Blackstone Inc (BX) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Performance Food Group fourth-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, Donna (ph).

Good morning, and welcome to the Performance Food Group conference call and webcast to review the company's announcement earlier today of its financial results for the fourth quarter ending January 3rd, 2004.

I'm joined this morning by Bob Sledd, our Chairman, and Michael Gray, our President and CEO.

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

As many of you may recall, we reviewed preliminary expected fourth-quarter results with you on January 2nd.

This call is also intended to review anticipated results for the full year of 2004.

Our fourth-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 fiscal year ended 2003, and discuss certain expectations for 2004.

Before we start, let me say that 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 (indiscernible) current expectations.

Actual results may differ materially.

These risks are more fully described in our press release and our 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 measures and a reconciliation of the non-GAAP measures to those GAAP measures will also be available on our web site.

In looking at our financial highlights, net sales for the quarter registered a very strong 1.5 billion, exceeding the 1 billion mark for the seventh consecutive quarter.

This represents an increase of 24 percent from the year-ago quarter.

Sales for the year were 5.5 billion, which are also up 24 percent versus the prior year.

As you may recall, 2003 included a 53rd week in our fiscal year.

The extra week added approximately 8 percent and 2 percent to our sales growth for the quarter and year, respectively.

Each of our business segments contributed to this internal growth, and complete segment breakdown is included in the news release.

On a consolidated basis, inflation amounted to approximately 5 percent for the quarter, and 2 percent for the year.

Our gross profit decreased 14 percent from a year ago, while our gross profit margins decreased 132 basis points to 15 percent, from 16.3 percent last year.

The decline in gross margin was driven by a number of factors in each of our business segments, including increased raw product costs, net of price increases to customers, production inefficiencies, and production inefficiencies in our processing network in Fresh-Cut segment.

Gross margins were also negatively impacted by the significant amount of product inflation and the devaluation of meat inventories in our Broadline segment.

Gross profit for the year increased 19 percent, while gross profit margin declined 76 basis points.

Operating expenses for the quarter were 200.1 million, or 13.3 percent of sales, which represents a decrease of 19 basis points versus the prior-year quarter.

For the year, operating expenses were 715.8 million, or 13 percent of sales, which represents a decrease of 44 basis points.

For the quarter, our operating expense ratio decreased in our Broadline segment, offset, in part, by increases in our Customized and Fresh-Cut divisions.

The operating expense ratio decreased due to improvements in operational efficiencies, offset in part due to increased estimated self-insurance costs for both workman's' compensation and auto liability.

Operating profit for the quarter was 24.8 million.

Our operating profit margin was 1.7 percent, reflecting a decrease of 113 basis points for the quarter.

For the year, operating profit was 138.7 (ph) million, or 2.5 percent, an increase of 32 basis points.

Interest expense in the loss on sale of accounts receivable decreased slightly to 5.2 (technical difficulty) for the quarter, versus 5.8 million in the prior year, as a result of both favorable interest rates and reduced (indiscernible) levels.

Interest expense in loss on sale (technical difficulty) for the year amounted to 20.9 million, compared to 20.6 million for the prior year.

Other income decreased to approximately 209 million for the quarter, versus (indiscernible).

I'm sorry, 209,000 versus 240,000 for the prior year.

For the year, other income amounted to 1.8 million, compared to 1.3 million in the prior year.

Our effective tax rate was 38 percent for the quarter.

We expect that tax rate to continue through 2004.

Earnings for the quarter were 12.2 million, or 26 cents (ph) per diluted share, compared to 17.5 million, or 37 cents per diluted share, for the year-ago quarter.

Net earnings for the full year were 74.2 million, or $1.54, compared to 66.5 million, or $1.42 in the prior year.

At the end of the quarter, our balance sheet remained healthy.

Our debt-to-capital ratio was 31 percent.

This excludes 110 million of exposure under our accounts receivable purchase facility.

Working capital management continues to be strong.

Day sales outstanding in receivables were 24 days, which remained flat versus the prior-year quarter.

And inventory turns amounted to 19 turns, which was an improvement of two turns versus the prior-year quarter.

