Blackstone Inc (BX) 2003 Q2 法說會逐字稿

Good morning, Ladies and Gentlemen.

Welcome to the Performance Food Group Second Quarter fiscal year 2003 Earnings Conference Call.

It is my pleasure to introduce your host, Mr. John D. Austin, SVP and CFO of Performance Food Group.

Thank you, Mr. Austin.

You may begin.

Good morning.

Welcome to the Performance Food Group Conference Call to review the company's announcement earlier today of its financial results for the Second Quarter ending June 28, 2003.

With me this morning are Bob Sledd, Chairman, Michael C. Gray, our President and CEO and Roger L. Boeve, EVP.

This call is primarily intended to review results for the second quarter 2003, and as you know we pre-released anticipated second quarter results approximately two weeks ago.

Today we will review those results and also provide an updated outlook detailing expectations for the rest of the year.

Our second quarter earnings release was issued this morning and a copy of that information is available on our Web site www.pfgc.com.

I will briefly address operating highlights for the quarter and introduce Michael C. Gray who will provide more insight in to the quarter and provide an update on our anticipated 2003 operations.

Before we start, let me say certain of the statements made in this call may be forward-looking statements under the private securities litigation reform act of 1995.

These statements involve risks and are based upon current expectations.

Actual results may differ materially.

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

I would also like to remind you that we may refer to certain non-GAAP financial measures in this discussion today as defined by SEC regulation G and presentation of the most directly comparable measure, reconciliation of the non-GAAP measure to that measure will be available on our web site.

Net sales for the quarter were very strong at $1.4 billion, exceeded $1 billion mark for the fifth consecutive quarter.

This represents a 28% increase from the year ago quarter.

All of our business segments contributed to this growth, and complete segment breakdown is included in your news release.

During the quarter acquisitions, represented 14% of our sales growth and internal growth amounted to 14%.

On a consolidated basis, inflation amounted to slightly less than 1%.

Gross profit increased 18% from a year ago quarter as our gross profit margins decreased 132 basis points to 15.73% from 17.05% last year.

The decline in gross profit margin was primarily driven by the decline in gross margins in our Fresh-Cut segment as a result of the increased raw product costs, impact of fruit test and prior year impact of the favorable pricing as a result of increased lettuce cost in the first quarter 2002.

Operating expenses for the quarter were $171.3 million, or 12.5% of sales, which represent as decrease of 75 basis points versus the prior year.

Our operating expense ratio decline primarily due to Fresh-Cut segment.

Operating profit for the quarter $43.7 million and the operating profit margin was 3.20, reflecting decrease of 57 basis points.

Interest expense and the loss on sale of accounts receivable increased slightly to $5.3 million for the quarter, versus $4.9 million in the prior year, due to additional borrowings to fund acquisitions of quality, TPC in 2002, offset in part by favorable interest rates. rates.

Other income declined to 200,000 for the quarter versus 300,000 in the prior year quarter.

Our effective income tax rate was 38% for the quarter, and we expect our tax rate to be approximately 38% through the year end 2003.

Net earnings for the quarter were $23.9 million, 49 cents diluted earnings per share, compared with $22.3 million or 47 cents per diluted share in the year ago quarter.

At the end of the year, the end of the quarter, balance sheet remains strong, at the beginning of the quarter we added additional liquidity for the company by increasing our revolving credit facility to $350 million.

In addition, during the quarter, we terminated our master operating lease facilities totaling $56 million and refinanced a portion with a long-term operating lease.

Also working capital management continued to improve, day sales outstanding and receivables were 22 days, compared with 23 days for the first quarter.

Inventory turns amounted to 19 times versus 18 times and accounts payable float was 136% compared to 133% for the first quarter respectively.

Our debt to capital ratio was 32% which excludes $78 million of exposure under interest and accounts receivable sold in our receivables facility Depreciation amounted to $10.4 million and amortization amounted to $2.1 million for the quarter.

Capital expenditures were $32.9 million in the quarter.

This includes approximately $15.3 million of properties purchased upon the termination of the master operating lease facilities.

This results in free cash flow for the quarter of $3 1/2 million and to remind you, we define free cash flow as net income plus depreciation and amortization less capital expenditures.

We continue to expect the following in 2003:

Depreciation to be approximately $40 to $45 million, amortization to be approximately $9 to $10 million, and Capex to be in the $100 to $130 million range Just before I turn things over to Michael, let me review expectations for the second half and year end.

With our July 14 press release we updated estimated earnings range to $1.75 to $1.79 for the full-year 2003 This includes estimates of 45 to 47 cents in the third quarter, and 46 to 48 cents in the fourth quarter.

With that I will turn it over to Michael C. Gray, President and CEO.

Good morning, welcome on this morning's call and web cast.

Thank you for joining us during this very busy midterm earnings season.

I will briefly add to comments John as made regarding second quarter financial, operating highlights, and the performance of our business segments.

This has been the second quarter for Performance Food Group.

