Blackstone Inc (BX) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Performance Food Group third-quarter fiscal year 2003 earnings conference call. (OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce your host, Mr. John Austin, Senior Vice President and Chief Financial Officer of Performance Food Group.

Thank you Mr. Austin, you may begin.

Thank you Diego (ph).

Good morning and welcome to the Performance Food Group conference call on Webcast to review the company's announcement earlier today of its financial results for the third quarter ending September 27, 2003.

With me this morning are Bob Sledd, our Chairman, and Michael Gray, our President and CEO.

As many of you know, Roger Boeve, our former CFO will be officially retiring at the end of this week.

Roger has had such a positive influence on PFG over the last 15 years, and also as a mentor to me.

We wish Roger much health and happiness as he enters this next phase of his life.

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

Our third-quarter earnings release was issued this morning and a copy of the information is available on our web site -- www.pfgc.com.

I will briefly address our operating highlights for the quarter and then Michael Gray will provide more insight into the quarter and provide an update on anticipated 2003 operations.

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

These statements involve risks and are based on current expectations.

Actual results may differ materially.

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

In addition, these remarks may include certain non-GAAP financial measures, as defined by SEC Regulation G. A presentation of the most directly-comparable GAAP financial measure and a reconciliation of the non-GAAP measures to those GAAP measures will also be available on our web site.

Looking at our financial highlights, net sales for the quarter registered a very strong 1.4 billion, exceeding the $1 billion mark for the sixth consecutive quarter.

This represents an increase of 19 percent from the year-ago quarter.

During the quarter, acquisitions represented 2 percent of our sales growth; and internal growth amounted to 17 percent.

All of our basis business segments contribute to this internal growth and a complete segment breakdown is included in the news release.

On a consolidated basis, inflation amounted to approximately 2.5 percent.

Our gross profit increased 14 percent from the year-ago quarter, while our gross margins decreased 62 basis points to 15.51 percent from 16.13 percent last year.

The decline in gross margin was primarily driven by the decline in gross margins in our Fresh-Cut segment, as a result of the increased production costs related to growth of our Tender Leaf (ph) salad products.

Operating expenses for the quarter were 175.6 million, or 12.65 percent of sales, which represents a decrease of 87 basis points versus the prior year.

Our operating expense ratio declined, primarily due to efficiencies in our Fresh-Cut and Broadline segments.

Operating profit for the quarter was 39.8 million, and our operating profit margin was 2.87 percent, reflecting an increase of 26 basis points. (indiscernible) over-adjusted for the (indiscernible), there was a decrease of 15 basis points.

Again, primarily related to our Fresh-Cut segment.

Interest expense and the loss on sale of accounts receivable increased slightly to 5.2 million for the quarter versus 5.1 million in the prior year, due to the additional borrowings to fund the acquisitions of both Middendorf and TPC in 2002 -- offset, in part, by favorable interest rates.

Other income increased to approximately 210,000 for the quarter versus 170,000 in the prior year quarter.

Our effective income tax rate was at 38 percent for the quarter, and we expect that rate to remain constant throughout 2003.

Net earnings for the quarter were 21.6 million, or 44 cents per diluted share, compared to 16 million, or 34 cents per diluted share in the year-ago quarter.

Again, during the third quarter of 2002, there were costs related to the ammonia leak -- approximately 4.8 million pretax, or 6 cents per diluted share.

Adjusting for the ammonia leak charges, net earnings would have been 40 cents per share.

At the end of the quarter, our balance sheet remains strong; our debt-to-capital ratio was 28 percent.

This excludes 110 million of interest and accounts receivables sold under our accounts receivable purchase facility, which is the only component of off-balance-sheet financing that we currently have.

Working capital management continued to improve; day sales outstanding in receivables were 22 days, and inventory turns amounted to 19 times, which were flat versus the second quarter, but an improvement of one day and one turn, respectively, versus the prior year quarter.

Accounts Payable float was at 133 percent, compared to 136 percent for the second quarter.

Depreciation amounted to 10.8 million, and amortization amounted to 2.1 million for the quarter.

Capital expenditures were 16.4 million; free cash flow, which we define as net income plus D&A minus CapEx, was approximately 18.1 million.

We continue to expect the following for the full year 2003 -- depreciation to be in the 40 to 45 million range; amortization to be approximately 9 million; and CapEx to be in the 95 to 105 million range.

Before I turn things over to Michael, let me review our earnings expectations for the fourth quarter and year-end.

As we announced this morning in the earnings release, we revised our earnings estimates, based on current trends in our business; the operational challenges related to our growth in Fresh-Cut; and the unknown outcome of the grocery store strike in certain parts of the U.S.

Based on this, our forecast for the fourth quarter are 40 to 45 cents, and that brings the full-year 2003 to $1.67 to $1.72 for full year 2003.

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

Welcome to everyone, and thank you for joining us.

I will briefly discuss some general trends in our business, and then give you some operational highlights and the performance our business segments.

During the quarter, our Fresh-Cut segment continued to experience the impact of higher-than-anticipated strong demand for premium salad products.

This strong demand for premium salad products from the quick service sector, coupled with strong growth in our Tender Leaf blends plus products at retail, have created increased supply chain complexities -- impacting manufacturing capacity, warehousing, and transportation.

