Blackstone Inc (BX) 2002 Q4 法說會逐字稿

Good morning, everyone and welcome to this Performance Food Group 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 Vice President of finance, Mr. John Austin.

Please go ahead, sir.

Thank you and good morning.

Welcome to Performance Food Groups conference call to review the company's financial results for the fourth quarter and year end 2002.

With me today are Bob Sledd, our Chairman, Michael Gray our President and CEO and Roger Boeve our CFO.

This call will review the results for the fourth quarter and the full year 2002 and provide preliminary outlook detailing it our expectations for 2003.

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

I will briefly address our operating highlights for the quarter and year and then turn the call over to Michael Gray who will provide more insight into the year and outlook for 2003 results.

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.

Actual results may differ materially.

These risks are more fully described in our press release and SEC filings.

Net sales for the quarter were very strong, at over $1.2 billion and exceeded the 1 billion mark for the third consecutive quarter.

For the year, net sales were $4.4 billion.

This represents a 31 percent increase from the year-ago quarter and 37 percent from the year-end 2001.

All of our business segments contributed -- continued to show improvements in net sales and a complete segment break down of sales is included in our news release.

During the quarter, acquisitions represented 21 percent of our sales growth and internal growth amounted to 10 percent.

For the year, acquisitions represented 29 percent and internal growth was 8 percent.

Our broad line sales grew 43 percent for the quarter and 34 percent for the year, aided by the acquisitions of Quality Foods, Mittendorf Meets (ph) and Toms Pressler.

Costomized sales grew up 19 percent for the quarter and 14 percent for the year.

Our Fresh Cut sales grew at 21 percent for the quarter and 129 percent for the year as we lapped our acquisition of Fresh Express (ph) during the fourth quarter.

Our gross profit increased 34 percent from the year ago quarter as our gross profit margins increased 39 basis points to 16.35 percent from 15.96 percent last year.

On a 12-month basis, our gross profit margin is up 212 basis points to 16.24 percent.

Operating expenses for the quarter were $163.3 million or 13.57 percent of sales which represents an increase of 40 basis points.

Operating expenses were $595.2 million for the year or 13.41 percent of sales, an increase of 164 basis points.

Our operating expense ratio increased primarily as a result of our acquisition of Fresh Express, which had a higher ratio than many other subsidiaries and by costs associate with the ammonia leak at our Springfield facility.

Operating profit for the quarter was $33.5 million and our operating profit margin was 2.79 percent.

Operating profit for the year was $125.7 million and our operating profit margin was 2.83 percent, which represents a 48 basis point increase over the prior year.

Operating profit was negatively impacted for the quarter by approximately 1.8 million for the year -- $1.8 million for the quarter and $6.6 million for the year relate to the ammonia leak at our Springfield facility.

Interest expense and the loss on sale of accounts receivable increased to $5.8 million for the quarter and $20.6 million for the year, primarily as a result of the issuance of $201 million of convertible notes in October of 2001 and from borrowings to fund our acquisition of Quality Foods, Mittendorf Meats (ph) and Toms Pressler (ph).

Our effective income tax rate was 37.5 percent for the quarter and the year.

We expect our tax rate to be approximately 38 percent in 2003.

Net earnings for the quarter were 17.4 million or 37 cents per diluted share compared to 30 cents per due lighted share in a year ago quarter.

This is a 23 percent improvement in diluted earnings per share on 19 percent more shares outstanding.

Net earnings per share for the year were up 38 percent to $1.42 per share diluted on 32 percent more shares outstanding compared with net earnings of 1.03 per share diluted for the year earlier period.

Adjusted for the impact of the ammonia leak and the change in accounting for goodwill in the prior year, earnings per share diluted share increased 33 percent for the year.

At the end of the quarter, our balance sheet remains strong, sales outstanding and receivables were 26 days, which remained constant from the prior year.

Inventory turns amounted to 15 times versus 16 times in the prior year.

Accounts payable float was at 130 percent.

Our debt-to-capital ratio was 34 percent, however, including our accounts receivable facility and off-balance sheet lease facilities of $134 million, the debt-to-capital ratio is 42 percent.

Depreciation amounted to 36.5 million, and amortization, 8.3 million for the year.

Capital expenditures were 57.7 million for all of '02.

This resulted in free cash flow for the year of approximately 54 million.

We expect depreciation to be 40 to $45 million, amortization to be approximately 9 to $10 million and capex to be in the 100 to $130 million in '03.

Looking at the rest of '03, we expect total sales growth in the high teens and internal growth in the low double digits.

Anticipated earnings per diluted share are in the $1.75 to$1.80 range.

EPS on a quarterly basis is anticipated to be in the following range: first quarter 33 to 35 cents, second quarter 50 to 52 cents, third quarter 44 to 46 cents, I'm sorry third quarter and fourth quarter, 45 to 47 cents.

With that I will turn the call over to Michael Gray our President and Chief Executive Officer.

Good morning.

Let me add my greetings to those expressed by John.

I want to welcome everyone on the call and thank you for joining us during this very busy year end earnings season.

I will briefly add to comments John has made regarding our fourth quarter and full year operating highlights and performance our business segments then an outlook will be provided for the remained over the year.

The strong gains that occurred during the fourth quarter continue to validate our growth strategy of deepening the penetration within existing accounts, winning new customers, focusing on product and service innovation and capitalizing on strategic acquisitions.

I believe you will agree when you mix all of the above ingredients together, you will generate a company on the move.