Accounts payable was 123 percent, compared to 130 percent in the prior-year quarter.

Depreciation amounted to 42.9 million, and amortization amounted to 8.3 million for the year.

Capital expenditures were 112.8 million for 2003.

This increase was driven by increasing our production infrastructure, especially in our Fresh-Cut area, and investments in certain Broadline operating facilities.

Other free cash flow -- I'm sorry -- free cash flow for the year was approximately 12.6 million.

Looking at 2004, we expect the following -- depreciation to be approximately 50 to 55 million; amortization to be approximately 9 to 10 million; and capital expenditures in the 120 to 140 million range.

Before I turn things over to Michael, let me review our earnings expectation for 2004 on an annual and quarter-by-quarter basis.

Our forecasted range for full-year earnings in 2004 are $1.62 to $1.72 per share.

We anticipate earnings ranges of 13 to 16 cents for the first quarter; 50 to 54 cents for the second quarter; 52 to 56 cents for the third quarter; and 42 to 46 cents for the fourth quarter.

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

Welcome everyone, and thank you for joining us.

While we are disappointed with our results for the fourth quarter, we did produce a very solid year of sales growth. 2003 is the ninth consecutive year in which net sales and net earnings have increased, compared with the prior year.

We are very focused on the issue that impacted us in 2003 and the fourth quarter, and remain confident that our strategies are sound.

Now, let's review highlights of the operating divisions.

Fresh-Cut sales grew 20 percent during the quarter.

Inflation was 7 percent, resulting in 13 percent internal growth.

For the entire year, sales grew 12 percent, with 1 percent inflation in the Fresh-Cut division, with the majority of the growth resulting from increased sales of higher value-added product offerings.

We continue to see strong demand for Fresh-Cut products in both the foodservice and retail channels, especially in the Tender Leaf product category.

The Tender Leaf product category is the fastest-growing product line in the value-added salad category at retail, with our Fresh Express brand being the undeniable marketshare leader.

Premium salads in the quick-service restaurant sector have fulfilled important needs to provide additional healthy food options for their customers.

We expect the growth in this product category to continue in '04.

As consumers continue to seek fresh, healthy, conveniently, and ready-to-eat food alternatives, our products continue to meet consumer needs with new product offerings that reinforce our position as the innovative product leader in category.

Our test program with fresh fruit continues to progress and focus on our product refinement.

We continue to expand our learning of consumers, and build our knowledge and supply chain execution for this new product category.

Our sliced Apple Tips, or McDonald's Apple Dippers is progressing well and meeting our expectations.

During the year, the division experienced unprecedented disruption in raw materials supply, especially during the fourth quarter.

In addition, volume declines late in December negatively impacted the division.

Additionally, the division was impacted in the fourth quarter by the increased self-insurance accrual.

We continue to address the agricultural risks associated with raw material supplies.

During 2003, we endured four major periods of disruption in Iceberg lettuce and Romaine lettuce supplies, while during a normal year, only one such major event occurs.

The division has used a variety of methods in the past, including, among others, forward contracting, promotions management, product substitution, and pricing adjustments to mitigate the impact of variations in raw material costs.

While these tools are normally very effective at minimizing these risks, the unprecedented frequency and depth of the disruption during '03 and their resulting impact on customer relationships reduced their efficacy.

We are implementing additional measures, including an adjustment of supply and pricing policies to further mitigate agricultural risks impacting the division's earnings.

Selective increases in crop plantings will increase the available pool of Iceberg lettuce at contract rates during historically higher risk time periods.

Increased collaboration with customers in advance that better defines pricing and (indiscernible) actions during a disruptive time period will improve the alignment between customer expectations and pricing policies.

This collaboration will prove our ability to recover the costs necessary to ensure continuity of supply to our customers and alignment with our customers' needs and their participation.

Furthermore, the increased diversity in product offerings among Tender Leaf, spinach, fruit and other vegetable categories, in addition to providing revenue growth opportunities, reduces the impact of fluctuation in the Iceberg lettuce category, which is more commoditized.