Supply chain improvements are likely to take some time, due to the lead time associated with installing new equipment and increasing warehouse space.

The strong demand for our salad products, along with good sales gains in our distribution segments, continue to strengthen our top line, and validate our gross strategies.

Grocery stores and restaurants continue to produce real growth in sales.

Restaurant sales ramped up over 6 percent in the third quarter.

And through September, real restaurants sales are up 4.15 percent from a year earlier, according to the Food Institute.

Performance Food Group's real growth for the quarter was 14 percent, adjusted for approximately 2.5 percent inflation.

Our distribution segments produced real sales growth of 15 percent, adjusted for slightly-less than 3 percent inflation.

This was our 35th consecutive quarter of earnings gains versus the same quarter last year.

Let's now look at the highlights of our individual business segments.

In Fresh-Cut, sales for the quarter grew 13 percent, with real sales growth of 11 percent.

This is driven by the strong demand for our premium salad products.

As we mentioned earlier, the success of these products has created inefficiencies in our processing and warehousing activities, primarily due to the slower throughput rates of the Tender Leaf processing equipment, and the related physical capacity consumed by these product lines.

In anticipation of this new demand, we made improvements to six production lines earlier this year, but demand continues to outstrip capacity.

Additional capacity improvements to seven production lines, along with the acquisition of two complete Tender Leaf production lines, are in process, bringing substantial new capacity to the supply chain network -- beginning in October, 2003, and continuing into April, 2004.

The lead time associated with these new Tender Leaf is approximately 8 months.

In late September, this segment began operation of an additional warehouse location in Chicago, Illinois to support its production facilities in the Chicago area.

This new space, which took 5 months to renovate and occupy, is expected to relieve warehouse congestion in Chicago, increase productivity and improve customer service levels as it become fully operational over the next few months.

The company expects similar results in it's Moira (ph) Georgia production facility, where we are expanding our cold storage warehouse, as well.

Construction is underway and expected to be completed in April, 2004.

Despite the supply chain issues being addressed in this segment, once addressed, the emerging business fundamentals for the segment are extremely exciting.

Consumer trends towards fresh, convenient, healthier foods alternatives continue to improve.

Media awareness to healthy diet improvements is almost a daily occurrence, and supports our product offerings.

The foodservice channel, especially the QSR sector, continues to test and expand our menu offerings to provide healthier foods alternatives.

The introduction of premium salads by McDonald's has been successful, and two other customers are testing premium salad offerings.

We continue to be encouraged with the long-term prospects for the processed food category.

We continue to expand our test market with fruit now being sold in more than 1,400 locations, as we gather new insights into consumer desires and develop our chain capability.

Discussions with customers are promising in both the retail and foodservice channels, with several customers considering Fresh-Cut fruit options.

And our work with McDonald's Apple Dippers (ph) test is proceeding smoothly.

The growth of Tender Leaf and Blends Plus products is driving the value-added salad category at retail, and Fresh Express continues to be the innovator in this product line.

We are very excited by the stronger demand for our new products with higher margins, and believe the initiatives we are undertaking will produce positive results.

The Broadline division grew sales 15 percent, with internal real sales growth of 7 percent, adjusted for approximately 4 percent inflation.

Operating profit margins were 2.76 percent, up 20 basis points from the same quarter last year, with the costs associated for the ammonia leak added back.

Continuing to focus on sales to independent restaurants produced approximately 16 percent increase in street sales for the quarter.

For the year-to-date, street sales have grown to 50 percent of Broadline sales.

The addition of many qualified salespeople and our training, focused on accountability, are producing results.

The sales per delivery are up 6 percent for the year.

We have continued to roll out our high-quality proprietary brands with success.

Our branding philosophy is not about private-label products, but rather producing high-quality products under brand names that will be recognized by the operator as best in their and a value.

This year, we have successfully launched Heritage Ovens baked goods;

Bay Winds value-added seafood; and Sonero and Roasters Exchange coffee, to name a few.

This strategy continues to produce strong sales growth in proprietary brand sales, and year-to-date, proprietary brands are 24 percent of street sales -- up from 20 percent at the end of last year.

We are progressing with the integration of the 3 acquisitions made last year.

We have now (indiscernible) all three, and many of our associates have worked very hard to transition them into our system.

The customized distribution division had another strong quarter, with sales up 30 percent, with approximately 1 percent inflation.

Operating profit was up 31 percent.

The strong sales are a results of the new business added in the fourth quarter of last year and the first half of this year, and continued solid growth with our existing customers.

We are currently focused on improving productivity and service, and adding capacity for future growth.

We're just completing a project that doubled the size of our Elkton (ph), Maryland facility.

Our Board of Directors has approved a project to build a new facility in the Midwest.

We will begin construction in the fourth quarter.

The building will be 219,000 square feet, and is expected to be completed late in the third quarter of next year.

This center will service existing customers now being serviced from our Lebanon, Tennessee facility.

This will help balance our capacity and enable us to add new business.

We are now ready to take questions.

(OPERATOR INSTRUCTIONS).

John Heinbockel, Goldman Sachs.

This is Simeon Govan (ph) on behalf of John.