Our reported results, even with the impact associated with ammonia leak at our Springfield facility marked record fourth quarter sales and earnings.

Let me add this was the third consecutive quarter in which we surpassed 1 billion in quarterly sales and the 32nd consecutive quarter of earnings gains versus the same quarter last year.

Even though we continue to see softness in restaurant sales, our sales growth for the quarter was 31 percent and for the year was 37 percent, aided by contributions from acquisitions.

Real growth for the quarter adjusted for deflation was 11 percent and for the year was 8 percent with very slight inflation.

However, I would like to point out that our distribution businesses have produced real sales growth of 12 percent for the quarter, adjusted for deflation and 9 percent for the year adjusted for deflation.

Operating profit margins were equal to the fourth quarter of last year because of the costs relate to the ammonia leak but increased 48 basis points for the year to 2.83 percent.

In our last conference call, we projected an impact of 2 to 3 cents in the fourth quarter relate to the ammonia leak and we actually experienced 2 cents, bringing the combined third and fourth quarter one-time charges to 8 cents.

I want to stress that I'm very proud of the I have for the efforts of our people involved with resolving this problem and getting SFC back on track.

The interruption in business had a negative impact on the sales and operations of SFC but thanks to the dedication of our associates, the business has rebounded better than our expectations.

We are pleased to have this behind us, with the exception of resolving the claim with our insurance carriers.

I will now address the performance our individual business segments, all of which are contributing to our performed -- improved performance in a meaningful way.

Our Fresh Cut division increased sales by 21 percent in the fourth quarter as we left the Fresh Express acquisition in the fourth quarter.

Our growth rate was 5 percent adjusted for 1.4 percent inflation.

Revenue growth in retail remains strong and driven by growth in wins.

Revenue growth in food service on the other hand continued to be impacted by the anticipated loss of food service distributor business and soft sales in the QSR segment.

We are focusing on new products and new customers to boost food service sales.

As we told you last quarter, we are experiencing the expected synergies as a result of a very successful integration process.

We continue to focus on leveraging the synergies to create greater growth with existing and new customers.

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

Operating profit margins in the quarter were 6.63 percent and we are in line with expectation, because of seasonality and the expected ramp up in expenses for the real fresh fruit initiative.

Operating profit margins for the year of 8.3 percent were better than expected, primarily due to realization of merger synergies, production efficiencies and favorable changes in product mix towards higher value added items in the retail and food service channels.

This shift was especially produced -- pronounced in the second quarter when non-iceberg lettuce was featured during the lettuce shortage.

Even though no contribution to earnings was expected this year, we are very pleased with the results of our real fresh fruit test market thus far.

We now have the product in approximately 400 stores in Northern California.

Our raw product supply has been acceptable as we transition to Mexico and Central America and we are meeting our shelf life targets.

The feedback from consumers and store personnel has been very positive.

The Fresh Cut team of associates works tirelessly to make '02 a banner year.

With the integration and transition process, new product introduction and normal course of a business being ramped up, their comments were extraordinary.

In our customized segment, quarterly real sales growth for the division grew 21 percent to $371 million adjusted for 2.5 percent deflation.

Real sales growth for the year grew 16 percent to 1.4 billion adjusted for 2 percent deflation.

Operating profit margins for the fourth quarter improved 14 basis points to 1.07 percent and were driven by across-the-board efficiencies throughout the system.

Operating margins for the year improved 9 basis points to 1.13 percent.

As a result of our focus on superior service our customized division expanded its relationship with Ruby Tuesday's and TGI Fridays.

We announced we were awarded an additional 200 Ruby Tuesday's restaurants a 265 TGI Friday's restaurants.

The Friday's units were rolled out in the fourth quarter and expected to generate 200 million in sales annually.

We rolled out 140 Ruby Tuesday's units in the fourth quarter and rolling out 60 additional in the first quarter of '0 3.

These units are expected to generate $120 million annually.

During the fourth quarter, we successfully opened two new lease distribution centers to support the new business and better serve our existing customers.

We also began a substantial expansion of our Elkton (ph), Maryland, facility.

As we announced in the last conference call, we ceased doing business with Avado brands in December.

Avado brands represented approximately 110 million in annual sales.

We do have additional new business to announce.

We have started rolling out 70 units of Mimi's cafe, which is expected to generate about $40 million in annualized sales and we have recently been awarded an additional 103 units of Ruby Tuesdays in the Midwest, expected to roll out mid-year and generate $50 million annually.

We are extremely proud of the associates in our customized division in a year brought more chances to their business than ever before, opened two new facility and added $410 million in new annualized sales.

The broad line division grew sales 43 percent in the fourth quarter to $635 million with real sales growth of 6 percent adjusted for approximately 1 percent deflation.

Sales for the year were up 34 percent with real growth up 4 percent adjusted for approximately 1 percent inflation.

Operating profit margins improved 21 basis points to 3.21 percent in the fourth quarter.

For the year, operating margins showed a modest decline to 2.51 percent because of the costs associated with ammonia leak and expected decline due to the addition of Quality Foods at lower margins.

Our streets sales grew 7 percent for Q4 and were up 9 percent for the year, reaching slightly over 46 percent of total broad line sales.

Proprietary brand sales were up 31 percent for the year and represent slightly better than 20 percent of street sales.

Our street sales for delivery were up 14 percent for the year as a result of our focus on building street sales and penetrating existing customers.

We will continue these strategies in '03, as well as continuing to grow our proprietary brands.

We added a lot of experienced sales people last year as a result of the turmoil in the industry and look forward to their contributions in 2003.

