Blackstone Inc (BX) 2003 Q1 法說會逐字稿

Please standby, we are about to begin.

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

Today's call is being recorded at this time for opening remarks and introduction.

I would like to turn the call over to the Vice President of Finance, Mr. John Austin.

Please go ahead sir.

Thank you Bill.

Good morning and welcome to the Performance Food Group conference call to review the company's announcement earlier today of its financial results for the first quarter of 2003.

With us here this morning are Bob Sledd, our Chairman, Michael Gray, our President and CEO, and Roger Boeve, our Executive Vice President and CFO.

This call is primarily intended to review the results for the first quarter of 2003.

We will also provide an updated outlook detailing our expectations for the rest of the year.

Our first quarter earnings release was issued this morning and the copy of the information is available on our website www.pfgc.com.

I will briefly address our operating highlights for the quarter and then refer to Michael Gray.

He will provide more insight into the quarter and provide an update on anticipated 2003 operations.

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

These statements involve risks and are based on current expectations.

Actual results may differ materially and these risks are more fully described in our press release and our SEC filings.

Looking at our financial highlights, net sales for the quarter were very strong at 1.3 billion and exceeded the 1 billion mark for the fourth consecutive quarter.

This represents an increase of 27 percent from the year ago a quarter and all of our business segments continued to show improvements in net sales and a more complete breakdown by segment is included in our newest release.

During the quarter, acquisitions represented 16 percent of our sales growth and internal growth amounted to 11 percent.

On a consolidated basis, deflation amounted to approximately 1 percent.

Broadline sales grew at 43 percent for the quarter, needed (ph) by the acquisitions of Quality Foods, Indoor Meats, and TPC in mid 2002 and our Broadline segment inflation amounted to less than 1 percent.

Customized sales grew at 21 percent for the quarter, primarily reflecting expanded relationships with existing customers.

Our customized segment experienced deflation of approximately 1 percent versus the prior year quarter.

Our Fresh-cut sales grew 5 percent for the quarter, which were negatively impacted by approximately 5 percent deflation in [Inaudible] versus the prior year quarter.

Our gross profit increased 30 percent from the year ago quarter as gross profit margins increased 33 basis points to 15.71 percent from 15.38 percent last year.

Operating expenses for the quarter were 168.9 million or 13.31 percent of sales, which represents an increase of eight basis points.

Our operating expense ratio was impacted by the result of harsher than normal weather and higher fuel costs.

Operating profit for the quarter was 30.4 million and our operating profit margin was 2.40 percent, an increase of 25 basis points.

By segment our Broadline margins remained flat at 1.86 percent, operating margins in our Customized segment increased 17 basis points to 1.18 percent and in our Fresh-cut segment increased 221 basis points to 8.39 percent.

Interest expense in the loss on sale of accounts receivable increased to 5.1 million for the quarter versus 4.7 million in the prior year due primarily to additional borrowings to fund the acquisitions of Quality, Indoor and TPC.

Other income included approximately $900,000 gain from the sale of 80 percent interest in a joint venture.

Effective tax rate was 38 percent for the quarter and the expected tax rate to remain at 38 percent for the rest of 2003.

Net earnings for the quarter were 16.4 million or 35 cents per diluted share compared with 10.8 million or 24 cents per diluted share in the year ago quarter.

This represents a 46 percent improvement in diluted EPS on 16 percent more shares outstanding.

At the end of the quarter our balance sheet remains strong and we added additional financial flexibility for the company by increasing our revolving line of credit to 350 million.

The sales outstanding and receivables were 23 days compared to 24 days for the fourth quarter of 2002 and inventory times amounted to 18 times versus 17 times and accounts payable for it was 133 percent compared to 130 percent at the end of the fourth quarter.

The debt-capital ratio was 33 percent; however, including our exposure under accounts receivable facility and the net operating lease facilities of 134 million, the debt-capital ratio was 40 percent.

Appreciation amounted to $10.2 million and amortization amounted to $2.1 million for the quarter.

Capital expenditures were $20.2 million for the first quarter of 2003 and this resulted in free cash flow, which we define as net income plus depreciation and amortization plus capital expenditures of $8.5 million for the quarter.

