.

Thank you.

I wanted to go back to the comment you made about the expectation for margin expansion next year in the Fresh Cut business.

Is that including or excluding the investment in the fruit effort?

That's after we make the investment in the fruit, we still expect that investment -- we're making an investment this year in fruit and I would expect about the same, so, the bottom line impact of fruit next year should be, I mean, neutral with this year.

On a year-over-year basis.

So.

Yeah, we're looking at a least a 50% improvement in operating margins --

50 basis points.

Excuse me, 50%! 50 basis points!

Thank you for saying that!

A 50 basis points improvement, you know, including the investment in fruit.

And as we've come through the third quarter, could you give us an update on an estimate of the investment looking like this year?

Well, we had sold the market -- you know, I don't have a specific number for the quarter, Freda, I'm sorry, but we did anticipate and we do feel we're on track to about a $10 million net impact on operating profit for the fruit initiative.

Okay.

Thanks.

And then you did touch on --

That's a good question, I'm sorry, excuse me, one other thing.

The big question next year is where that's going to fall.

That's why we're a little reluctant to give quarter-by-quarter --

We have not finalized our plans.

Until we finalize our plan and know where it's going fall next year.

Just going back to the comment you made about the Avado Brand situation, I think in your prepared remarks you said it would better position you for future growth.

I'm not quite clear on why, if you could help, I'd appreciate it.

Well, it -- it will free up some capacity in some distribution centers where we have some relationships with customers that we can add into the distribution centers.

That's probably about all I can say.

So, is it something that you would expect to transition quickly in the first part of next year, that there is pent up demand to fill the capacity?

Or it will take 6 to 12 months to replace it in the specific facilities?

It will take awhile.

It's not a one-quarter issue, but should be addressed before 12 months, as well.

We will be ramping up the Ruby Tuesday's and TGI Fridays and Mimi's Cafe, which we announced we picked up, so it won't impacting dollar-for-dollar the same distribution centers, but we will be ramping the business up next year.

And we will be selective in looking at customers with strong financials and good growth prospects.

So, just overall you don't expect it to disrupt your planned margin expansion because this business will roll-off?

Again, we haven't finalized our '03 plans, so we really can't comment '03 at this point.

And margin expansion and customized was 5 to 10 basis points long-term.

So, that's -- you know, that's not a major impact on our overall margins.

Right.

Looking at 50 basis points in Fresh Cut and 20 to 30 in Broadline.

But is it better for to us think about that as some kind of a transition issue that, you know, I hear what you're saying, that it is relatively small, but in terms of the trend line that we might take a step back on a short-term basis?

Yes.

Again, until we finalize our plans, we will give you more guidance as it relates to '03 when we finish our plans.

Okay.

Thank you for your help.

And once again, if you have a question or a comment, please press star one at this time.

And we will go to Dana Walker with Culmer Invests.

Good morning.

Would you expect, perhaps feeding off of Freda's question, any frictional costs in Q4 as you wind down with Avado?

We're going to have that business into December.

We will have a slight impact as it moves on the of our distribution centers in December.

Exactly how much it is, we don't know at this point.

It will be slight.

And it is included in the numbers,the guidance that's been given for the quarter.

That's right.

Understand that.

Final thing: Or thankfully it doesn't happen very often, but do you have a game plan you can follow when you have a business interruption that allows you a model to pursue in regaining lost business?

As you're now looking at in Springfield?

Well, like you said, thankfully it doesn't happen very often, so, it's not a contingency that we pulled a book off the shelf and had a plan ready to go, but we're developing one as we go along and our risk management people and our divisional operating people have learned a lot from this and going forward, you know, should we have another situation, we will be much better prepared to handle it than we were, even though I think we've done an excellent job and we had lots of experienced people from all throughout PFG and other operating companies come in there to support.

Thank you very much.

Thank you.

Now a follow-up question from Mitch Spicer with Lehman Brothers.

Thank you.

First a question on Fresh Express sales into the food service channel.

Wondering if you could given us an update there, should we expect any -- or is your earnings guidance for '03, does it reflect any incremental business, you know, just Fresh Express branded salads into food service?

And then I have another question.

Well, their doing some food business now.

As we develop our plans for '03, we're taking a worst case scenario in case we lose, you know, as a result of a distributor desiring to leave them because of their association with PFG, we're taking a worst case scenario in our expectations there.

But, same time, they are working very hard to -- some of our casual theme restaurant relationships to move the fresh express product line into more food service.

We're working both ends of that.