First of all -- in terms of the reduction of your 4Q your guidance, can you break it down, perhaps, into what the inefficiencies from Tender Leaf will be?

And, perhaps, what you are building in for the grocery strike?

It is difficult, Simeon, to really nail each of those.

However, the strike -- a lot of uncertainty on what the duration will be.

That could be as much as a couple of cents a share.

So, I think the relative range would be in that range.

Okay (multiple speakers)

The balance of that, then, would be the Tender Leaf.

The primary balance of that would be the Tender Leaf -- that's right.

Okay.

And it sounds like there will be some residual impact into early '04 from the Tender Leaf?

Right.

We have not come out with any '04 guidance (technical difficulty) But maybe in the first quarter until we get probably -- at least one more of these lines up, there probably will be some impact. (multiple speakers)

That's right.

Some of the facility infrastructure additions, as well as the new lines we are putting in, will probably go into early '04.

Okay.

And secondly, in terms of inflation, what impact is the rate of it having on your margins and expenses within Broadline?

It has not had a major impact to this point.

But, we are starting to see a little bit of pressure from higher beef prices and dairy products.

And we think we will continue to have a little bit of margin pressure in the fourth quarter.

But, beef in Broadline represents about 7 percent of sales.

So, we hope we will offset that with sales of other parts.

And I guess from the leverage side -- I mean, that higher cost of beef has already helped a little bit in that -- in terms of getting through from the margins side?

We are not seeing that at this point.

We think in the quarter it had a little bit of dilutive effect in the third quarter -- not a tremendous amount; not enough to really move the needle, but it did have a little dilutive effect.

Okay, and finally, within Broadline, is there any way you could speak to, at least, your market share with your A and B customers?

Where does that stand?

Well, I can only approximate, but we anticipate with our A customers, we generally would have about 60 to 70 percent of the business.

And these would probably be in the 40 to 50 percent range.

We do continue to be very, very positive that there is lots of ample opportunity for us to continue to penetrate our existing A and B customers, and continue to add new A and B customers.

And I guess in the third quarter -- how much of that internal growth was due to selling more products within the As and Bs versus the lower categories -- or even picking-ups in new business?

No, I don't have a number to give me that.

We have continued to focus on penetration of A and B customers and selling less to C customers, which would be our less-profitable customers.

And, it is pretty much a basic distribution strategy to penetrate where your best customers are.

So, I would say the majority of that growth came from new customers and from A and B customers.

Thanks.

Jack Murphy, First Boston.

I just wanted to talk a little bit more about the Fresh-Cut business.

Could you give us a sense of -- before you began the quarter, what type of growth you thought you would get in sales in Fresh-Cut versus what you actually they got?

We exceeded our expectations probably by a fairly-significant amount.

And let me kind of go through the whole Fresh-Cut area with you.

If I can just take a minute -- is that we've gone through quite a bit in Fresh-Cut.

We tripled the size of the business in late 2001. (indiscernible) and even with that, we exceeded our profit expectations for last year in Fresh-Cut.

Then, over the last 18 months we probably had more volatile growing conditions than we had in the previous 10 years combined.

But even with that, we have exceeded expectations last year; we would have met expectations this year, except for these your Tender Leaf products.

And they have just taken off much faster than we did expect.

And I kind of need to take a minute just to kind of get into that -- is that now about half of our sales growth is actually coming from Tender Leaf products.

And this includes the spinach and the (indiscernible) spinach items, the Spring Mixed (ph) blends -- and we did not introduce those until the end of Q1.

The Blends Plus products, which is those same items plus walnuts, cranberries, and Parmesan, was not even introduced until August.

And, finally, the Foodservice premium salads -- you know, those were not introduced until April and May, and started to be promoted during that period of time.

So, really within the last 6 months, we really have just been starting to introduce these items.

And they have just really taken off much more than we could have foreseen.

I can give you an overview of kind of how we -- as we added lines and so forth, but -- .

So, I guess, there was both a mix issue in the sense that you sold a lot more of these newly-introduce products, as well as just kind of an overall greater volume that you thought you would get in the Fresh-Cut business as a whole?

Is that fair?

Yes.

Let me just talk about our production, because I think that is kind of a critical issue.

Our first Tender Leaf line was not even -- did not even come onboard until January of this year.

And that was in Salinas.

And that line is now running very efficiently.

Our second, third, and fourth installations took place in April through September.

And, we've got two now in Atlanta and one in Chicago.

And we just simply don't have those lines running as efficiently yet, as we need them to run.

So, the production costs are higher, because the throughput is lower.

And we're taking care of the customers, which we think is critical.

But, it is also causing us to ship products -- because certain plants are not able to meet expectations or customer demands, at this point in time, we're having to ship products between plants, also, to meet customer demands.

And that is adding significantly to our freight costs.

So, as Michael has alluded to, the initiatives we're taking are helping.

We are confident that we will get these lines running as efficiently as our West Coast line.

But, you've got to keep in mind, again, that all of this just started within the last six months;

I mean, it is just -- we had no way of knowing that these products were going to take off the way the did.

And our lead time for these lines is a 6 to 8 months.

So, if you take that into consideration, we just -- again, we had no way of knowing.