As we have mentioned in our last quarterly call, we expect depreciation to be approximately $40 to $45 million for all of 2003, amortization to be $9 to $10 million for all of the trade, and CAPEX to be in the $100-130 million range, as spending on some of our initiative ramp ups during the year.

Looking at the remainder of 2003, we continue to expect total sales growth in the high teens and internal growth in the low double digits while we do not intend to provide guidance every quarter, we do not have any reason to change the guidance we have previously given you at our last quarterly call.

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

Good morning.

I add my greetings to those expressed by John.

Welcome to everyone on the call and thank you for joining us during this very busy earnings season.

I'll briefly add to the comments John has made regarding our first quarter operating highlights in the performance of our business segments, and then an outlook will be provided for the remainder of the year.

To say this has been a challenging quarter for the foodservice industry as well as the entire country would be an understatement.

Fortunately, things looked a lot better by quarter end for the country.

I am also happy to say PFG's financial results were very solid considering the war in Iraq, the unpleasant weather experienced by parts of the country and higher fuel cost.

Strong gains that occurred during the first quarter continue to validate our growth strategy of deepening the penetration within existing accounts, winning new customers, focussing on products and service innovation, and capitalizing on strategic acquisitions.

I am very pleased to say that this was the fourth consecutive quarter in which we surpassed the $1 billion in quarterly sales and this is our 33rd consecutive quarter of earnings gains versus the same quarter a year earlier.

As John pointed out, there were a number of less than positive factors influencing the business environment during most of the first quarter.

When your factor in some inaudible (ph) in restaurant sales, it makes Performance Food Group sales growth for the quarter of 27 percent including 1 percent deflation, look even stronger.

This grown was aided by contributions from acquisitions in '02 as well as enhanced, enlarged and expanded relationships with existing customers.

Real growth for the quarter adjusted for deflation was 12 percent.

I would like to point out that our distribution division's real sales growth for the quarter was 13 percent adjusted phenomenal in place of deflation.

Operating profit margins were 2.40 for the quarter, an increase of 25 basis points over the same quarter last year.

Let me now turn to the performance of our individual business segments, all of which continue to contribute to our improved financial performance in a meaningful way.

While sales in the Fresh-cut segment were impacted in part by adverse weather conditions, the anticipated loss of foodservice distributor business that I mentioned to you last quarter and continue to self-sales in the quick service restaurant segment, our real growth rate was 10 percent adjusted for approximately 5 percent deflation from the latest storage a year ago.

This deflationary impact will continue into the second quarter.

Overall, favorable trends and consumer focus towards healthier fresh food alternatives continue to provide growth opportunities for this segment of our business.

Revenue growth and retail remain strong with continued growth in blend (ph) serving as a catalyst.

We continue to focus on new product offerings and new customers to boost foodservice sales.

Two quick service customers, McDonald and Subway have introduced new fresh styled (ph) offerings that they hope will appeal to new consumers and we will be participating in those new product offerings.

We continue to be encouraged by the cross channel selling opportunities that exist between our retailer foodservice channels and are working hard to earn new business in this area.

We believe our emphasis on products, service innovations, and a distinct focus on freshness will further differentiate us and lead to increased growth.

Operating profits margins for the quarter of 8.39 percent showed a significant improvement compared to last year.

We continued to see expected margin improvement resulting from favorable changes and product mix towards a more, higher value added items and the realization of integration synergies.

Let me update you on our real fresh fruit test marketing progress.

We continued to be encouraged by the results thus far and we are continuing to make key marketing and product refinement.

The product is now being sold in more than 1000 retail outlets in California and the Northwest.

Consumers continue to tell us that using our products meets their needs for affordable, high quality, fresh fruit product offerings.

We continue to refine our raw product procurement model as we transition in the new growing areas and improve our processing capability that has allowed us to extend the shelf life on most of our food products offerings by three days.

The successful efforts of our fresh-cut associates have produced positive feedback from consumers and store personnel regarding the product line.

While we intend to announce the results of our tests at the next board meeting, preliminary plans are to fully develop the western region of the United States prior to embarking on a national role-out due to this region's importance as the trend setter for the nation.

The upcoming summer months are an optimal time to attract new customers to this exciting product line.

We will be working hard during this time to increase distribution.