We are very pleased with the integration of process of Quality Foods, Mittendorf meats and TPC and expect positive contributions from them this year.

The division experienced many challenges last year and the associates stepped up and proved that they are a team to be reckoned.

The dedication and hard work of these associates epitomized the performance in our name.

We cannot expect to do anything but build on our successes last year as we enter a new year full of potential and promise.

We projected eight to ten cents as the worst case scenario for the ammonia leak.

As reported, the result was 8 cents.

We projected earnings, including the leak costs of $1.41 to $1.43 and we earned $1.42.

This puts us at the top end of the normalize earnings projections we gave you in our second quarter conference call of $1.48 to $1.50 and very significant improvement over our earnings of 1.03 per share diluted in 2001.

We also told you last quarter that we expect to earn 1.75-1.80 per share diluted in 2003.

This estimate assumes no impact from the 2002 ammonia leak.

And at this time we are comfortable with the 1.75-1.80 range for this year.

Operator, we are now ready to take questions from our audience.

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 telephone.

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

Also, please initially limit yourself to one question.

And our first question will come from Eric Larson.

Good morning, everyone.

Hi, Eric, good morning.

Good morning.

It was a nice quarter.

Um.

Quick question on your -- I think I heard this correctly, your going forward look for internal revenue in '03 was -- is it -- high single digits or low double digits?

I might have missed that?

internal growth rate, Eric, looking for low double digit he is, total sales growth, which includes some acquisitions, we expect to be in the high teens.

okay.

And it looks like deflation is abating a little bit, you know, fourth quarter versus third quarter.

Could you give us a glimpse of maybe what you see for deflation this quarter and maybe for all of '03?

well this quarter, I think Michael had commented on his comments about [inaudible] we experienced 1 [inaudible] in the fourth quarter.

In '03, we really don't give any particular guidance nor anticipate any significant inflation or deflation.

We don't get that scientific about our budgeting process. -- scientific in our budgeting process.

The only guidance we know for sure unless something happens in the Fresh Cut side, you know, we had some very high lettuce prices last year, we have anticipated a couple of percent deflation in Fresh Cut, primarily in the first part of the year but the balance of the business, we don't know.

Okay.

I will follow-up with just one more question and turn it over to someone else.

Your Fresh Cut margins in the fourth quarter year-over-year, you said were obviously down.

There was seasonality.

Was the bulk of it due to the ramp-up of your Fresh Cut fruit business?

Yes.

That is when we really put the investment into it and started rolling out the test was late third quarter through the fourth quarter.

Okay.

Thank you.

And is that -- is any extension beyond the 400 stores expected in the first half?

We can do -- probably with the setup we have now, we can do as many as 700 stores and probably expect this time next conference call to be pretty close to that number.

Thanks, everyone.

Good quarter.

Sure, thank you.

We will move next to Jeff Omohundro at Wachovia.

Good morning.

A couple of questions for you.

First I was wondering if you could provide us a little detail for the Q1 EPS target.

Looks like you are expecting a pretty strong quarter and then I was wondering if you could perhaps elaborate a little bit further on the plans for the Fresh Cut fruit rollout, for example, when can we expect to see another facility open?

As far as the Q1 EPS, Jeff, that is just where all of our business rolled up.

Obviously a lot of that is seasonality of Fresh Express.

And I don't know, Bob, if you want to comment.

Jeff, this is Bob.

As it relate toys the Fresh Cut fruit rollout, -- relates to the Fresh Cut fruit rollout, we are continuing to run the test, we call it a test because we are analyzing all the different results and productivity and so forth.

We really expect probably in may, in our may board meeting to make a determination to have a plan laid out and presented to board as to recommendations for rolling this out.

Probably before may, we do not expect to, you know to have anything approved at other plants, you know, probably shortly there after we will make decision and be prepared to roll out very quickly, but there are a lot of things we are looking at right now and very positive that we will continue to make progress and I think our people are real pleased with the rollout so far T is going to stay on the west coast, as we indicated earlier.

Very good, thank you.

Okay, you're welcome.

Now to David Caleb (ph) Siegel Brian Hamill (ph).

Good morning.

There has been some talk on the street about your return on equity and return on vested capital, return on equity specifically, absolute relatives and relative to Cisco.

Just wondering if you could just discuss if you believe it is low what goals you have to get it higher and if there is any reason that your returns should be substantially lower than Cisco in the long-term?

I think qualitatively, David there are a couple of comments I would make.

One we have been investing significantly in our growth.

We invested in a number of broad line companies this last year, Fresh Express and some broad liners in the prior year, so, where we are in our growth cycle, being a growth-oriented company, we have been investing a fair amount and that has had an impact on our return on capital and return on equity is something we are very focused on and expect to see continued improvements there obviously, that might be influenced by any future acquisitions but as far as our core business, we are very focused on realizing some of the benefits of those investment he is and continuing to improve those.

Any specific goals out there five-year goal for return on listed equity, return on equity?

We haven't state hit in the particular goals.

We are looking to generate as much return as we can.

And make those investments pay off.

Do you plan -- when you are looking at new acquisitions is there some sort of hurdle rate you are looking at versus what your current return on equity is?

Are we going to see diluted acquisitions based on return on vested capital, not necessarily on earnings per share but returns on vested capital?

We look at acquisitions in a number of ways, from an accretion perspective, return perspective and strategic perspective, where those companies are located, what other independents are in that market.

There is a number of factors that go into our decision making.