And I think our folks have done a good job of working through these production problems.

But, we are still not where we need to be, and do not expect to be until probably the end of the year.

And, then we still are going to have some capacity issues until these new lines come onboard.

So, that is kind of where we are.

If you've got to have a problem, I guess that is a good one to have.

Right.

Just two more kind of quick questions that are related.

One is do you believe that there were sales that were left on the table because of the capacity constraints?

And secondly, because the volumes seem to be higher than what you had expected, when the capacity is in place, is there any reason to believe that we would not actually be looking at a higher base of earnings as opposed to the cuts that we saw here in the back half of the year?

You are talking about for next year?

Yes, just generally speaking -- I know you are not giving guidance.

Right. (laughter) -- We are optimistic that our sales will continue to expand on these product categories.

I mean, obviously, as we improve efficiencies in productivity and throughputs, profitability should definitely improve.

But, we're just not prepared right now to really address that in any detail for next year.

I mean, we are very optimistic, obviously, or we would not be -- I mean, this is our bread and butter.

These kind of products are where we make our better margins.

And so we do not feel like we have sacrificed any sales.

In fact, we could have sacrificed sales and improved earnings.

But, we chose to take care of the customers, meet demand, and sacrifice some short-term earnings in order to do that.

Okay.

Thanks.

Mark Husson, Merrill Lynch.

Can you talk about the competitive environment in the Fresh-Cut environment?

You obviously have got a huge increase in demand.

What have your competitors been able to do to satisfy that demand?

Are they on the same boat as you right now?

Right now, our competitors are not doing Tender Leaf products; they do not have these Tender Leaf lines.

We are the only ones out there with the Tender Leaf lines.

So, we do not have competition in this area.

I should not say -- I mean, they make bled products and all these different things, but there's some definite advantages to the way these lines handle the product.

They do not bruise the products, so the product looks a lot better, holds up a lot better, and that's why it is selling faster.

We do not have any competition.

That is not to say our competition won't come in and buy some of these lines.

But again, it is a 6- to 8-month lead time.

So I believe that we will not have competition in this category for probably most of next year.

Using your definition of what Tender Leaf is, what percentage of, say, the McDonald's business is Tender Leaf versus a regular blend?

We're doing all their new premium salads on our Tender Leaf lines.

Which, again, we chose to do that.

They wanted us to do that because it improves the quality of the product.

But they do some of their premium salads with other vendors on regular high-speed lines?

Yes, they do.

But, clearly, if they had their druthers -- presumably, it is a better presentation.

They would rather do it with you, using your lines?

If you have the capacity to do it?

You know, I really do not feel comfortable addressing that.

But, they are very happy with the quality of the products that we are producing for them.

That would be a good question to ask them. (laughter)

Guys, I'll switch gears -- on to the customized business.

Could you just go through some of the contract wins?

You've seen a sort of steady acceleration in the customize business.

You've had great sales growth there for some time.

Can you talk about what most recently has driven the increase in sales growth there?

And, is that unsustainable?

Well, it is the result of the additional TGI Friday's and Ruby Tuesday's business that we brought on in the fourth quarter of last year.

And then, Mimi's (ph) Cafe during the end of the quarter into the first quarter.

And then, in second quarter, we rolled out an additional group of Ruby Tuesday's.

So, that is what is driving the growth at this point in time.

We had capacity constraints, which we began addressing through that Elkton facility expansion, and now with the Midwest facility.

And we have continued to talk to additional customers.

But, we have not really had the capacity to bring anybody onboard.

We will lap (ph) that business in the second quarter of next year.

And, we are very hopeful that we will be able to announce the addition of an additional new customer sometime between now and then.

But 4Q and 1Q -- you are still running all these businesses; not really lapping much until you get halfway through 1Q -- or a little bit of 4Q and then halfway through 1Q.

We will lap the majority of TGI Friday's in the fourth quarter.

Okay.

And then, finally, on the U.S.

Foodservice business -- we have found out some numbers recently from U.S.

Foodservice in terms of margins.

It looks like their margins are even worse than we thought, currently.

You have hired a bunch of people from them.

At what stage do those salespeople get back into their original accounts? (indiscernible) And when can you get going?

Well, some are already are.

A typical contract is one year.

And we have been hiring people for probably two years.

So, it is all in various stages; it's not going to hit at one particular period of time.

But, we believe that a lot of that is what is reflecting in our strong street sales growth -- 15 percent.

So do you think -- is the U.S.

Foodservice business still a marketshare donor, as far as you are concerned?

Well, you know what I would like to say.

But, (multiple speakers) I think that they still have some issues.

I believe that when they get a management team in place permanently that they will become a much more rational competitor.

And, we are going to continue to be very optimistic about our ability to grow our sales. (multiple speakers)

(technical difficulty)

Pardon me?

Hiring those salespeople has worked? (technical difficulty)

You are breaking up -- I can't really understand the question -- I'm sorry.

So, hiring those salespeople has worked?

(technical difficulty) I think is what he said.

Mark, I'm sorry, you are breaking up a bunch.

Hiring those salespeople has worked?

Hiring the salespeople has worked -- is that your question?

Yes.

Yes, it has worked. (laughter)

Good. (laughter) Thank you very much.