Diversity in customer channel and product offerings both work to mitigate the agricultural risks to a single commodity on our cost structure.

The division continues to bear the impact of capacity constraints and production inefficiencies in its Tender Leaf processing equipment.

As previously disclosed, these constraints result from the unanticipated growth in the premium salad category, (indiscernible) quick-service restaurant customers, and the successful launch of its Blends Plus baby spinach and mature leaf spinach products.

The (indiscernible) of these products outstripped our production capability due to the (indiscernible) associated with adding additional production capacity.

During the fourth quarter, progress was achieved in improving the throughput on existing production lines, providing additional capacity.

New Tender Leaf production equipment purchased last summer and planned for installation during the first and second quarters of '04 is proceeding on-schedule.

In October, '03, we opened a new warehouse in the Chicago area, and it's resulting increase in distribution capacity has made a favorable impact on operations in the Chicago area.

Our expansion project in Morrow, Georgia is underway, and is expected to phase in operations beginning early in the second quarter.

One of the new Tender Leaf production lines is scheduled for the Morrow, Georgia expansion.

The Broadline division had strong sales growth for the quarter of 21 percent, and 12 percent growth over the prior year.

The 53rd week added (indiscernible) growth to the fourth quarter, and 2 percent for the full year.

Internal (indiscernible) sales growth for the quarter was 14 percent, adjusted for 7 percent inflation.

As a result of our focus on building sales to independent restaurant (technical difficulty), our street sales growth for the year was 15, percent, and street sales were 50 percent of Broadline sales for the year. (technical difficulty) our proprietary brands remains strong, and for the year, we were 23 percent of street sales.

Operating profit margins for the quarter of 2.3 percent were below our expectations.

Our forecast for the quarter were generated at the operating company level, and failed to properly anticipate the impact of unusually high inflation, the impact of the sixth week, and the (indiscernible) holidays in the December period.

During the quarter, the division's gross margin was less than anticipated.

We experienced significantly more inflation than normal, and did not get it all passed through to customers.

Additionally, gross margin was impacted by the sudden devaluation in beef inventory late in December.

The increased self-insurance accrual negatively impacted the division for the quarter.

Quality Food's results of operations were less than anticipated.

We have made a number of management changes to address these issues.

We completed the installation of our Foodstar (ph) operating system in all Quality locations.

This gives us better information and more controls to manage with.

We expect to add a significant amount of new business to Quality in '04 as well.

During the fourth quarter, we completed the rollout of the Lawson HRMS (ph) system to all Broadline companies.

We are continuing to evaluate and enhance forecasting and monitoring processes.

These enhancements include a more detailed weekly flash report, including the most pertinent financial and operational information, and more detailed weekly conference calls to review results for the regional, divisional and senior management.

PFC Customized ended '03 much stronger than a year ago.

Sales grew by almost 400 million, a 28 percent increase.

Customized shared approximately 100 million in sales to core customers with declining prospects.

The lost sales (ph) were replaced by growth with our existing customers, extending our relationship with TGI Friday's and Ruby Tuesday's to additional territories, and adding new customer, Minnie's Cafe (ph).

Customized ended the year with a (technical difficulty) of strong growing customers.

Customized earnings for the three quarters met our objective, with an 11-basis-point improvement in operating profit.

Customized was negatively impacted in the fourth quarter by a driver (ph) over a dispute at its Merlin facility, and by the fourth-quarter increased self-insurance accrual.

We expect the labor dispute and the higher insurance cost to also impact earnings into '04.

Customized has addressed its construction program for '04.

Our new 219,000 square foot Indiana facility will open in the fourth quarter of '04.

Construction is also planned for our new facilities for our California and Carolina operations, in addition to our plans for our Texas and Florida distribution centers.

Customized sales growth in '04 will be in the single digits.

However, we will resume aggressively growing sales in '05 at completion of our new and expanded facilities.

Donna, we are now ready to take questions.

(OPERATOR INSTRUCTIONS).

John Heinbockel, Goldman Sachs.

It's Simeon Govan for John Heinbockel.