In the first quarter, we and the majority of the food service industry, the entire country, very successfully preserved during the war in Iraq, unpleasant weather and higher fuel costs.

During the last few weeks of the second quarter, Performance Food Group as disclosed to you July 14, 2003 experienced an increase in raw product costs, driven by the unexpected industry wide increase in demand for new premium salad products and quick service restaurants.

This level of demand was not anticipated when growers made planting decisions several months ago which resulted in a significant increase in market prices for lettuce in the last few weeks of June.

By the company, routinely contracts for vast majority of lettuce needs, the success of these products meant that the company had to make additional market purchases at higher prices to satisfy increased customer demand.

On a more positive note, later this summer McDonald's will launch a market test of a new item called apple dippers, the product includes sliced apples to be provided by us, that can be substituted for French fries in happy meals or purchased alone.

Strong gains in net sales occurred during the second quarter continue to validate our growth strategy of deepening penetration within existing accounts, winning new customers, focusing on product and service innovation and capitalizing on strategic acquisitions.

I am very pleased to say that this was a fifth consecutive quarter in which we surpassed $1 billion in quarterly sales and is our 34th consecutive quarter of earnings gains versus the same quarter a year earlier.

Grocery stores and restaurants both posted real growth during the first six months ahead of real growth in the first half of '02.

Restaurant sales for the quarter were slightly ahead of the first quarter and finished the first six months of real sales at 2.78% higher than the first half of last year according to the Food Institute.

Performance Food Group's real growth for the quarter was 13 1/2% adjusted for slightly less than 1% inflation.

Our distribution real sales growth was 14 1/2% adjusted for approximately 1% inflation.

Let me highlight the performance of our individual business segments.

The customized division had an outstanding quarter with 43% operating profit increase and operating margin improvement of 16 basis points.

Quarterly real sales growth was 26% with little or no inflation.

This was driven by the addition of approximately $300 million in annualized net new business and after stages over the past year and continued solid growth on the part of our existing restaurant chain partners.

Our customized associates continue to improve service to our customers while simultaneously achieving internal efficiencies.

We expect to announce the location of our Midwest distribution center shortly and complete construction in the third quarter of '04.

The new center and expansion of several existing centers will provide the space needed to continue growing our customized division.

The Broad line division sales grew 37% in the second quarter with approximately 1 1/2% inflation.

Internal real sales growth for the quarter was 6 1/2% adjusted for inflation.

Operating profit margins compared with second quarter last year were down slightly impacted by the expected decline due to addition of quality foods at lower margins.

Our continued focus on increasing sales to independent restaurants resulted in an 11% increase in street sales for the quarter, for the year-to-date street sales represent 49% of Broad line sales.

Strategy of building proprietary brand sales is continuing its momentum.

Brand sales up 35% for the first half and represent 24% of street sales.

We're very pleased with integration of three acquisitions made last year, the conversion of the computer system at quality foods is a big step in the process, this is well underway and all three of quality's distribution centers should be converted by the end of the fourth quarter.

Consumer focus towards healthier, fresh food alternatives continues to provide growth opportunities for the Fresh-Cut segment of our business.

The retail segment continues to produce good growth with focus on growing blended salads, demand for premium salads in the segment was strong for the quarter, but was partially offset by previous loss of food service business.

Overall sales for the segment were up approximately 10% over prior year with real sales growth of approximately 9 1/2% adjusted for slight inflation.

Operating profit margins for the quarter were 8.93% impacted by raw product costs explain in July 14 release, the unusual quarter to quarter comparison with last year and the timing of expenditures for the fruit roll-out.

The company continues to be optimistic with results of the real fresh fruit sales and operations test on the west coast.

Test extended beyond 1300 retail locations with plans for continued expansion over the next several quarters to optimize west coast manufacturing capacity.

While developing supply chain experience in raw sourcing, manufacturing and distribution, the test continues to provide valuable insight in to consumer preferences.

Consumer attitudes towards product recipes, packaging, merchandising options are being carefully evaluated.

In conjunction with the announced fruit test with a major QSR customer we anticipate adding manufacturing capacity in our Midwest operations over the next several quarters.

We are very pleased with quarterly results despite challenges associated with increase cost of lettuce in June.

All divisions showed good progress and operations were solid.

We are positioned well to benefit from an economic recovery tomorrow we're --we're now ready to take questions

Thank you, Ladies and gentlemen, at this time we will be conducted a question and answer session.

Our first question comes from Andrew P. Wolf with BB&T capital markets.

Good morning.

I wanted to ask you a couple questions about the margins during the quarter.

On the SG&A ratio contracting, I guess you mentioned Fresh-Cut efficiencies.

Could you give us more detail?

Was there anything in there, you know, looked like a nice expense management.

Did the bonus crols change or anything, sort of discretionary like that?

You know, some compensation related things, you know, depending on their profitability.

But also driven a lot by all the integration we have done and changing, we are spending some money last year with some consultants looking at what the right configuration of the plant infrastructure and things like that.

So it's a lot of that kind of expenditure.