You your still breaking up, Mark.

Mitch Speiser, Lehman Brothers.

A few questions -- first, on the Tender Leaf.

And forgive me, but that is like the first time I have kind of heard this term Tender Leaf.

Is it actually -- is it a lettuce product?

Or is a type of production line?

And, is that the problem -- that there's not enough Tender Leaf production versus other forms of production?

Your question is -- is the issue -- I'm sorry, we are having some communication problems.

Did you hear --

I think so -- Mitch, let me try to paraphrase what your question was.

And correct me if I don't get this right.

It sounds like you have not heard the word Tender Leaf, or that product description before.

And so, could we give you a little color on what type of product that is?

And maybe address some of the productivity issues and production issues related to Tender Leaf versus our more-traditional lettuce lines?

Is that correct?

Yes.

And just -- is Tender Leaf a type of production line or a type of lettuce product?

Oh, no -- yes.

Well, it is both.

We use the products that I mentioned to you before, which would include -- I mean, you can run these products on a regular high-speed line.

The problem is that these particular products are a little more sensitive than iceberg lettuce.

And so, these products bruise more easily.

So, the products that we are producing just do much better -- any spinach products for example, other types of Romanian, and all these other different types of products -- (multiple speakers)

The soft lettuces -- (multiple speakers)

The soft lettuces just run better and don't bruise on these Tender Leaf lines.

It is just a -- it is an actual production line.

So, the answer to your question is -- both; that it is the products -- certain types of products run better on these particular types of lines.

And these are now -- we have four of these lines in place.

As I said, one came in January, the others have come in, I guess --

Later in the second quarter -- second and third quarter through September.

And so, it has just taken -- the first line we put in, in Salinas in January is running the throughput rates, and they are very acceptable.

We have just got to get these other lines running much more -- with efficiency much higher.

We've got a couple of -- you know, like (indiscernible).

I mean, we are still experimenting with some of those things and getting some of those things just tweaked and fine-tuned.

And we just are feeling like it is going to take a few more months to do that.

Plus, anticipating continued growth in that area, we are going to need these other couple of lines to help us kind of meet customer demands.

And the results of that issue right now -- also is compounded by the fact that, because of customer demand and because we're not able to make all the products we need in certain plants, we are actually having to shift between plants to meet customer demands.

So our freight costs are also higher.

And a salute to our people -- to show you that they are not asleep at the switch -- to bring this line on in Salinas in January, it had to be ordered in the early part of last year.

So our people saw that the demand was going to be there for these premium soft lettuces.

And got this line -- and they searched this technology out and got this line in place a long time ago.

And a salute to them.

We have a competitive advantage because we do have this technology and can produce this wonderful product.

But, that has caused us the problem.

As demand has grown for premium salads -- and our product is so superior in quality that our demand has just really outstripped our ability to produce it.

So, it is a horrible problem to have, I guess -- being facetious.

I would love to have problems associated with too-strong a demand for your product.

Now, how many non-Tender Leaf lines do you have?

And can you convert a non-Tender Leaf line into a Tender Leaf production line?

No.

Those other lines are high-speed lettuce lines.

I mean, we have a bunch of those lines.

And those are more-than-meeting capacity.

We took spinach, for example, off a high-speed line and put it on -- mature spinach off of a high-speed line and put it on a Tender Leaf line.

And the differences -- you're not going to notice the difference day one.

If you picked up a product from a high-speed or Tender Leaf line, you don't notice the difference day one.

What you do notice is day 8, because you start to notice some problems with the product after day 8.

These particular type of products -- if it's done on a high-speed line versus -- and then, on a Tender Leaf line, though, the product looks perfect -- You know, much, much longer because there is no bruising of the product.

Great.

If I could move along.

You mentioned on your second-quarter conference call that you were going to recoup some of the costs from the second-quarter lettuce, spike.

And I would just like to know how that did, in fact, progress.

Were you able to recoup all the costs?

Some of the costs?

Or, just in line with your expectations, were you able to recoup these cost?

We recouped some of them.

And that is why we think the third quarter -- we gave you a little -- I think we missed this quarter by 2 cents.

The third quarter, we've got a little more range in there.

And that is because we did recoup a little bit of it in the third quarter.

And we are not going to recoup that in the fourth.

Okay.

We're not going to have that issue.

I mean, we're not going to have that issue in the fourth.

Okay.

And just on actual lettuce costs -- are you finding that there is enough pure lettuce capacity at this point?

Have you been -- have you had to go to the spot market?

Are you able to forecast actual -- or is there enough pure, raw product out there, you know, versus your internal capacity constraints?

I mean, our -- we have upped our crop.

We, at this point in time, have a pretty good handle on the forecasting of the growth trends in this area.

So we have upped our requirements for our products -- our growing of our products.

So, I think we are in pretty good shape.

I mean, you know, sometimes we always -- we may have to go to the spot market from time to time, but we think that is going to be fairly minimal.

And lastly, I believe there is an extra week in the fourth quarter versus a year ago.

And I was wondering if you could quantify that in terms of earnings per share?

And of course -- I know you're not talking about '04 guidance, but if you could just quantify what the earnings contribution would be from that extra week here in the fourth quarter?