I think the decision whether or not we would go ahead with an acquisition of diluted capital would depend how strategic that acquisition is.

Obviously there is a limit to the amount of future acquisition targets for us, but there is also if we don't take advantage to get into an opportunity of a major market and make that acquisition, someone else gets it and no more opportunity to get into the market at that level so we are going to try to have a balance going forward of measuring a return on capital against acquisitions but also taking advantage of opportunistic opportunities to strengthen and build the company.

All right, thank you.

Maybe I can say one of the things we are probably more optimistic now than we have been in the past because before, we were at a size where we made significant acquisitions, they always had an impact on our return on capital but as we get bigger.

For example, Cisco makes acquisitions but they are such a small part of their raw business that they have just a small impact on the return on capital.

The bigger we get, the less impact we think acquisitions will make, so, that will certainly be a benefit to us going forward as we work diligently to improve our return on capital and return on equity.

Thank you.

Now to Mark Husson.

Yeah, Hi.

A couple of questions.

Could you just talk a little bit about the capital expenditure number you gave us?

It perhaps a little bit lower in the year just gone and perhaps higher in the year to come.

What is in the budget and what are you getting out of it?

A couple of things, mark, we can comment on.

I think you touched on part of it.

We forecast about 70 million this year, which we are a little later on spending, that will carry into next year.

Then the balance of it is really just growth oriented initiatives, growth of the companies, larger company, '03 than we were in O'52 and '01, so --

Part of that may be something like, you know, tooling up a new business and perhaps the McDonald's business.

Can you tell us where you are with McDonald's on the salad rollout?

We are in the process of that.

I mean it is hard to say exactly where we are, but we are in the process of that and we think it is going to be beneficial.

McDonald's is promoting the salads and so forth.

So, we do expect, you know that to be beneficial next year.

Let me comment, I mean, on the capital expenditure, only of that expenditure, a imagine juror sit going to Fresh Cut and that is because we are look ac the upgrading equipment and looking for ways to become the low cost provider in that area, so we are investing in a lot of high speed equipment and different things that is going to help lower our costs and improve our profitability and service to customers.

So, that is where a lot of those expenditures are going the next year as well as the, you know, continuing to invest in some equipment.

Some of that includes investment of equipment to continue to roll out the fruit.

That is why there is a variation between the 100 and 130 million.

Okay and just point of clarification on the return on capital debate.

Could you just -- to be clear, can you just say, is the return on capital on some of your mature broad line or customized distribution centers, is that a mid-teens snub clearly higher than average for the company as a whole.

Can you give us a ball park?

I don't have a particular ballpark by company but yes, some of our more mature companies are generating, you know, an acceptable return on capital.

We have opportune pills in the other companies to improve that and continuing to work on those.

Sorry, what is acceptable?

Is it double digits?

I mean, what is it?

Absolutely.

Yep.

Okay, great, thank you.

We will go now to William Leach with Bank of America Securities.

Good morning.

Morning, Bill.

Congratulations on another great quarter.

I had a couple of questions, your guidance this year doesn't include insurance proceeding, does it?

That is correct.

You have any idea how large those might be if you get them?

Still too early.

Still working on that settlement with our insurance carriers.

At this point, we don't have any guidance what that might be.

Obviously, we will have an update for you when it does come.

And can you quantify the investment you made in the fruit business last year?

As I recall, you were budgeting a loss of $20 million S that right?

I think the original guidance we gave was 10 million in operating profit and 10 million in capital expenditures. 10 million operating cost and operating profit.

Right.

A loss last year?

loss, yes.

You expect that to be about the same this year?

yes, in that same ballpark.

Yes.

Then in 2004, we start to get break even or --[inaudible]

We expect it to be profitable in '04.

'04.

Thanks.

John, do you have a guidance for interest expense this year?

Um, I don't in particular.

It should be generally in the probably 20 to $25 million range.

Okay.

Great.

Thanks a lot.

Thank you.

We will move now to Mitch Kaiser of Lehman Brothers.

Thanks very much, good morning.

Just a few questions.

First on the calenderization (ph) for earnings you gave us, the second quarter, the numbers come to about 6 to 10 percent earnings growth, if I got it right, I'm just -- perhaps comment on why it decelerates to that level, which we haven't seen in a while and then a couple of other questions.

Well, let me start and John can chime in, one thing I said in my comments was that our second quarter was impacted pause of our shift to much more profitable blends as a result of the iceberg lettuce shortage in the first quarter.

Part of our strategy for overcoming that huge shortage was to shift the spread and the retail grocery stores to more blends and promote [inaudible] and move consumers to more blends which made the second quarter a lot more profitable as we continue to see improved sales in those.

And part of it is seasonality in Fresh Cut that second quart certificate strongest quarter for Fresh Express.

John, you have additional comments?

No I this thank you is right.

A lot of promotional activities associated with the higher margin items as they return to a more normal sales mix, you will see that normalize in the second quarter.

Okay.

And moving along --

Probably the last part of that is the fruit expenditures in the first and second quarter, we expect a lot of that to happen in the early part of the year and then be less effect on earnings in the second half of the year.

Okay.

Thank you.

Also, on Fresh Express, can you give us -- you said that at retail, the sales are strong.

Can you give us what the retail take away has been recently or the past three months or so?

You mean the growth in retail?

yes.

Total category?

It continues to be double digit, low double digits, you know, around 11 percent.

Great, thanks.