So you would say the majority of it was Fresh-Cut related either efficiencies or some of the cost that's were in there last year that you referenced?

Virtually all Fresh-Cut, that's right.

Great Then on the operating margin and contraction in the Broad line business was a little bigger than I estimated, not a lot.

What is the lag normally when product costs, food inflation starts heating up from dormant or being down like it was last year?

I think there's a bit of a lag.

Could you give us a sense of the transition that we can think about modeling when you might have an upturn in margins in that segment?

I'm sorry, Andy, I didn't get all of that question.

Would you repeat that? .

I guess my supposition is when you get inflation in food costs after it's been deflating you can't pass it all along in the same quarter.

And so my question is, is that correct?

And is that the main reason why you're having operating margin contraction in Broadline in the last couple quarters and when, if that is the reason or the primary reason, you know, when would we expect or when do you expect, you know, to be able to pass through some of those increased product costs and get the margins up?

I'm sorry, I think that was the part I missed was the Broadline piece.

In distribution inflation or deflation gets passed along fairly quickly.

Most of the margin or lack of margin expansion in Broadline is really driven by the quality food service lapping that or we haven't fully lapped that.

As was indicated, that was a lower margin business, the balance of our other business.

We have had, you know, there was slight inflation for the Broadline segment in the quarter but not enough to really cause a major impact on margins.

We do expect margins to steadily improve for the balance of the year.

So you've had no issues passing along some of the increase in meat and other costs?

No, not really, not in Broadline.

In customized it's not a factor because the customer negotiates with the suppliers and sales.

Thank you.

Next question comes from Ann H. Gurkin with Davenport.

Please state your question.

Just want to talk about the environment little bit like what's your pipeline for adding new customers?

What's your pipeline for acquisitions?

Can you talk about that a little bit?

In terms of adding new customers, we have had a good year for that.

We have run a couple of promotions for salespeople to add new customers, we have been actively pursuing additional salespeople when the opportunities exist.

So I would say for new customers it's been good both for chains and for street customers.

In terms of acquisitions, there have been several things enter the pipeline, but to this point there has not been anything that really meets our criteria that we have been extremely interested in.

May be too small to be a stand alone for us or they have been too focused on a niche.

Can you tell me how long the test will last with McDonald?

That's really up to McDonald's.

That's not something that we control.

Okay.

What is your cap ex plans for '04?

We have not given any guidance, Ann, on our '04 numbers as we wrap up the budget later this year, you know, we'll come out with '04 guidance.

But at this point we have not given any guidance on any '04 numbers.

Thank you.

Thank you, Ann.

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

Please state your question.

Good morning.

On the Fresh-Cut, you said you experienced only slight inflation in the quarter.

Could you tie back for us, you know, given the fact you had the spike at the end of the quarter kind of how full quarter came out, kind of only slight?

And kind of the second part of that is given the higher sales resulting in some pressure on the, you know, on the margins, should we kind of think about the business as more volatile going forward?

Has there been a fundamental change?

Have you kind of learned from the experience of the past quarter how to manage that volatility a little bit better?

Sure.

A couple of things, Jack.

Let me address your inflation question.

You know, the raw product cost increases that we experienced right at the end of the quarter really didn't impact the sales line in our inflation measure is really at the sales line.

As we mentioned in our July 14th release, we were not able to pass along those increased costs quick enough when they escalated right in the last couple months of the year.

So that's one of the reasons you don't see that really driving inflation.

Hopefully that answers your question there.

As relates to volatility and things like that, I don't think there's any fundamental shift.

Bob may have some comments as well when we experience a cost issue like that just in the last couple weeks of the year, you know, the tools in place that we have to pass along some of those increased costs, you know, just can't be pulled that quickly.

It really, Jack, wouldn't have happened if we had not had the spike up in salads that we had.

It was really, that's really what caused it.

So it was really more of a sales issue than some other volatility issue, not just to us but to the whole industry.

So I would say, you know, that we're able to control volatility very well, I mean the worst lettuce crisis in the history was last year and first quarter of 2002 and we were still able to make our estimated numbers.

So I think our guys are doing a good job with controlling any volatility in our category.

This was really more of a sales question than a spike up in sales that caused this than any other type of volatility issue.

So, you know, we think we are able to control that reasonably well.

Okay.

I guess that was just sort of driving at, as opposed to, you know, maybe the more predictable Broad line business, it's not, you know, as directly related to the lettuce and the salad business.

Is there just more inherent volatility in that business, which is, you know, obviously got bigger over the last couple years?

There's certainly, you know, a little more volatility because you're dealing with, you know, some products that -- to offset we contract the vast majority of the products that we buy, we contract the price and then we have prices contracted with our customers. .

Right.

What caused this was that we typically contract over the course of the year close to 100% of our product that we purchase.

In this particular time of year, we contract only 95% because historically if we had to go to the market, lettuce is inexpensive even below our contract cost this time year.

Because of the spike up in premium salads, we ended up having to go to the market for 15 to 20% of our product, closer to 20% versus .