Early real sales growth for our customize division grew 22 percent to $413 million adjusted for approximately 1 percent inflation.

Operating profit margins for the first quarter improved 17-basis points to 1.18 percent driven by efficiencies throughout the system.

Our customized division expanded relationship in 2002 and earlier this year with two premier customers Ruby Tuesdays and TGI Fridays are on target to generate approximately $370 million on an annual basis.

A role out of mini [Inaudible] in the first quarter is completed and should generate approximately $40 million on annual sales.

Our two new distribution centers in South Carolina and New Jersey are fully operational and our expansion of our Elkton, Maryland, facility is moving along.

The Broadline division sale grew 43 percent in the first quarter to $643 million with nominal inflation.

Operating profit margins were flat compared to the first quarter last year impacted by the expected decline due to the addition of quality foods at lower margins, bad weather, and a slight impact of higher fuel costs.

Our street sales grew 6 percent for the first quarter and contributed 48 percent of total Broadline sales.

The proprietary brand sales were up to 34 percent for the quarter and represents 23 percent of street sales.

Our street sales per delivery were down slightly for the quarter, impacted by the addition of new sales people, new accounts added, and the bad weather.

We continued to work our strategy of focusing on building street sales, penetrating existing accounts and focussing on selling more of our controlled brands.

As a result of the turmoil in that industry we are experiencing many opportunities to expand our sales force and customer base.

We are pursuing every available opportunity legally and [Inaudible] .

The integrations of our three acquisitions made last year are on target.

I concluded my last conference call scripts with you by assuring you that we expected to build on our successes of 2002 as we entered a new full year potential and promise.

The potential and promise remain and in spite of somewhat soft business environment of the first quarter, we are optimistic about the balance of '03.

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

Thank you Mr. Gray.

Today's questions and answers session will be conducted electronically.

If you would like to ask a question, you may do so by pressing the * key followed by the digit 1 on your touchtone telephone.

If you are using a speaker phone, please make sure, your function is turned off to allow your signal to reach our equipment.

We will proceed in that order to your signal and will take as many question as time permits.

We do ask that you please limit yourself to one question at a time, however, you may re-queue for another.

Once again, that is, dial 1 for a question. [Inaudible] just a moment to assemble the roster, and we will take our first question from Bill Leach, Banc of America Securities.

Good morning, everyone.

Congratulations, another great quarter.

Thank you.

If I can sneak in two questions?

You said that you had a $900,000 gain, that would be about a penny per share, is that right?

Correct.

So, can we say that the operating EPS were actually one cent lower?

Yes.

And, in terms of your guidance the last time you gave guidance quarterly was for, as I recall, a relatively modest gain in the June quarter and then acceleration in the back half, is that still what we are looking at?

Yes.

We have no change to the guidance that we have previously given, right.

Okay, great!.

Thanks a lot.

We are going next to Mark Husson, Merrill Lynch.

Yeah, good morning.

I just want to talk about Broadline.

I think in the fourth quarter, unless my memory serves me badly, the inclusion of the acquired companies didn't have a deleterious effect on the margin in the first quarter in Broadline, it seems to have.

Can you just talk through the seasonality of those businesses or whether you have to get slightly worse in terms of profitability getting better in the acquired companies or what is the dynamics of that?

The acquired assets (ph) did have a deleterious effect in the fourth quarter, their margins for the full year were below average for the Broadline division, so it did have some impact in the fourth quarter.

And also Mark, the first quarter as you know is seasonally more difficult quarter for the Broadline segment and given where those acquired companies were, you might think that impacted the margins somewhat.

Okay, so going forward what happens to the margin contribution of these, also (ph) it didn't stop the margin going up in the fourth quarter, obviously it had an impact, but it is still managed to get out from underneath the impact.

Did it have a diluted effect throughout the whole of this year on Broadline?

I think it will take us a while to fully ramp those acquired companies up, and Quality in particular.

So, I think it will have an impact on our overall Broadline margins for some time.

We are comfortable that we will continue to show operating margin improvements in our Broadline segment.

That doesn't mean it is not a [Inaudible] earnings, just means it will hurt the operating profit and margin percentages.

Yeah, and we would expect, as we have said, our long-term objectives are 20 to 30 basis points improvement in margins and we would expect that to be through.