And just lastly on street accounts, wondering if you can give us a kind of a weather report, if you will, on the street accounts and with the weak economy and the overall category sluggish, you mentioned fast food being sluggish, how the street account business is doing in terms of if you look at it perhaps on a -- on a same store sales basis, thank you.

Well, as I mentioned in my comments, we actually saw fourth quarter street seams ramp up with real sales growth of 6 percent, adjusted for 1 percent deflation compared to 4 percent --fourth quarter ramped up for us so we showed total sales growth three times the industry last year and at the same time, our street seams for delivery were up 14 percent and our total street sales were up 9 percent for the year.

So, we continue to focus on that and move toward our goal, which is 55 percent of total broad line sales within five years.

Able to quantify the real total sales in the fourth quarter for broad line on a new account basis versus a same store sales basis in general terms?

We don't keep track of, you know, the new account sales versus established account sales.

Fair enough.

Thank you.

Next we will hear from Jonathan Feeney with SunTrust Robinson Humphrey.

Good morning, guys.

Good morning.

Could you talk a little bit about the competitive landscape in broad line customizing?

Clearly you and Cisco have been benefiting from the declines in some of the recently acquired large European large competitors.

Do you see any change in that?

Is there any stabilization?

Continuing to win business there?

And also on the customized side, you know, has there been any change to the competitive landscape, i.e., people becoming more or less competitive in wining this incremental chain business?

Well, I think our numbers speak for our ability to compete in this environment and we, you know, our distribution because -- distribution produced 12 percent for the quarter and 9 percent for the year and we are really pleased with those numbers.

Obviously, we have benefited from the terminal in both division.

We have added a lot of new experienced sales people in broad line.

We have added a lot of new good accounts and customized, we have added $410 million of sales analyzed.

So, our ability to compete going forward is certainly not going to be diminished.

If anything, as strong as it ever was if not stronger because of many of the strategies that we have in place.

Fair enough.

Are you seeing any signs of stabilization in the assets?

You know, getting fewer sales people or them winning back any business?

It is really not our policy to comment on our competition.

We let our numbers stand on our own and talk about our company.

Okay then, justify could ask one follow-up.

Is the acquisition pipeline right now look any better, worse or same to you than it did the beginning of 2002?

Probably about the same, maybe a little bit less activity.

Yeah, 2002 was a very, very active year mid-year but I would say it is a more normal pace right at the moment.

Okay.

Thank you very much.

Thank you.

We will go now to John Murphy with CS First Boston.

Good morning.

Morning.

I just -- a couple of quick questions.

On the new acquisitions and capital allocation, Fresh Cut I guess is around half of operating income and I think Bob mentioned that a lot of the capex would be ear marked for that business.

Could you give us a sense where you want to be long-term with that business in terms of, you know, its overall contribution in operating profit terms and the -- I guess when you are looking at acquisitions, are you focusing more on the broad line segment over customized or in the Fresh Cut business?

We are aggressively looking to grow both sides of our business.

We think we have tremendous upside in the broad line side of the business and we expect, you know, our ability to grow.

That will keep this probably a 50/50 kind of contact context.

We may, as we do additional broad line acquisitions, there really aren't a lot of Fresh Cut acquisitions out there.

The only thing that may change that is if, you know if this fruit is wildly successful and we make boat loads of money, we will be extremely happy about that wouldn't complain if that mix for some period of time goes up to larger Fresh Cut than distribution.

But we anticipate those two will probably be pretty equal going forward and, you know there may be years where broad line exceeds -- distribution exceeds Fresh Cut and there may be the opportunity for Fresh Cut to exceed distribution but we are going to grow both of them as aggressively as we can because we think that makes sense as it relates to getting a return to our shareholders.

If you look at just sales growth, the Fresh Cut division grew 21 percent.

A lot of that was acquisition of Fresh Express.

Customized grew 21 percent, all that was internal growth and broad line grew 43 percent, distribution in terms of sales growth is outpacing Fresh Cut.

Great.

If you look at where the capital spending dollars are, acquisition dollars in that, a lot support kind of leaning toward the fresh cut side of the business and the broad line is going to keep pace in terms of overall income growth?

Yeah that is kind of varies from year to year.

We don't plan any major facility constructions or expansion for broad line in '03.

And that possibly -- that obviously had something to go with it.

We have expansion going on in customized.

Obviously, a smart decision is to flow your capital where you have the opportunities and we see lots of opportunities for productivity improvements by investing in higher speed equipment and also producing better quality products for the consumers in Fresh Cut.

That is where we are flowing a large part of the capital now.

Will met clarify on what Bob had commented on earlier.

The mix of Fresh Cut cap ex versus distribution is about 50/50.

Not the [inaudible] imagine Fresh Cut.

okay.

Last question is on the customized business.

You have been able to consistently add new accounts there.

Are you seeing any pressure in terms of pricing or kind of the returns that are coming out of new customized business or has that been pretty steady over the last six quarters or something?

It has been steady.

We produce a fair return or four shareholders but we also share -- shower our customers with a huge amount of service.

I think our customers are happy with the level of our operation and we are not seeing a lot of pressure.

Okay, thanks.

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

Good morning.

Back to the broad line business.

There are a couple of things on the sales I wanted to ask you about, first the impact of lost sales from Springfield was negatively and what the impact from sort of the windfall from U.S. food service problems was positively.

We aren't able to quantify those for you.

It is not something we disclose.

We do disclose by operating company or things like that we have quantified for you the impact on operating profit obviously associated with Springfield leak for the quarter.

About 1.8 million.

Okay.

What is in the 1.8 million?