The cost of the market price rather than being lower, was significantly higher.

So that was really an unusual circumstance caused by the spike up in volume on the premium lettuce.

And again, we're typically able to control that, pass that on to the customer.

Even in this case, we're able to pass that on to the customer, but we, the majority of that cost only on to the customer.

But because it happened right at the end of a quarter we will not recoup that or some of those costs until the next quarter.

So the combination of those things kind of acted to cause this shortfall which is why I think the comment was made we thought we could make up most of the balance or most of the difference here over the balance of the year.

Okay.

Just the last question for John, if you could just go through kind of the low end of the capex versus the high end in terms of the forecasts you gave us and what the difference is there.

You know, I think it really depends, Jack on the timing of expenditures, we have a lot of initiatives in place.

Right now we're I think total capex for the year-to-date is up $53 million, $52, $53 million.

You know, we expect to be somewhere between $100 and 130 million for the full-year.

I think that, the variability of that range is really dependent more upon the timing of those initial initiatives and how quickly our folks implement some of those.

Okay.

Okay.

Thanks.

Thank you.

Our next question comes from Mark Husson with Merrill Lynch.

Please state your question.

Yes, on the 15 to 20% of the fresh stuff you had to buy to market, is that 15 to 20% of your requirement for the quarter or just the last few weeks?

That was during, during the month of June.

Just right at the end.

Right.

Second thing I want to talk about, what you're seeing out there in competition.

I know you picked up an awful lot of salesmen, maybe 5% increase in your sales base over time.

Is there a update on that kind of number?

Are they providing a bit of a cost drag inside the Broadline business?

Is that one of the reasons why Broadline margins have been soft?

Well, there's some drag there because we bring the guys over on a guaranteed basis and they're not able to cover their costs.

But it's not significant.

The primary drag on the margins as we mentioned is the quality foods which we are lapping in this quarter.

We didn't bring on a lot of new salespeople in the second quarter, but we are seeing some increased activity for some reason in the third quarter and still getting lots of inquiries.

So we're not experiencing any real difficult competitive environment and we're still getting lots of inquiries from salespeople and management people.

Thanks.

Just back on to that first question, I forgot to follow up.

If you've got to go to the market for 15 to 20% of your product requirement and you normally cover 100% or thereabouts of what you need, does that mean that McDonald's is 25% or 20, 25% of your salad business now?

Well, it wasn't just McDonald's.

There were other people doing premium salads as well.

Obviously the promotion was successful and.

The answer to that question is no.

They had quite a bit of spike up during that period of time as they were promoting it and so forth.

It's still been very successful but during that time they were reducing and promoting it and it did spike up sharply.

The premium salads include quite a bit of iceberg lettuce that goes to the entire market.

Typically I think as we said, we would be 95% covered for the month of June and only behind about 5% --

Lettuce and Romain , you know, which are the two primarily ingredients are not, you know, we sell dozens of other items, tomatoes, onions and other things.

If you were asking us, you know, did McDonald's represent a significant amount of lettuce in that period the answer would be yes.

You know, not total sales of the category.

Okay.

Does that make sense?

Yes, it does.

What percentage of lettuce is your total category?

I'm sorry, say that again.

What percentage is lettuce of your total fresh category?

You're trying to back in to a number for McDonald's there, mark?

We don't disclose that.

By category, no.

Final rather esoteric question.

How does the apples from going brown.

Little elves in the plant.

No, actually the process, that's process out there which I don't know all the details to.

We can get that information for you, Mark.

I don't know that process off the top of my head.

But there is a process that the apples go through which extends the shelf life and keeps them looking good.

And tasting fresh.

One of the primary things used is to keep the apples from turning brown.

I don't know if what we're doing is proprietary or not.

Thanks, guys.

General in the industry is use sit trick acid.

If you would like more information we would be happy to -- as long as it's not proprietary.

McDonald's like the soft leaf handling production lines and so on.

I wonder whether you had to do something proprietary to get the product out.

John can get back to you on that, Mark.

I'll follow up on that with you, Mark.

Our next question comes from Jeffrey F. Omohundro from Wachovia.

Sir, please state your question.

Thanks.

Actually I have two questions.

First, on the Broadline side, the internal sales growth momentum there, I wonder if you could dig in a little deeper behind the drivers, and then what the flesh out the outlook for the second half of this year And then the second one, maybe you could talk a little further about the Fresh-Cut on the fruit side, the plant capacity and the plans for expansion there.

Okay.

On Broad line it's a number of things.

Restaurant sales accelerated in the second quarter, you know, not hugely but a small increase on the sales volume that's in restaurant sales is quite a bit.

We're starting to see some gains made from our investment in salespeople over the past two years.

That's starting to deliver.

We had a major promotion running at the sale end of the first quarter into the second quarter for account penetration and we have also been very focused on selling more of our brands which gives us the opportunity to penetrate accounts more too.

And our brand sales were up 35% year-to-date over the prior year.

So I think all those things are contributing.