You know, the business ramps up the second half of the year, strongest half for the Broadline division.

Just finally, I am speaking for myself and I am sure a lot of the other analysts, just can you wish Roger Boeve well, he was unusually helpful, patient and wise, and he will be missed.

Thank you.

We will miss him as well.

Thanks, Mark.

Here we go next, Jeff Omohundro, Wachovia Securities.

Hi, I would echo those comments of Mark, but my question is on the proprietary brand growth and the continuing acceleration there.

I wonder if you can get into a little bit, and maybe let us know what efforts you are pursuing to drive the control brands, are you seeing an acceleration in new products or increased emphasis by your sales people, maybe elaborate a little bit on that.

A little bit of all of these, Jeff.

We have continued line expansions under the brands we have already introduced.

We have introduced a new line of bakery products under control brands, we intend to roll out a line of spices this year, some beverages, a new line of value added seafood products.

So, we are continuing to roll out new brands and we are promoting very heavily with our sales force and that may be over the last year, we got everybody converted to a higher commission rate on selling our brands.

So, we are experiencing really good customer acceptance and our people are very sold on our brand concept and are pushing it strongly with our customers, and we got all the incentives in place to continue to drive that.

So, you think that this acceleration might continue?

Yes.

We fully expect it to.

Very good.

Thank you.

We will take our next question from Eric Larson Piper Jaffray.

Yeah, thank you.

Congratulations on a nice quarter.

Congratulations to both Roger and John as well.

My question is on the Fresh-cut side of the businesses.

Michael could you just help us again, I know that Fresh-cut fruit was going to lose about the same amount of money in '03 as it did in '02.

I think it was about $10 million.

Is that a straight line per quarter or can we divide that number by four and assume that that's what the cost is per quarter?

I think Eric that, yes it is about $10 million, which is comparable to what our investment was last year.

I think last year our promotional spending was really more back half weighted than it was for the full year.

This year, we expect to continue to make improvements in that test line and would continue to improve our profitability there.

So, I would think the investment would probably be a little more first-half weighted than second-half weighted, as we continue to drive productivity and [Inaudible] through our warehouse.

Yeah, it should be getting pretty close to breaking even by this last quarter of the year.

Okay.

Good.

In the margin for your Fresh-cut for the quarter, I assume that the price turbulence a year ago was what maybe put some margin pressure on, and then this year, it's just a easier operating environment, is that the bulk of the reason for improvement in the Fresh-cut margin.

Yes.

That's the big part of it is exactly that, and then in the second quarter, we talked about the profit being a little lower, number one that's because of the fruit spending that we didn't have in the second quarter last year, but second part of that is that we did have, we sort of, with some of our customers, we have a lag (ph) time in recouping some of the cost associated with the latest prices, and so we recouped a little bit after the second quarter, which helped the second quarter last year but, this year will be a more normalized quarter.

So, those two things will combine to, that's why you see a little more modest growth in the second quarter this year than the last year.

I would say the other opinion that contribute to this year's margin was just the benefits of synergies derived from the acquisition where, a year further along in the integration of that acquired company so that also helped margins this year versus prior year.

Right.

We will go next to Jack Murphy Credit Suisse First Boston.

Thanks, good morning.

First is kind of a record keeping question here.

I wondered if you could help us with the, I think you referenced the gain in the quarter, we have little trouble getting on the call, wonder if you could just tell us what that is and what line item that's in and the other net (ph) , and also on the loss of sale receivables, if you could tell us the dollar amount of the receivables sold.

Sure.

Let me quickly do the latter.

We still have $78 million of exposure under our receivable securitization facility, so that remains flat versus last year.

On the gain, we had a $900,000 gain.

It is included in other net down below operating margin, and that was the sale of our 50 percent interest in a joint venture for this processing facility.

Okay and also just on the new account capture, you have (ph) obviously referenced the additional highs to capture that business.

Could you say, to what extent that you might be getting any benefit from the US Food (ph) Service or is the geography really not sort of you know map up enough for that to be meaningful.

Well its spread over, you know the entire Broadline division and if we have [Inaudible] come on board, they have one year non-complete which we obviously honor, so it does not ramp up in big blocks and would just occur slowly over the next several months, so we won't see a huge ramp up.