Is it cash, hard costs, or is it opportunity lost associated with -- it is both.

It is about a penny of hard cost and a penny of opportunity cost.

Great.

And the other thing again, staying on broad line was, you know this quarter was the first quarter since the first quarter where you had some very impressive expansion, March's expansion.

Could you just give us, you mentioned these, maybe could you order, rank order them or just talk about them, some of the things like private lane penetration, street business, you know the productivity improvements, how -- why this quarter was previous two weren't, turns of market expansion and maybe acquisitions factored into that as well but a diagnosis of that.

Well, third quarter was impacted heavily by the ammonia leak and, you know, merging quality foods in the middle of the year had an impact because we told you at the time, quality's margins were much, much less than our average margins but huge upside for margin improvements for us.

I think some of the efficiencies are starting to happen for us as we focused our procurement power and improved the proprietary brand sales, we improved 300 basis points as a percentage of sales for the year and that continued to ramp up into the year and had a big impact on the fourth quarter.

Last year about 17 percent of sales this year, a little over 20.

Every month, we improve over the prior year.

We expect that to ramp up as the year went on.

We have been focusing heavily on productivity improvements and see a lot of that impact as the year progresses.

Thank you.

Sort of a generalized follow-up, you don't want to give specific guidance by segment.

Are you comfortable with long-term guidance by segment.

Are you comfortable with expansion, 10 to 20 basis points?

We are in a normalized market.

Thank you.

Thank you.

We will go now to John (ph) Arboleda (ph) with Blackbird Research (ph).

Yes a couple of questions, I hopped on the call late. [inaudible]

Let me first give you the outlook for '03.

We expect depreciation to be in the 40 to 45 million range, amortization in the 9 to 10 million range and just cap ex in the 100 to 130 million range for '0 3, the annual number, apologize I don't have the quarterly number in front of me, depreciation for the year was 36.5 million, amortization was 8.3 million.

Would you happen to have an [inaudible] for the year?

free cash flow, I don't have the -- actually, operating cash flow is about -- I will point out and we have talked about this publicly before also, we view chances in outstanding checks in [inaudible] as an operating flow.

In the neighborhood of 130 million for the year, 131 million.

The depreciation for the fourth quarter was 9,784,000, amortization was 2,296,000, cap ex 15,054,000.

great. [inaudible]

We have just given a stock, condensed consolidated financial.

We will give that you when we file our SEC filings.

That is the conversion of the convertible notes, tough add back the interest after tack to the numerator.

The diluted share there is include the shares the notes convert into.

Great.

I will hop back in later.

Thank you.

Thank you.

We will move to Dena Walk (ph) we are Collier (ph) Investments.

Good morning.

Good morning.

Could you talk about your outlook for your food service sales and Fresh Cut?

You have talked about how the business has been soft.

How would you expect that to play out as '03 and O'54 come to terms?

In '03 as we mention,000, we were lapping some loss of business as a result of the loss of distribution business as a result of the acquisition of ready cut last year and we have lost some business --Fresh Express had some business and we haven't lost much of that yet but we anticipate that we may lose some this year.

So we are projecting that is going to be reasonably flat, maybe up just a little bit in 2002.

Along with the fact that quick service is -- is soft.

So, we are looking at promotions and new product rollouts at the quick service level and hopefully that will help in that area and also looking at expanding PFG distributors sales of food service products as well as looking at other vehicles, other product lines so we think there is a lot of opportunities.

We picked up new business from subway and other claims, aggressively pursuing other chains.

We are optimistic about the longer term 2004, once we overlap some of these things, but that is kind of where we are.

So, for that reason, we are projecting for the whole division, you know, in the range of about a 6 to 8 percent real internal growth in Fresh Cut for the year.

For 2003.

Where does sliced tomatoes fit into that?

Sliced tomatoes have been good for us, making nice profitability on them.

They are not a giant, in the big picture, not a giant part of our business, but, you know, we do have several customers using them.

Additional customers that expect to add them.

We will be expected to pick up sliced tomatoes.

That is a nice product category for us and continues to expand.

Bob, since you have the floor right now, if you succeed in growing your Fresh Cut business 6 to 8 percent, given the spending on real fresh fruit and my sense that this is primarily an investment year in Fresh Cut, how would you expect operating profit in Fresh Cut to progress in '03?

Well, one of the things, you know, product lines go through product categories and we, you know, our goal here is to drive out cost and gain synergies through this merger and we are still gaining synergies in our merger.

So, you know, I think we have made some projections.

I will let John talk about anything along those lines further but, you know, we expect, you know that it will contribute its fair share to the overall profit ability of the company and we are confident that it will help us achieve the -- you know the numbers that we have told the street that we are comfortable with.

Right, Dena, I guess as far as specific outlook for '03 by segment, we are not comfortable giving specific segment information but to Andy Wolf's earlier question, we are comfortable with longer term guidance we have out there by segment.

You have in the past talked about 50 basis points of margin pickup --

We are very comfortable --this year we didn't do it, as we told people earlier that we expected to actually have shrinkage in margin because of the merger of those two companies and 2003, we were very comfortable we were going to expand operating margin. 50 basis points is our long-term projection.

Okay.

Final thought.

Could you talk a little bit about perhaps the same thought broad line, where you think you are in some of those longer term opportunities on the procurement side, on the systems side, on pick up and street ratios and driving your ability to further your margins?

Well we get back to a normalized market and restaurant seams this past year, food institute reported right about 3 percent real sales growth for restaurant sale he is.