You know, we are optimistic that restaurant sales are going to remain good for the balance of the year.

And the fresh cut-

And the Fresh-Cut, we have added, or are adding a couple lines.

As Mike was mentioning, we have over 1300 stores now.

We're aggressively adding additional stores out on the West coast and have a large number of new customers that we expect to come on board with this test in the next few months.

So I think probably by the next conference call we'll have a pretty significantly increase in number in terms of the number of stores.

Then we're also adding a line in the Midwest as Michael mentioned, and we will be pursuing customers out there.

We have got some customers lined up and we'll continue to be aggressively pursuing that in the Midwest as well.

In the Midwest it's going to be the larger sizes.

At the moment that seems to be where the larger amount of volume is and so we're pursuing the larger sizes in the Midwest and we're also pursuing with the new customers on the west coast, but the larger sizes and the cups and snackers.

We're still only running one shift to west coast so there's lots of ample capacity there.

Okay.

That was really what I was getting at.

Thanks a lot.

Sure.

Our next question comes from Bob Cummins with Shields & Company.

Sir, please state your question.

Thank you very much.

Good morning. .

Good morning Bob.

I just following up again on the lettuce situation, I'm not clear on what the current status is.

Has there been a decline in the open market price since June?

Or have you been able to pass along the cost?

It came down very quickly in July, first few weeks of July came back down to normal.

Okay.

Two things.

One is I think the volume is, it's such a level I think, in pretty good shape on the, you know, on what we have contracted at this point in time because it's not being promoted as heavily, number one.

Number two is the price has come down.

Okay.

Very good.

And tying in with that for those of us that don't follow the restaurant industry, does McDonald's have its premium salads in all of its stores?

Or is there further expansion potential there?

And how much of their business do you have?

Do you have basically the lion's share of their volume in that line?

We have about 5,000 stores of their --it's in all the stores that we service.

Is there potential to get more than 5,000 stores?

Or is that about the maximum you're likely to get?

Well, we would hope, we're continually hopeful we can get more.

We have invested very heavily in technology to be able to produce higher quality premium salads and we're hopeful that our investment will pay off over time and we'll be given additional distribution centers.

This past year we picked up two additional distribution center for McDonald's so there is continued penetration and I do believe, I don't know for sure, I believe they have salads in all their stores.

Okay.

Are you seeing similar reaction by other fast food chains?

Obviously McDonald's so far is very successful with that product line.

Are others doing it?

And can you get some of their business as well?

We are running some tests with a couple other fast food chains.

And I think we talked earlier we're involved in a test with Subway and several of their regions.

Great.

Okay.

Thanks very much.

Thank you.

Our next question comes from Eric J. Larson with Piper Jaffray.

Hello, everyone.

Quick question.

The second quarter your overall internal growth rate of 14% was a clear step-up from what we have seen even really above your guidance.

Do you still think that a low double-digit internal growth rate is what we should be, you know, measuring you guys on?

Eric, our guidance for the full year was to be in low double-digits, total sales growth in the high double-digits to roughly 20%.

So we are seeing some incremental improvement but that guidance for the full year has not changed.

Pleasantly surprised, Eric.

Very pleasantly surprised when I saw the press release this morning.

So congratulations on that.

It's very healthy sales growth.

Our customized segment we'll be lapping the business they added in the fourth quarter.

Correct, correct.

Your fourth quarter will be a little bit more difficult on that front.

The second question is, the other very surprising positive surprise here is your expense ratios.

Where can those go overtime?

If you're running your business the way you want to run it?

What is the correct operating expense ratio to sales?

You know, I don't know that we have specific guidance about that.

Most of the guidance we have given, Eric, has been top-line and bottom line.

You know, we are continuing to look at, you know, efficiencies and things like that in our business.

As I mentioned, you know, most of the driver of this quarter was related to Fresh-Cut.

You know, they spent a lot of time over the last year or so integrating those businesses and things like that.

I don't know that we're necessarily done there.

But obviously this quarter was a very favorable expense ratio.

Okay. .

I'm not sure there's -- I'm not sure it ever stops.

We're always looking in all areas of the business for ways to reduce cost and be the low cost provider as well as provide high-quality products and high-quality service.

So that's just kind of a ongoing process.

Okay.

And we have talked about already the impact that Quality Foods has had on your growth margin.

Are there expense ratios still higher than corporate average?

Will that also be a positive factor going forward?

Sure, it will have some impact in Broadline.

Okay.

We're working there to reduce operating costs, we're working there to be more efficient in routing, we're eliminating, not eliminating, but we're evaluating all customer relationships and we'll probably be migrating out of some unprofitable customers.

We have been trimming the sales force.

We have got a lot of new management people in there.

Working on their margins, working on their brand sales, so while we have to improve their margins there will be some reduction in their cost as well and that will obviously have an impact on the Broadline division.

Okay.

Okay.

Final question is again back on lettuce.

In the final two weeks, was it mainly romaine that the pricing was higher?

I have seen the iceberg lettuce prices have been at rock-bottom levels.