Mitch, no, it is not something we quantified.

Obviously, it is built into our numbers.

But, it is very difficult to forecast or attribute particular sales, and then ultimately those earnings per share on those sales, to specific days or specific weeks of the quarter.

So, obviously, our total sales volume anticipates that 53rd week.

But, at this point I cannot break out for you the specific earnings per share (inaudible).

Just in terms of the '04 outlook, I would take it that you would have to -- you know, off of a 53-week base in '03, your 2004 outlook, I would assume, would be somewhat affected on the earnings line.

Is that not true?

Again, it's difficult to give you any '04 guidance, because we're still in the midst of that planning process.

So, as soon as we complete that, we will give you our views on '04.

Obviously, sales volume -- it has one less week in it, so I would anticipate there would be some impact of that.

But, I cannot give you any '04 guidance at this point.

And the last question -- just on Fresh-Cut fruit -- I believe it was a $10 million or so operating loss you were expecting for full-year '03.

Just wondering if that is on-track.

And I guess, maybe, the grocery strike might be affecting that.

Just wondering if you are still comfortable with that $10 million operating loss target for fruit in '03?

We have managed to achieve that goal.

I'm just kidding.

Yeah, we are.

And we are that that -- I mean, we think we'll be right at about that.

We are tracking our objectives.

And I think our previous guidance was that we would be near our breakeven run rate by year-end.

And, we are in that ballpark.

Obviously, we have also talked over the last quarter or so about the fact that we are tweaking some of those production lines and trying to get volume going and things like that.

So, as it relates to '04's impact, we cannot really give you guidance there.

But, we are comfortable with the fact that we are tracking near the guidance we gave you.

We revamped -- I think, talked about revamping the product line a little bit and the product offerings -- I mean, we are pleased with the progress in the area.

So --

Thank you.

Andy Wolf, BB&T capital.

Bob, in the Salinas line, has that reached your pro forma?

And how long did that take to work the kinks out and get the production up to speed?

Well, we had from January -- you know, we ran some tests and different things.

I don't know exactly how long it took.

I just, you know -- as we talked to them -- it was several months before we got the lines running as efficiently as we could.

So, what we are doing now is taking the best practice in Salinas and working with the other facilities to get them using those same best practices.

And we're just sure exactly how long that is going to take.

Hopefully that training process and so forth will be sooner rather than later.

But again, we have -- you know, the volumes ramped up so quickly, it is just hard to say exactly how long we will have that same success in the other locations.

Is it more an issue of learning how to work with the equipment?

Hopefully it is not the equipment itself.

Or is it just getting the numbers -- enough throughput in there?

Well its working with both the products -- because these are some new products that they have not dealt with -- and also the equipment.

You know, we developed a whole bunch of new products as we mentioned before -- I think I went through the list a couple times already.

And so it is a combination of working with these new products, learning how to do these, and working with them in conjunction with the equipment.

When we got the equipment in the plant, obviously, our people started tweaking it.

And, you know, the bottleneck exists at the end of the line -- getting stuff in the bags.

So, we have done a lot of work at the end of the line with the tubes and the baggers and being able to put more products through that line.

So, we have made a lot of improvements to it in Salinas during the last year.

That is good to hear.

So you're not shredding up lettuce or any of that stuff?

Or, it's not -- at the end of the line, it sounds like pretty -- much B&E (ph) to your engineering task to fix?

Is that the right assumption?

Right.

We are confident that we are going to get there.

I mean, we are very confident we will get there.

It is just a matter of exactly when.

And hopefully, that will be accomplished by the end of the year.

And then, again -- you know, with the growth, however, we're still going to need at least one of these new lines on board before we get exactly where we want to be.

So we do think there will continue to be a slight impact in the first quarter of next year.

You know, they have talked to us about several additional ideas that they have in the middle of the line, too, that can make significant improvements into the throughputs.

So, our guys are really focused on this issue and have lots of good ideas in place.

It is just going to take a while to get them all working.

And right now, just to get back to another, sort of, basic question here -- you've got four lines that you're going to have -- you know, in various stages, sort of being brought up.

And, it sounds like you're adding 2 more.

Is that --?

One more beyond that. (multiple speakers)

No, one more in first quarter and one in second.

Okay.

Okay.

I just wanted to -- on the Broadline side of the business -- this was asked before, but I just wasn't sure I understood exactly the answer.

Are you passing through most of the inflation?

You know, there's been a rapid increase -- Sysco said they couldn't pass it all through, so there was some gross margin impact.

That is number one.

And the other thing is -- Sysco also said that travel-related business -- end really just their independents -- business engineer independents -- that was finally starting to pick up.

Can you just, sort of, comment on your experience with sales into the independents?

And if you could pass through inflation yet.

How long do you think that might take?

We do not have a huge difficulty in passing along inflation in Broadline.

We do have some customers that are on monthly programs, weekly programs where you cannot pass it along until a specified period of time.

But generally, we pass it along fairly quickly.

And I believe, if I'm not mistaken, Sysco has made some comments, too, that they have passed along the majority of their inflation.

And I believe at this point we have probably passed along better than 90 percent of the inflation.

We are seeing strong demand.