We grew our seams at three times that rate and, you know, just two years ago, restaurant sales were 5 percent a year.

We get become to a normalized market, we expect our Brad line to be in a double digit growth rate, we projected in the long-term.

Our strategies for increasing brand sales are coming along nicely 31 percent increase month over month every month this year.

We have increased it 300 basis points as a percentage of sales.

We expect that to continue to ramp up and our target there is 30 percent of sales.

Focusing on street seams, we have, you know, begun to build an entire department to provide training and accountability and also to help us recruit better seams people for building street seams and a strong initiative behind that supported by marketing programs.

At the same time, our broad line sales growth has been a little bit less than normal for the past couple of years bus of that street sales focus and we have really not been focusing on adding good regional chain accounts where we can make a good operating return.

So we have created an entire department to focus on selling chain accounts for our broad line division.

In terms of productivity improvements, we have employed some very talented individuals to work with our operating companies on squeezing out productive improvements, we expect those to really start contributing four us in this year.

And in future years.

We have taken over support of our warehouse productivity system for scanning and productivity and supporting that ourselves and we will be rolling that improved version into our facilities and expect they will have a big impact for us.

Thank you, goal we will go to Mark Lawrence (ph) with Tyndall Management.

Hi, I just had a couple of top line questions and one accounting question.

On the top line, I guess you had said that your guidance was low double digit internal growth with acquisition high teens right?

correct.

and I just wanted to clarify that high teens with acquisitions that includes acquisitions done in 2002?

Yes.

Does not include future acquisitions.

What was the contribution of Quality and Mittendorf (ph) and Thomas Pressler (ph) in 2002?

We don't disclose sales by individual operating company.

Okay.

Great.

In terms of new acquisitions, do you have any target in terms of 2003, 2004?

Our stated annual targets are 2 to 300 million a year and -- in distribution sales, primarily broad line.

We exceeded that last year and there have been years we didn't hit that target.

Just really depends on how good the candidates are that come into the pipeline.

Okay.

Great.

And the accounting question was have you, you know, kind of a topic of the day, have you considered expensing stock options for the company and if you don't plan to, why not?

Well, we have had a lot of discussion internally about that and obviously want to pay attention to what is developing in the marketplace.

I guess more my personal view, there is still a lot of uncertainty how to measure options and we obviously are -- will comply with whatever gap comes out with, I don't know that has been nailed down enough to make sense for us to adopt it yet.

We have not been extravagant with our options.

Our options go way down in our organization, the sales people and buyers and supervisors, we are not laid heavy at the top with stock options.

We believe it is an important motivator for our people, gives them skin in the game and closely aligns our people with the best interest of the shareholders.

With he will go along with whatever FASB or SEC or whoever dictates to us.

At this time, we believe it is a very effective motivator.

We are only about 10 to 11 percent of our outstanding shares are in our option program, which is a very good number.

Great.

Thank you.

Thank you.

As a final reminder, please press star one if you have a question or comment.

We will go now to Robert Cummins (ph) with Shields (ph) Company.

Thanks very much.

I have a question about financing.

Your long-term debt was about 100 million this past year.

Can you give us a figure on what your total expense was for the acquisitions you made during the year and whether you're comfortable continuing to add to debt as you go forward in your acquisition program or what point you consider doing another equity financing?

Bob, obviously we couldn't comment on any particular financing strategy.

We are very comfortable with our debt-to-cap ratio in the range of 40 to 45 percent, which is where we are.

I think we have mentioned that we are 42 percent, including our off-balance sheet obligations.

We did add and finance a number of the broad line acquisitions with a combination of stock that was either directly to the sellers as well as debt and we think that is prudent.

We like that mix because we like to have the sellers having some skin in the game.

So we will still manage our balance sheet prudently and, you know, just look at opportunities when they come along and how we might best finance them.

Can you tell us what your total cash outlay was for acquisitions for the year?

yes, acquisitions cash outlay was about 215 million.

Thank you very much.

Sure.

Thank you, Bob.

Now we have a follow-up question from Mitch Kaiser.

Thanks.

Can you comment on your '03 real turtle sales forecast of low double digits?

I believe in the third quarter or throughout '02 it was upper singles.

You did, I think, tick it up a bit.

Is it primarily due to the customized segment and more accounts there or do you see an uptick in other categories and then a follow-up.

Thank you.

Mitch, we don't give guidance specifically by segment.

The guide dance we gave of low double digit internal growth is continuing along the trend that we have shown over the last quarter or two.

So, that is coming in from a number of segments of our business.

All of our segments are growing.

Obviously customized has a piece of that but broad line and Fresh Cut are also growing nicely.

The way we build that is obviously the company says they are on plan, we work with them and they have got -- look and see what they have got in the pipeline and what they have got working, when they think it is going to hit that is how the budgets and the plans were built and that is why it works out, our forecast working out the way they do.

There is a lot of -- a lot that goes into that.

Okay, just secondly, Fresh Express, I know you don't break out particular segments within your segments, Fresh Express, did that, all things considered, the inclusion of Fresh Express and the real turtle sales numbers did that contribute to the 11 percent or real turtle sales growth and the expect the Fresh Express be --appease to be a contributor, meaning above your guidance for '03?

Thanks.

We don't expect it to put us above the guidance that would be inclusive of the guidance.

We continue to anticipate that our food service will have modest growth and -- in '03 and then ramp up by '04 as we lap some of these one-time loss of business from -- as a result of these mergers.

So we think that '03 will continue to be modest growth in food service and the majority of the growth in retail.