It is part of what is contributing to the overall strength in sales but not, we don't expect a major ramp up.

Next is Mitchell Speiser of Lehman brothers.

Thanks very much if I could may be sneak in an extra question.

The first one is just on the acquisition pipeline, can you give a sense of how that's working and maybe in particular within the context of the US Food Service debacle, has that perhaps hindered more acquisition prospects and then a follow-up.

The pipeline has continued to be active.

We are very selective in companies that we would seek to acquire, we don't want to do fixer-uppers, we want really strong niche players and in certain niches that we are not already in.

And there are certain geographies that we are not interested in, so some of the recent things that have come along have not been of interest to us, but there is still a lot of activity in the pipeline and I would expect that it continue to be there, obviously there is one less acquirer there, so it should be a better environment for acquisitions when they become available.

And secondly, just on the Fresh-cut business, nothing on Fresh-cut (ph) in particular, just trying to get a better read of the seasonality.

It seemed like last year was a bit unusual with the lettuce spike and may be some synergies that you are now reaping.

To look into 0-4, what should we expect in terms of seasonality, do you expect like the first quarter to be quite strong in terms of earnings and then acceleration thereafter given no other acquisition activity?

I would say you know that last year and I'm glad that you asked that question because if you look at last year, that was support lettuce crisis.

You know, there is no event of crisis of that magnitude, so in terms of looking at that as a normal season, that's just not the case.

This year, we will consider more normal seasons, so I would say going forward, that we are pretty confident that we should be working at the optimal of this year as a more normalized year over year comparison.

Right and measures that we mentioned when we acquired Food (ph) Express from a seasonality perspective, the first quarter is a strong quarter, the second quarter is also a very strong quarter for the Fresh-cut segment and then it tailed off a bit in the third and the fourth quarter.

So it think that guidance still holds true.

We will take our next question from Bob Cummins, Shields and Company.

Right, thank you very much.

I may have missed it, but in discussing the Broadline business, I don't know if you mentioned whether you showed any internal growth in Broadline sales or whether it is better, do you feel that, can you give us more of an outline of how your established businesses did?

Internal growth probably at 6 percent.

Okay.

For Broadline business and then there was slight really nominal inflation there so real sales growth which just slightly less than that.

Okay.

And also a distribution Elkton and Broadline.

If you had both distribution divisions together, the real sales growth was 14 percent.

Okay.

And with regard to the customize division, can you tell us if it is possible to break down organic growth there, in other words establish regions and establish customers as opposed to the new business that you added.

Was your established business down from the prior year in view of the food service industry trends?

We really have no way to measure that.

Our best measure is really just internal growth of companies that have been a part of the PFG for over a year.

It would really don't need to start back customize to ruling out [Inaudible] individual customers.

Alright, alright.

Okay, that's good thank you.

Thank you.

Next is Andrew Wolf, BB&T Capital Markets.

Hi good morning, I wanted to ask you two questions on the Broadline service followup.

First, if you comment on the sales run through the quarter and recently, I am trying to get to you as there has been any pick up in the kind of sales there and the other question is on the street sales for delivery being down.

It seems like a change in trend partially I guess, for the reasons you mentioned, but I wanted to know when you talk about quality the acquisition of Quality Foods affecting you know operating margins.

Did have the same effect here and therefore when Quality Foods cycles out of the numbers or anniversaries I should say at the end of May, can we look for both margin and sales per stop (ph) to rebound?

Okay.

Let me comment on the success for delivery.

We added Quality and its sales people last year, we are bringing on new accounts, these sales people, a lot of them had not complete agreement, so they could not go out and work in their existing customers, so they got to go out and build new territories.

So if you bring on new accounts, you are typically going to be starting at a much lower penetration levels and with our existing business and we have had a strong drive on the add new accounts throughout the entire first quarter.

That and the weather, we obviously were impacted considerably.

The restaurants were not getting traffic, so they were ordering less quantities of groceries for the next several days, so we believe that that has pretty major impact on our street sales for delivery.

We really don't roll acquisitions in until we have a year's [Inaudible] because it would really dilute our comparison and subsequent to that I forgot what is the first part of your question was.

The second one was, we will after we lapped Quality Foods, shall we see an improvement in the second half in terms of street sales [Inaudible] .