And our ability to grow sales to independents by 15 percent, I think, is good verification that independent restaurant sales are strong and healthy.

As far as travel -- travel and leisure is less than 1 percent of our sales.

So, we have not experienced a big setback during the past couple of years because of that.

And it would not have a big impact on us if that picks back up.

Thank you.

Eric Larson, Piper Jaffray.

My first question is -- lettuce pricing.

We saw boxed lettuce -- lettuce prices spike in September to very similar levels -- I think it's up to as much as $28 a box -- to what we saw in June.

Yet, it does not seem like that was a negative, or an issue in this quarter.

What is the difference between the June spike and the September spike in lettuce pricing?

Well, I mean, as far as the -- it did have an impact last quarter; it did have been impact -- I mean, raw products did have an impact this quarter, but it wasn't -- it would have been still -- we would have achieved our goals in the quarter if it had not been for the -- if it had not been for the Tender Leaf operational issues.

What we do is we manage on the shelf, our promotions.

And we manage customer demand.

And when product is at a lower price, what we do at retail is -- we do not promote as much as we did before.

And that is how we have managed the volatility and the demand with the customers.

And that has helped us quite a bit.

And so we have been able to work that.

One other point, Eric, is -- the percentage of produce that we contract for at different times of the year -- if you remember back in June -- we talked about that -- it has historically been a very stable product month.

And we were contracted for less than our expected need, which is -- in the past, that has worked very well for us.

You know, you get later in the year and during some of the transition periods, like in the third quarter and the fourth quarter -- we contract for a greater percentage of those expected needs. (multiple speakers) That's probably why you don't see it as well.

We were close to 100 percent contracted.

Where, earlier in the year, because of the growth of the premium salad and so forth, which had not been anticipated at that point in time -- we were contracted, if you remember, for a much less percentage.

Okay.

That's fair.

I mean, simply the June quarter, you got surprised more?

That's really what happened on supply --?

And it hit right at the last two weeks of the quarter where we could not pass it along.

All right.

Fair enough.

My next question is -- is something that is more of a longer-term concern.

It is pretty common knowledge in the food industry that when you get McDonald's as a customer, they add extreme complexity, not only to your manufacturing logistics side of the business, but -- and they are very good at doing that with their vendors.

But then, in many cases, they are not willing to pay for it.

They really push on margins and price on their vendors.

My question is, assuming that your manufacturing is all running efficiently, etc., and McDonald's becomes a bigger piece of this pie, can we still except to see margin advancement in your Fresh-Cut business?

We've had McDonald's since the inception of the company in 1987.

And our experience with McDonald's has been a very positive experience.

We see them as a customer with extreme integrity.

We see them as a customer that wants their vendors to be profitable and show a return on their capital investments, so they can continue to be partners.

And, we have continued to grow our share with McDonald's.

So, I don't know what more I can tell you.

We are very good business partners and we help them solve issues in their business with products.

And, they have been a good partner for us.

Okay.

Thanks.

And just one follow-up.

Given the capacity issue that you have, which is -- frankly, it is a very high-class problem.

Would you expect -- and I know you're not giving guidance on '04 -- but, is it -- just from a general point of view, do you think that your earnings growth rate will trail your revenue growth rate by a modest amount next year?

It is difficult, Eric, to respond to -- I think what you are trying to get at -- I mean, we do you think that some of these capacity- and productivity-related issues -- you know, we will be working and are working very hard, as we speak, and it will have an impact in the fourth quarter, probably into the first quarter.

So, how that all plays out when we roll up our plans is difficult for me to respond to.

So, probably defer that until we come out with '04 guidance.

Our goal, historically, has been to increase operating margins in Fresh-Cut each year.

And, obviously, we are going to be working diligently to do that next year. (multiple speakers) operating margin percentages.

All right.

Thank you very much.

Bob Cummins, Shields & Company.

I just wanted to switch gears here and sort of discuss your strategies in Broadline.

If I'm not mistaken, your last acquisition in Broadline was more than a year ago, now.

I may have missed one since then.

But, number one, how are the acquisitions from last year progressing?

Are you satisfied with the way things are going there?

You have been able to improve profitability, etc.

And, beyond that, with all the things on your plate, currently, have you reduced your strategic emphasis on building the structure of your Broadline operations, in terms of geographic expansion, in particular?

Well, you are right.

We have not made an acquisition in over a year.

Last year we brought in 750 million in additional sales.

And our target has been 2 to 300 million per year.

So, in effect, we brought on two years worth last year.

In addition to being three companies, Quality Foods had three distribution centers.

So, that is like integrating five companies.

And, we are satisfied with the integration process and the progress that we have made with those companies.

We have looked at acquisitions during the past 12 months, but frankly, there have been no acquisitions that met our criteria.

We do not want companies that are extremely focused on a product niche, at this point in time.

We want good, profitable, Broadliners and contiguous geography, where the management team wants to stay in place.

And we don't want fixer-uppers.

And we want them to be accretive to earnings in the first year.

So, nothing has really come down the pipe that has met our objectives, but we're still very much in the market.

We've got the powder to do it and we look at every opportunity that comes along.

Okay.

Do you think it's possible, with the new management at U.S.

Foodservice, that they might be divesting some operations?

I cannot answer that.