I haven't seen them that low in some time.

Was it mainly roamaine or iceberg?

Iceberg shot up to the 25, $30.

You're right it has come back down.

Okay.

So iceberg was at 8, it went to 25 to 30?

Right.

Wow, okay.

Thank you, everyone.

Down to normal pretty quickly, so it was a short period there right at the tail end of the quarter.

Got you.

Okay, thanks.

Thank you.

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

Please state your question.

Good morning.

In terms of fruit are you still budgeting a loss of about $10 million this year?

And when do you think it will break even?

The investment was planned to be $10 million and they're telling us that they expect to be at a break-even run rate by the end of the fourth quarter.

Which has been the plan all along.

So we are on plan there in terms of how much we're going to lose.

When we go the first quarter of 2004 that will be a positive variable year to year in terms of earnings?

Well, it's factored in to our plans.

We won't, we don't expect to be continuing to make the investment that we have.

It should be carrying itself.

We don't expect there to be a huge contributor in 2004.

But it should be slightly profitable versus a loss?

Yes.

Yes.

Okay.

And the other question I had, have we pretty much lapped all acquisitions you made last year in the Broadline segment?

No, Quality Foods lapped at the end of the second quarter and the other two are in the third quarter.

Do you know offhand roughly what acquisitions will add in the back half?

Will add, what do you mean? .

In terms of sales growth, this quarter I think they were 14%.

No, I don't have a number for you that we're going to disclose on a quarterly basis, Bill.

Guidance for the full-year sales was somewhere between, you know, low double-digits for internal growth and then high teens roughly for total growth.

So for full-year that gives you a sense that it's, you know, in the high single digits for the full-year.

Okay. .

Yeah, we have not, as we have been profit zing Quality Foods we have not been growing sales there obviously because we have been backing out of some unprofitable customer relationships and we have been evaluating sales force.

So we wouldn't expect to see huge contribution to sales out of that one and that was about $37 a million of the act -- 375 million of the acquisitions made last year.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Mitchell J. Speiser with Lehman Brothers.

Please state your question

Good morning.

A few questions on Fresh-Cut and lettuce.

Have you contracted out 100% of your lettuce needs for the third quarter?

Typically the third quarter is pretty close to 100%. really varies by month or things like that, Mitch, not by quarter.

That's assume we don't have any big --assuming we don't have any big promotions or spikes up in volume, which we do not.

We think we pretty much have that under control.

Although we did not, you know, the plantings were made last year but we do not expect any surprises in the third quarter.

Okay.

And in terms of inflation in the Fresh-Cut segment, in the third quarter, any sense, I take it do you plan on recouping some of the pricing.

Right.

We will recoup some of the pricing this quarter.

We right at the end of the last quarter.

I don't think we're good enough at this time to project what inflation is going to be for the quarter.

We haven't even closed out the first month yet.

Okay.

And just moving along with lettuce and Fresh-Cut.

Versus meat and chicken in general, would you say that lettuce is a more, you know, volatile commodity?

Or can you give us the dynamics of your increasing lettuce mix and how that is kind of relative to meat and chicken in terms of handing the price volatility?

If we didn't have it contracted it would be pretty volatile but it's not -- you know, because we have contracted prices we're not at the mercy of that volatility.

You know, it has different things influencing it.

Weather influences where, you know, other things influence chicken and meat prices.

The fact that we have a contract I think takes out the vast, vast majority of the volatility.

You know, again, I hate to repeat myself, but really what effected this quarter was not, you know.

I mean it was the volatility of lettuce caused by a shortage of let us the because of the increase --lettuce because of the increase industry wide because of this premium salad that was introduced and promoted heavily.

And that truly caused a spike up in the price of lettuce because people had not anticipated that.

So premium lettuce had never been introduced we wouldn't be talking right now.

We would have made our numbers and this wouldn't be an issue.

But premium salads were introduced and in fact we think it's a good thing long-term.

Did it hurt us for the quarter?

Yeah, but we think it's good long-term .

We're glad we've got the business.

And it's creating a whole new category of consumption.

People either brought a lunch for home or having something else, now going out and having premium salads, attracting people to quick service segment and expanding the entire salad category.

Very much a positive and we're excited about it.

Yep.

Got it And in terms of just the supply, you know, is there an available or is there incremental supply that could be brought on for 2004?

Are there any constraints to, you know, to increasing the supply of lettuce grown in the key markets in the key areas?

We don't know of any.

No, just it's a matter of predicting volume and that's basically what got caught in the second quarter.

Volume was predicted based on past performance with, and projected sales growth and the growth just was much greater than was anticipated.

So, you know, there's land available and just a matter of making good projections.

The second part of that, again, historically, you know, -- well, we do have the ability to pass on in food service to our good customers, these costs as they go up.

And in this particular case because it happened at the end of the quarter we didn't, have that ability.

It takes longer to recoup those extra costs.

So we are going to recoup that, majority of that, over the balance of the year.