The answer for that is yes.

Once we lapped Quality Foods we certainly should and then also in the second half we had the prices at Springfield which had effected the second half of the year the [Inaudible] and that should help us in the second half as well.

And this too, the sales trend, if you could comment on that, and just on Quality Foods for a second unit (ph) , figure acquisition and most of the ones you have done recently in Broadline at least, and if could just talk for a moment on what has been going on there?

You know there is a lot of potential for improvement and just how things are tracking in sales and margin improvement there, particularly margin?

Well, we don't expect real strong sales growth because a big part of profitizing the business is installing our ABC customer classification and really focusing on the more profitable customers and probably sharing some business as you profitize.

So, we are not looking to drive strong sales growth there, but a lot of the improvement, and we were currently in the middle of installing our computer system.

When we get the information system in there, we'll have a lot better tools to manage the business, but the productivity improvements and features [Inaudible] out and those type of things are being installed very quickly, and we do believe that there is a lot of [Inaudible] improve that we will be able to capture and a lot of it is breaks into our second half of our plan.

We will take our next question from Andy Smith, AG Edwards.

Hi everybody.

You have already touched on this a little bit, but second quarter profitability relative to first quarter, is most of that due to the fruit spending last year and to the change in mix in the Fresh-cut business last year or there is something else going on this year?

Well, as we mentioned before Andy, which is, yeah, number one the fruit spending and number two of the kind of the lag in the fruit, and we have that store crisis in lettuce, which affected the first quarter somewhat last year, and then in the second quarter we had a little bit of pick up from that as we kind of picked up from the tail end so that perfect first quarter little last year, helped the second quarter and this year is a more normalized quarter.

So, really going forward, 2004, we shouldn't have the same kind of difference between the two quarters.

They should be more normalized.

During March we had shifted the sales very strongly for blended salads...

Okay.

....are of much more profitable [Inaudible] retail grocery enables a way of reducing the payments on iceberg lettuce.

So, more strong sales continued in the first month of the second quarter and added a lot of new profitability into that quarter too.

austin.

Right.

Thank you.

Thank you.

And we will take a follow up question from Bill Leach, Banc of America Securities.

Hi.

I was wondering if, was there any residual factor in the spring field situation in that quarter.

No.

That's all behind us?

It's behind us.

And another question I had is, what is the other point for fruit, you mentioned that you are going to present a plant, I think to your board, if that is successful, would you announce the National [Inaudible] , how will that proceed?

In terms of the Fruit, we are, our next step really is, that we are going in next week, let me kind of start the clock.

We have already ordered additional equipment on those Westcoast, kind of the next generation equipment, and that will help us expand, to continue to expand our capacity out there.

That should be ready to go by July, we have grown to a thousand stores from the Westcoast, we expect that, and that's up from, like 400 in January.

So, we expect to continue to roll out several hundred stores each quarter, for the balance of the year as we expand this test throughout the west.

In next week's board meeting, we will be evaluating our results to date determining our next step, but don't expect a detailed outline, though one may actually roll out.

Quite frankly, we expect any roll out to go one reach from the country at a time, and we will evaluate our progress as we go, and just move steadily across the country.

You said earlier the business is going to lose about $10 million this year the same with last year, so tell me if it is successful when you expand it, would it lose more next year or...

We expect this to be modestly profitable in 2004 and progressively so thereafter.

I mean, longterm we do continue to believe that it will be a significant attribute to our Fresh-cut division.

Okay.

Thank you.

Okay.

We will take another follow-up question from Mark Husson, Merrill Lynch

Yeah, I just wanted to know if you could just talk about the insurance in spring field, when you get the money or you got it yet, presuming nothing is clutching up the P&L account in terms of insurance right back.

Right Mark, we are still negotiating with our insurance carriers there.

We have not received any recovery at this point.

If and when we do receive that it would just going to be a one-time gain and we would appropriately identify that for you.

And that, just a third to follow-up, I know there was some commentary from other marketing comments right at the back, a lower return on investing capital in charge of business and I think we, thought that a lot of that was to do with recent addition of capital in the form of acquisitions that hadn't matured yet.

Could you just talk about the underlying ROIC in your business, obviously with these strong numbers helping that and how you see that modeling out over time?