I don't know.

Okay.

Thank you.

Ken Zaslow, Morgan Stanley.

Can you comment on the deceleration in the margin expansion for the customized business?

It seems like margins only crept up modestly, and before we had a lot more margin expansion.

Sure, Ken.

You know, the guidance we put out there is that on an average annual basis our longer-term view is that we would grow operating margins 5 to 10 basis points per year.

Granted, the third quarter was, I think, one basis point.

But, year-to-date, it is up pretty handsomely, and certainly within that guidance.

So, I would not -- the guidance we have given is not -- you know, every quarter -- every quarter you will see that 5 to 10 basis points.

But on average, over the, kind of, five-year time horizon, on an annual basis, you'll see that kind of growth.

So you're saying nothing has fundamentally changed in the quarter?

It just seems like a rather sharp decline in the acceleration.

That is correct; nothing fundamental has changed there.

The second I have is -- can you comment on the competitive environment in the Fresh-Cut fruit, given that -- I mean, Dole is coming in the East Coast, Chiquita is coming in the Midwest, and you guys are obviously on the West Coast.

How does that all play into it?

And how do you set your competitors' (indiscernible)?

We anticipated that they would come into the party, probably sooner rather than later.

So, they have not disappointed us.

So, that really did not surprises.

I mean, we go head-to-head with them now, as it is, on -- or at least with Dole and several other competitors on the salad market.

And we think we are ahead of them in terms of what we have learned in the Fresh-Cut fruit market.

So we don't -- I mean, we'll just play that as we go.

Neither one of them have a plant up and running.

And we have a one-year history with a plant, so we have a lot of learnings, we have a lot of technology.

And quite frankly, fruit is a huge category.

So, the more people, the merrier.

The real challenge there is consumer acceptance and consumer awareness and learning that they can buy a good pre-cut product.

The product, quite frankly, that has been on the market, done in the back rooms of grocery stores and local cut shops, has not done the product category any favors.

And the sooner we get good, viable products out there from responsible competitors, the faster the category is going to grow and be better for all of us.

Great.

Thanks.

Mitch Speiser, Lehman Brothers.

When do you think you will be providing 2004 guidance?

Will that be on the fourth-quarter conference call or earlier?

We think we will be in a position to do that earlier, Mitch.

As Michael had mentioned earlier, we are in the process of rolling up each of our individual operating company plans, and going through those plan reviews.

During the course of November, we will be consolidating those and evaluating those plans.

So, I would say mid-December is probably a reasonable expectation.

We will work, obviously, as hard as we can, and if we can provide guidance earlier than that, we will.

But, I think that is probably a reasonable expectation.

okay.

And, also, separately -- there had been some account losses in the Fresh-Cut segment.

I was wondering if you anticipate any more of those, going forward?

And, when will we lap some of those larger account losses?

Is that here in the fourth quarter?

Are you talking about in retail or what?

Because we -- (multiple speakers)

Food service, maybe?

I mean, we gain and lose customers kind of constantly; it is kind of an ongoing battle.

So, it is not that we are really -- I mean, we are not really concerned at this point about -- at retail losing it.

In terms of lapping them, we have lapped most of them.

I think we will lap them if Foodservice -- the ones that we talked about as a result of the Fresh-Cut, I think we will probably lap those in the third quarter.

So, you know -- there aren't huge numbers, but there have been some small things that we have lapped.

But, again, at retail, it is kind of -- you know, we gain and lose small customers kind of on an ongoing basis.

So far, we've had more pick-ups than losses.

And that is just kind of historic.

And at retail -- you know, we have widened the gap in our marketshare against our number twos.

And we are right at 40 percent marketshare now in grocery stores.

And I think the lost customers we have talked about have been in the foodservices sector, due to us being in the distribution business.

Yes, that is what I meant.

And it seems like you will be lapping most of those you; or you have lapped most of those in the third quarter.

That is true.

Yes.

Okay.

Great.

And the last question -- just on doing Fresh-Cut lettuce to your customized accounts.

I know that has been a longer-term strategy.

Has there been any development there?

Have the casual dining operators embraced this Fresh-Cut lettuce opportunity just yet at all?

We have one customer that really embraces the opportunity.

And we are working diligently with that customer.

And we really cannot disclose what any of the customers are doing in their kitchen, with regard to their process -- whether they are using pre-cuts or fresh, but we are focusing on that, and we do believe that we will make progress; it is just a long-term sale.

Thank you.

Gentlemen, there are no further questions at this time.

Okay.

It's never easy to announce higher-than-anticipated operating cost, but I do feel good when they are driven by higher-than-expected demand for our new products.

Our primary business distribution remained solid and demonstrated good sales growth.

Our company is fundamentally sound, and I believe the steps we're taking in Fresh-Cut will produce benefits, and the investment in this new equipment will improve throughput and result in higher-quality products.

In the long-term, solid growth in higher-margin premium salads will also have a positive impact.

I hope that you were pleased with our strong sales growth, and share in our confidence that we are managing through these production warehousing issues effectively.

Our growth strategies are sound, and we are confident in our associates' ability to execute.

Thank you for joining us.

This concludes today's teleconference.

Thank you all for your participation.

All parties may now disconnect now.