And just lastly, can you compare maybe contrast the pricing terms that you have, with just say a street customer, just say as it related to produce versus like a big food service customer like a McDonald's and then like a retail customer like a big supermarket?

Are there differences, fundamental differences in the pricing terms?

It seems like it's easier to pass on pricing at Broadline and why wouldn't it be easier to pass it on, you know, to a McDonald's or just say a big grocery chain?

Well, the two aren't related at all the way the business is approached.

In retail we're dealing with contracts with the retailers.

We have actually contracted a price for a period of time and we impact that price and improve demand by running promotions.

Foodservice, quick service we are able to raise prices, and in fact McDonald's will let you recoup your product costs, you just can do it quickly.

You have to do it over a period of time.

You can't, I mean they will let you increase prices and Foodservice we don't have any contracts that preclude us from passing along increased raw product costs.

In distribution with produce, you know, you pass along all costs in distribution, even if you have a chain contract, you may not be able to adjust the price till the end of the week or end of the month but you pass those along eventually.

Lastly, the last "lastly."

You did, I guess lower the second quarter by 3 cents and you kind of inched up your second half by 2 cents so it seems like that perhaps you can't recoup all the costs.

I'm just wondering why you wouldn't be able to perhaps recoup all of the costs that fact you can pass it on.

Thank you.

Sure.

Mitch, as you know in our segment, only 42%, last year only 42% of Fresh-Cut sales were in the Foodservice channel.

So we are able to pass along increased costs that Michael is taking about through the Foodservice channel, but have less ability to pass along through the retail channel.

It affected the higher prices we said, we don't contract 100%, so higher price didn't just affect Foodservice.

It affected, you know, all of that 15 to 20% that we bought with all of our customers, including retail.

Thank you very much.

Okay, Thank you.

Our next question comes from Justin Thomas from Capital.

Sir, please state your question.

Good morning.

A couple questions, actually.

The first is on the difference in gross margin at Quality Foods versus rest of the business, can you give us a sense of what the difference is there?

We don't disclose gross margin by individual operating companies or segment.

We obviously disclose operating margins by segment, but not by operating company.

What we're talking about is operating margin, not gross margin.

Okay.

And how about on the private label, because you mentioned that the margins at Quality Foods you will start to lap them I guess this quarter.

But you also had an increase in private label to I think 49% versus 35%, which I'm assuming helps the margin.

Can you give us a sense for maybe is it 1% or 2% better on the private label side?

Well, those weren't the numbers exactly.

The 49% was street sales as a percentage of Broad line sales.

The 35% was our year-to-date comparison versus last year and improvement in brand sales.

That's across the entire Broad line division.

Okay.

I would venture to say the Quality Foods is not at that pace since we have been going through integration introducing brands to them versus companies have been embracing and building on our brand sales for three years now.

So quality is not at that pace.

Generally our proprietary brands deliver us between 100 and 500 basis points more top line margin than the leading national brands.

Okay.

Thank you.

Lastly, the 12 1/2% on the expense, the SG&A, is that sustainable going forward?

I know you mentioned largely came from the Fresh-Cut.

Should we expect that lower expense rate as we move through the rest of the year?

You know, I think it's difficult for us to forecast individual line items like that .

All of our guidance is related to top line and bottom line.

So that's about as specific as we could be.

Okay.

Okay.

Thanks.

Our next question comes from Dana Walker from Former Investments.

Maam, please state your question.

(Dana Walker) I will be a guy and I will state my question.

Hi there.

On the food service front, can you talk about whether these salad, premium salad releases given that you have been lamenting the absence of growth in food service in fresh cut whether this sets the stage for being a sustainable growth category for you?

I think it rolls up in to the mix.

But of our food service Fresh-Cut sales, premium salads is less than 8% projected at, for this year to be less than 8% of total food service sales in pre-cut.

If it is a factor and as more of our customers roll out salads, we'll see more in that.

The fruit is another contributing factor.

We're also working very diligently on approaching the casual theme segment of the industry which has not been a big pre-cut salad user and we think we have the product line now to attack that.

We're also approaching grocery store dailies with salad products.

So, you know, we have disclosed that before, I think last time we said we're targeting the Deli segment.

There's lots of things happening to help us ramp up the sales in good service.

You would have seen faster growth, except just to remind everybody that we, we're lapping some business that we had given up as a result of the merger, number one.

And we're also calling out some pretty low profit business at the moment.

And the combination of those two things is what kept the quarter from being even bigger sales than it otherwise would have been.

Bob, if you would expand on that thought, could you talk about where you seem to be on the culling as well as on the volume losses from the integration?

We'll start to lap some of that in the fourth quarter.

We expect to see, you know, probably some expansion in the fourth quarter of sales numbers.

But actually we're ahead of where we budgeted in Fresh-Cut for the quarter and for the year-to-date.

On another topic, one of the things --

For sales I mean.

Right.

One of the things you have been working on another topic is purchasing initiatives in Broadline that you felt that you would better be able to prosecute when you were on a common system.