Sure, we saw nice improvement in return on equity and return on capital in this year's quarter versus the prior year quarter.

Our model shows our base business continuing to grow return on capital into the mid teens in the next three to five years.

So, we are very comfortable with continuing to make progress here and we will look to continue to make progress now in that respect.

Right, thanks very much.

And we will take another follow-up question from Mitch Speiser, Lehman Brothers.

Thanks, a few various questions, first on the salad roll out.

Want to know, if you can give us initial read on the salad roll out at McDonald's and perhaps then we talk about Subway in terms of how many stores you are servicing in the Subway system at this point?

We are servicing in Subway about 400 stores and McDonald's we were servicing over 5000 stores.

In terms of a field forward, I mean, its not a new product, its a tenderly the product, which we are used to handling and so we think, I mean, I believe our people are doing a great.

We are also rolling out a new tenderly baby spinach product at retail.

So, we think both those products, I mean we think this salad will be a winner for McDonald's, they just started a promotion, made promotion last week, I am sure, we will be happy to give you a more specific information on success of that promotion.

I believe McDonald's got only about a percent or so of your sales, I was wondering if you, if just a tremendous success that we had actually moved in on [Inaudible] .

Would not have another significant impact.

And secondly, I just need to ask a question on venture (ph) rebates, I did, when I last read your 10-K, I believe, it said that you do use small item growth rebates and you do perhaps book the rebates if its reasonable that you are going to sell the entire product at the specified time.

And I am wondering if perhaps you might get a little bit more conservative on that going forward just in terms of waiting and to a 100 percent of the product is sold until you book the actual rebate.

Mitch, as we had previously mentioned and as we have discussed this issue over the last month or two, we have a fairly conservative view on what EITFO 216 allows you to do.

As you have mentioned EITFO 216 would allow you to recognize growth programs ratably as you make progress toward that goal if it is reasonably estimable and highly probable that you will make that growth target.

We have a fairly conservative interpretation of that and for performance oriented targets like that, we don't recognize that until we have either met that target or we are very comfortable that we are going to meet that target.

So I think we have pretty conservative interpretation of that guidance.

Our next question comes from Bryant [Inaudible] Miera Capital.

I have a set of questions on the balance sheet, it looks like a good well balanced increase by about $10 million.

Did you have any aquisition for the quarter?

No, we did not have any acquisitions as we had disclosed in our 10-K and previous 10-Qs, we did have an earn-out payment on the First Express acquisition.

There is a $10 million payment related to that.

Okay.

So, what is the balance sheet [Inaudible] was that comfortable or was it includes liability?

I'm sorry.

What was the offsetting balance, was that cash coming out?

Correct.

Okay.

Thanks.

We will take a follow-up question from Andrew Wolf, BB&T Capital Markets.

Bob, when you gave the set of preliminary guidance on Fresh-Cut fruit being profitable in a [Inaudible] , was that for the West Coast only or does that include another regional or couple of regions of rollout into that?

It is just based on what our plan is at this point in time that we really until we go to the board really not prepared to talk about that anymore in detail but just based on our you know what we think our plan would be and you know we should be able to shed some light on that as steadily as the year goes along but just based on what our plan is, we think it will be, modestly profitable next year, which has really been I think what we have told you all from the very beginning this year is an investment year next will be modestly profitable and then we expect it to steadily improve as we go forward.

Do you think some of the startup costs in new regions, whether it is R&D or promotional can be substantially lower than they have been, you know out in the Salinas Facility?

Well, we are going through a learning curve in the Salinas Facility, you know, we are learning how to make the product, we are learning the processes to go through in terms of equipment, people, I mean we are going through a major learning curve there.

These are new products that have not been made by anybody before in the retail industry, you know at retailed and so as we learn to make them better, faster, quicker, you know, as we roll out to other parts of the country, we will be able to do it at a much lower cost.

The only costs that will probably the same is the actual promotion instead of marketing promotion and that is an important piece to the consumer [Inaudible] because you know, we have got to raise awareness, it was kind of like it was when we started off with salads.

You know, salads took a while to get the consumers attention.