We think there will be, you know, some -- I'm not sure exactly what to tell you.

If you're looking for specific numbers or something, we're not prepared to tell you that at the moment, but, you know, to Michael's point, we are continuing to aggressively pursue with their customers wand new customers in Food Service, you know, new product lines as well as new concepts.

New customer concepts.

Okay.

I was looking for a quantification, it sounds like it is moving along, to move Fresh Express into the food service channel.

Great.

They were already in the food service channel.

It represented about 70 -- 15%.

About 15%.

About $70 million of their sales.

So, you know, I'm sorry, go ahead.

Okay.

I think that -- thanks.

And second, just on Springfield, can you just kind of just walk us through, you know, and obviously the plant was -- had to stop producing your customers had to go to other distributors to get their product.

Is it now just the sales people kind of banging on the doors trying to re-establish the relationship?

Can you kind of walk us through, you know, how you plan on regaining it?

And obviously was it a short-term disruption and you've had the long-term relationships.

I guess my question is how long, you know, do you think you can recapture all of that lost business in a reasonable time frame?

Thank you.

Well, I can only describe a scenario that exists generally in the street.

But I don't think we're having to bang on the doors to open customers back up.

We stayed in the customers, called on the customers continually and shipped the majority of the customers, at least part of their needs through our other two facilities.

Our p0eople did a heroic job of making sure we kept relationships with the customers.

When we couldn't supply everything, say we were selling 20 or 30 items to an operator and he had to go to a competitor to pick up 50% of the items, the competitor stepped in and helped him out and generally there is some loyalty there.

So it takes us a while to get those -- get those 50% of the items back into our order and away from the competitor and, you know that, takes a while.

It is a relationship business and our sales people have great relationships with their customers and we fully expect we will penetrate back to the levels we were or greater.

As this process continues.

But, you know it does take a little bit of time to do that.

Understood.

Thank you.

Thank you.

And I think I could add, too, we're taking a fairly conservative forecast for 2003, we're taking a fairly conservative approach with that.

With their contribution to earnings.

Thank you.

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

I wondered, could you repeat your internal volume growth, your three concepts?

Could we what?

Reiterate the internal volume?

Yes, repeat -- I didn't take it all down, the internal volume growth by segment?

Internal growth by segment, Bill, was 5% in Broadline.

Internal growth 11% in Customized and 7% in Fresh Cut.

And that's volume?

Right.

That's -- that's internal growth.

That gives you combined internal growth of 7%.

And what was pricing by segments?

The impact of inflation was about -- deflation, I'm sorry, was about 1% in Broadline, about 4% in Customized and 1% in Fresh Cut.

All deflation.

And so overall it was minus 2.

Overall minus 2, giving you real growth on a combined basis of 9%.

Okay.

And I didn't hear your capital spending forecast.

Is that still expected to be about $70 million?

Maybe just someway shy of $70 million.

We're thinking between $65 and $70 million at this point.

Do you have a projection for next year?

We do not yet.

Would it be about the same or slightly lower?

Until we finish our plans, I can't speak to that.

Okay.

Thanks.

Yep.

Bill, also I pointed out that our distribution business, combining Broadline and Customized real growth was 10%.

And pure distribution.

Thank you.

Didn't you say it was plus 5 and plus 11?

Right, but then --

Add the two together with the 2% deflation was 10% real growth.

Okay.

Great!

Thanks!

Next we will go to Jeff Omohundro with Wachovia Securities.

Thanks.

I'm curious if you give us some details on the acquisition environment and pipeline.

In particular, I'm wondering what impact the tougher economic environment, increasing deflation, what impact that might be having on smaller distributors and whether you're seeing that reflected, saying that the state of your pipeline now versus what it was say two years ago.

Well, the pipeline is still fairly active.

There may have been more smaller deals out there recently.

I would say that, you know, we've looked to several -- several deals and we will continue to look at deals that make sense that fit our strategy, but it is -- right now it's probably not as -- as active as it had been in the prior year.

And we had a very big year, Jeff, as you know, with with what we closed earlier in the year.

So it's probably not as active as it was earlier in the year.

Very good.

Thank you.

And, gentlemen, there are no further questions at this time.

Okay.

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

We appreciate your interest in PFG and hope you're pleased with our third quarter results.

I'd like to thank all of our associates who worked tirelessly to minimize the impact to the ammonia leak to our company.

We look forward to reporting our progress to you in three months.

Thank you.

That concludes today's teleconference.

Thank you for your participation.