Where would you say you are now in the ability to do such things?

Well, all of our companies are now on a common system with the exception of recent acquisitions and we're working on that conversion.

We have two companies rolled out on our single item code strategy, which is a key part of that, developing one code for every item across our system.

So every Broadline has the same item code, will help us compile the data.

Big part of that strategy was coming with our brand rollout strategy and we have been very aggressively pursuing that as witnessed by the 35% increase in sales.

So we are on target and we have expanded our category management staff here at headquarters and in fact I think we have one or two more slots to add this year and we have very effectively integrated procurement of seafood through our empire seafood acquisition of a couple years ago.

So we're on target and still full steam ahead.

We will begin to rollout our single item code a little more assertively in the fourth quarter and early in next year.

Michael, but I believe you have talked about a fairly large procurement margin opportunity over a three to five-year timeframe.

500 basis points we thought we could drive out of cost of goods.

Where do you suppose you are along that line of 100 basis points of gain?

If anywhere so far?

I would say we're in the low end of that game at this point in time, but it's starting to ramp up fairly quickly.

One last comment.

Back to Fresh-Cut, when you talk about promotions, are you talking about promotion that's you are offering your customers?

Or are you talking about promotion that's the McDonald's and the Subways of the world are doing to drive volume on their end?

I think, I was talking about retail promotions in the grocery store in conjunction with retailers that we're in.

You know, key part of that strategy is to drive sales is to do in-store promotions, participate in their ads and signs on the shelves and so forth.

Very well.

Thank you.

Our next question comes from Ken Zaslow with Morgan Stanley.

Please state your question.

Good morning.

Not to overdue it with margins, but if you exclude and just for clarification, if you exclude the higher lettuce and the Quality Foods, would you comment on where margins would have been?

Would they have been higher, lower or the same?

Because it seems, I excluded the lettuce cost and margins still seem to be lower.

I just didn't go back to do the Quality Foods impact.

Where would you have thought they would be?

Well, obviously without those two things margins would have been higher.

It's difficult to do a quarter to quarter comparison because we had that unusual situation in the second quarter last year where we beat the earnings projection by 5 cents due to that extreme lettuce carry-over from first quarter to second quarter.

So, you know, we would have to go back and normalize the second quarter.

But, you know, in our numbers we would have shown a nice improvement in margins and certainly without the lettuce cost or Quality Foods we would have a nice improvement.

That's good to hear.

That's what I'm trying to get at, on a like business, you're thinking margins would have been up?

Yes.

As he mentioned as we lap some of these things in the third quarter margin we expect will improve.

Great.

We believe, you know, it was a very solid quarter and operationally we made good progress in all areas.

Okay.

The second question I have is, and not to overdue on it the Fresh-Cut, if you look back from where you started to now where you are you, would you say your time line has changed marginally to the slow side, stayed exactly the same or increased?

I recall when you were going to move more to the east coast maybe quicker, but is Dole there?

If you could give a little color on that.

Are you referring to the fright test? .

The fruit.

I don't know what I said.

I think we mentioned before that we were kind off a three to five-year roll-out on the fruit and we're basically right where we thought we would be.

I mean obviously you would like it always to go a little faster than you plan for, but we're about where we planned.

Okay.

The final question is, you said that at the end of the quarter you did a promotional program.

Was that the strike while it's hot program?

How successful has that been?

Are you seeing results now?

Well, that was in Broadline and strike while the iron is hot was very successful for us both in adding new customers and further expansion with existing customers.

Was that what you were talking about?

Was that the end of June promotion that you were talking about?

Or is that separate?

That was at the end of the first quarter and we have seen that momentum carrying into the second quarter, that's contributing to the internal growth in Broadline in the second quarter.

You may be referring to the fact that maybe that McDonald's was promoting the salads and that's, they're introducing premium salads, promoting those heavily, is that what you were referring to.

I thought you mentioned there was something you did at the end of the quarter and I didn't pick up exactly what that was.

You just started something promotional at the end of the quarter --promotional at the ends of the quarter.

I was answering the Jeffrey F. Omohundro question about the internal sales growth, what was driving internal sales and this was it was that promotion at the end of the first quarter for new accounts, and account penetration, with further expansion of our own brands.

Okay.

But that is not strike while it's hot promotion?

Yes, it was.

It is, okay, that's what I want to make sure.

Strike while the iron is hot or the grill is hot, I guess.

I wanted to check up on that.

Thanks.

Thank you.

Gentlemen, there are no further questions at this time.

Mr. Gray, would you care to make any closing comments?

Sure, I want to thank you for joining us this morning as witnessed by our second quarter performance sales trends are accelerating.

We're optimistic about the balance of the year, remain comfortable with guidance given July 14.

Our growth strategies for all segments are sound.

We've talented associates in all levels of the company committed to successful execution of our strategies and we're providing the necessary resources and rewards for achieving success and providing good returns for our shareholders.

Thank you.

Ladies and Gentlemen, this concludes today's Conference.

Thank you again for your participation.