You know, right now, our tests show that only 17 percent of the consumers on the grocery store even know that the product is in the shop and so, we are working to do more promotions in store and different ways of marketing to raise the awareness of the product because once the consumer does pick that up and try it out, our tests shows if they like it and they will continue to buy it.

So, you know, we are optimistic about that, but it is an ongoing process.

Thanks.

If I can ask again maybe, you have answered this, and I didn't hear it, but just any commentary on the sales front would be helpful?

I am sorry, in what category?

In Broadline, I am sorry, looking back to my earlier question, just how the Broadline business has been trending recently?

Well, we have been very pleased with what we have been able to accomplish in Broadline considering everything has been impacting us in the first quarter.

You know, real sales growth of slightly less than 6 percent was more than twice the real growth in the industry, almost three times the real growth the real growth in the industry, so now we are steadily proving that we are capturing market shares from weaker competitors and new western openings, so you know if I think we expect things to improve in the restaurant industry for the balance of the year and will be there to get our share.

We are still, I think optimistic that we will be able to produce mid single digits real sales growth in the broad line division.

Thank you.

Thank you.

Once again, that it is [Inaudible] wanted to have a question.

We will go back to Mitchell Speiser, Lehman Brothers.

Thanks for taking my third round of question.

The customized segment margins were up 17 basic points.

Year over year, that was the biggest increase we have seen a while, so that we can comment on that to all that have to do with new contracts or just better cost structure and that's my kind of a followup.

Thanks. austin: I think the business is driven through the whole system.

You know, we opened up a distribution center at Fort Mill, South Carolina, that took a lot of miles out of the system, and as we said our strategy for improving profitability is just to create efficiency then get closer to our customers and we have a big customer base in the North and South Carolina, North Georgia quadrant and that facility contribute quite a bit, and just continuing to focus on more profitable outings, and density of customers helps that, so all those things kind of form together to make it more efficient.

Okay, secondly on the fresh cut business that lost accounts, they mentioned that may have dragged the overall sales growth rate.

When do you think we will lap this or is it may be an ongoing accounts might be lost as fresh expense becomes that much stronger of a brand or do you think that it has given some sense that we are going to lap that lost account profiled and start building of at a slower pace.

I think the majority of you know, we will be lapping this year or will we lose anymore or we don't have a lot more outlet what we frankly that we think could lose.

So, the risk may be one other significant group that may be evaluating, kind of their future with us, but other than that, we think that will probably be extend of it.

And so we really know it is hard to answer that.

Yeah.

At the time, we are focusing in food service on a lot of new products and a lot of new channels of distribution, and new customer segments, and we expect to start to seek some growth contributions out of new segments of business.

Right.

So, we are you know we talked about going into [Inaudible] between abandoning or continuing the work on that, we will continue to work on new products.

As you know, in the quick service area, we are looking for healthy new products and so we are working with our customers in certain areas if they are to help them identify and source healthy new products, and so we think there is some real opportunities.

We our existing customer base with new products as well as categories of customers.

Great.

One more in, just on the fruit business.

I think you mentioned you extended to shelf-life perhaps by three days, if you can make a comment on that and what is the shelf-life at this point?

We have got ten days on fruits.

It is what we have opted of our shelf-life and we are comfortable with that level.

We don't know that we are going to go above that any time, so what we think that's strong enough number of days that we can keep product in the shelf, keep the product fresh, and delivering acceptable products to the consumer.

Right.

Great, thanks.

Yeah, thank you.

Mr. Gray, it appears we have no further questions at this time.

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

Okay, let me conclude about thanking you for your time this morning.

We appreciate your interest in PFG, whether you are a longtime follower or one of the many new comers picking up coverage on our company.

We continue to capitalize on our innovation and leading position in [Inaudible] processing and our distribution business continues to grow at about three times the rate of the restaurant industry growth.

I believe this demonstrates the soundness of our growth strategies.

In addition to the previously mentioned challenges in the first quarter, there were a lot of distractions caused by the attention devoted to the allegations directed one of our competitors and I am extremely proud of our associates across America who rose to the challenge, gave a little extra, and produced a solid quarter despite all these troubles that we have mentioned.

At PFG we are driven to succeed and we plan to continue on that tactic.

Thank you very much.

: That concludes today's conference call.

We thank you for your participation.

You may disconnect at this time.