In '04, we expect to have good growth in food service and with the addition of growing fruit sales stronger growth than we are even showing here in retail.

Thanks.

Thank you.

Another follow-up from David --

[inaudible]

For '02 or '03?

'03?

we have not given specific guidance on cash flow.

We have given you the components.

Your model have to take those components into account.

Looks like your [inaudible] [inaudible]

Our target debt to cap is in that 40 to 45 percent range.

As far as acquisitions being a component of our cap ex, they are not.

Any future cap acquisitions are not in the guidance we gave.

So, this is all, you know, our existing business and what we own at this point.

As Bob mentioned, half of our cap ex plan is investing in growth initiatives and our Fresh Cut segment.

That's probably a little bit higher.

But I had also commented on the fact that in '02, we really anticipated about 70 million in cap ex and some of that is actually coming --carrying over to '03, we were late on spending that I think you see more normalized trend.

Comparing '02 cap ex to '03 cap ex.

What John said, what -- he is projecting 100 to 130.

If you take 70 projected last year only 55, that was spent, that means 15 goes into the original 70.

If you want a comparison, it is like 85 to 100 from -- up to --

85 to 115.

so it is really not maybe as large as you think.

We are investing in opportunities in equipment and things I think will continue to drive business strong any '03 and '04.

I guess what I'm [inaudible]

Yeah.

It looks like there is a rapid drop-off on the free cash flow line [inaudible]

I'm sorry, could you -- we don't see a decrease in free cash flow historically.

Is that what you're --

Last year free cash flow operating cap ex is about 135 million.

This year, looks like it is about 72 and just wondering --[inaudible] in cap ex --

let me comment on a couple of things.

As far as cash flow, we define free cash flow as net income -- [inaudible] changes in asset he is and liabilities [inaudible] but I think what you are picking up, if you are looking at '01, we had 78 million in cash flow associated with the sale of receivables.

Which you really shouldn't factor that in to kind of an operating cash flow number.

That is gap but it is --

Not reality?

Not reality.

Right.

So you ought to exclude that for '01.

Okay.

And I think that there is a couple of new accounting pronouncements that might -- At this point, we have no plans to do those, we will look at the most opportunistic financing we anticipate

How is your --[inaudible]

I don't think you would see any change, my understanding wouldn't see change related to the [inaudible] and the exposure under our master operating leases is 55 or 56 million now and we do anticipate accounting for that, transition rules coming up this year.

We will go now to another follow-up from Mark Husson.

yeah, just being a bit dense, I think.

Looking at the guidance quart wire quarter, you touched on it not really explicit enough, I think.

Q1 looks like a huge increase, Q2 looks like a crawl Ford against Q2 of last year.

Could you explain why there is this huge volatility in the quarters?

I think the biggest impact, Fresh Express and initiatives going on.

Michael mentioned in his comments the softness in growth in '02 is because we had such aggressive promotions of some of our blends and higher margin products and that is really returning to a more normalized level in '02 2 Q that is causing that --[inaudible] related to the shortage in iceberg lettuce.

The operating silt impact in '01 because the lettuce prices were up to 60 bucks a case and normally 8 bucks that had an impact the other way in '01.

The weird thing, you had windfall gains in Q2 '02 and wouldn't get them this year.

They were carryover gains.

Some of that may should have fallen into the first quarter last, second quarter.

So it is kind of wasn't necessarily windfall but wasn't normalized.

Our mixed shift had a significant impact in the second quarter especially.

If you notice last year's second quarter, we beat estimates by 6 cents and part of that was the shift between the first quarter and second quarter.

just wondering, mixed shift towards blends is beneficial, why not just do it all the time?

Well, we are working towards that.

We do our largest market share gains in fresh salad is in the blend category, we continue to pioneer with better blends and in fact, a lot of the capital expenditures planned for eight 03 are in producing or installing better lettuce lines.

This past year, we installed a new line that produced a far superior product and we expect to continue to invest in better blends so that we can continue to leave that category.

Great, thanks.

Now to another follow-up from William Leach.

Hello?

Hello.

Hi, Bill.

I just wanted to ask about the fruit again in 700 stores by the end of this year?

No.

No.

No.

As we continue to roll out on the west coast and analyze the results and figure out ways to make it better and so forth, we are expanding our test on the west coast from 400.

We can do up to 700 stores with the equipment we have right now out there that is what we are looking at, expanding the test to 700 stores before we make, you know, roll out in other parts of the country.

That will be accomplished probably by may, by the time we have the next conference call, somewhere in the neighborhood of 700 stores we think.

As you look to 2004, what would you guess the revenues might be from fruit --[inaudible]

Not comfortable with projecting that at this time.

Too early to tell until we make a final determination how quickly we are going to roll this out.

Okay.

I tried.

Thanks.

We could -- sorry we couldn't be more definitive.

Thank you.

Good question though.

Next we will go to Mark Lawrence with another follow-up.

I'm taken care of, thanks.

Operator, I think it is maybe time to end the questions.

Okay.

There are no further questions at this time.

Okay.

Let me conclude by thanking you for your time this morning, we appreciate your interest in PFG, whether our long-term follower or new comer to the company.

We hope you are pleased with our results.

We continue to capitalize on our business.

With our new customized distribution customers, new sales people and broad line, the contributions from our acquisitions I and innovations in Fresh Cut we believe we have many catalysts to drive another successful year for the company.

Thanks for joining us.

That concludes today's teleconference.

Thank you for your participation. ---