Guys, it seems that many of the factors that have impacted you in the fourth quarter should moderate a bit in the first quarter.

And therefore, your first-quarter guidance against the second-quarter guidance that you've built in seems a bit surprising.

Can you guys walk through the factors that may have a greater impact in the first quarter?

And, kind of, how and why they will go away?

Sure. (indiscernible).

Thank you.

First of all, the first quarter is seasonally the lightest quarter, historically in our foodservice businesses.

But the other factors that are impacting the first quarter more so than the second quarter are the continuing, but improving, productivity network issues that we talked about in Fresh-Cut; the Customized labor dispute, which will continue early in 2004; the lingering effect of higher inflation of Broadline, until we can effectively pass those through; and the continuing impact of results of operations quality, which we do expect to improve throughout 2004, but certainly that takes some time to get them heading in the right direction.

There is also a number of start-up costs related to new business.

As we had mentioned, we expect to be adding significant amount of business, primarily at Quality, but at other locations also.

We expect to be adding, throughout the first quarter, about $80 million of additional multi-unit business, and transitioning out of the Wendy's business that we talked about in our third-quarter 10-Q.

And then, also, kind of the transition -- you know, thinking about first quarter versus the second quarter is -- the second quarter, historically, is the strongest quarter in our Fresh-Cut business.

And, also it is much better in our foodservice distribution business.

The second quarter is certainly an improvement over the first quarter.

So I think all those factors combined kind of impacts why that guidance ramped up significantly in the second quarter versus the first quarter.

A quick follow-on to your point about inflation.

Is it taking longer for you guys to pass the higher cost through to your customers?

Or longer than you would like?

Certainly, longer than we would like.

You know, I think the unusual amount of inflation that we had in the fourth quarter, and most notably, the significant part of that in December, we did not react to that quickly enough in all of our locations to get that effectively passed through.

So, we have historically dealt with normal periods of inflation and deflation, and had effectively passed that through.

But in all of our locations, we have not passed through the unusual deflation that we saw in the fourth quarter.

We are currently looking at some operating companies that were more effective than others, so we are in the process of very closely looking at those best practices and how they respond to the things to make sure we can apply those best practice throughout our business.

Okay.

Lastly, what is the amount of the start-up cost related to the new multi-unit customers you guys referenced?

It's very difficult to quantify specific costs there, Simeon.

Obviously there are productivity-related issues.

And, as you staff up to handle that new business and then transition out of some existing business, it's hard to quantify those specifically.

They are embedded in our operations and are included in our forecast, just in our normal course.

Okay.

Thanks.

Steve Schick (ph), J.P. Morgan.

I guess, John, I was wondering if you guys could discuss the Fresh-Cut volume loss that you speak of in the last couple of weeks of December?

You know, Fresh-Cut sales growth, even without the extra week, still looked pretty good.

And, I think, if I understand it correctly, the last couple of weeks, you said, were down, year-over-year?

If you can clarify that, and just comment on what you are seeing in volumes now (indiscernible), since you've had about a month of a look into that now?

Thank you, Steve.

One point I might clarify in your question is that it wasn't down so much year-over-year as it was down where we were trending throughout the fourth quarter.

So, that is the subtle distinction.

Okay, so you saw a little deceleration.

What have those volumes done after year-end, into the month of January?

Well, so far, they were -- there are two primary pieces of that.

Obviously, there was some in the retail channel, and some in the service channel.

You know, we expected to recover some of that very quickly and then need to work a little bit harder at recovering the balance of it.

We are seeing retail volumes, which is what we have probably the most visibility to rebound very nicely in the beginning of January.

Okay.

That is encouraging.

Now, also, just to follow up on the question about Q1 guidance.

It sounds like you are factoring a lot of cost in there.

But, thinking of my model a little bit, to be pretty conservative on really all segments to get you down to the range that you cited.

You are focusing on Fresh-Cut, and I think you did -- what?

The 1.6 percent margin in the quarter or so?

Is that a bottom?

Or should we think about it -- as we are fiddling with our models -- should we think about margins contracting a little further?

And then picking up as the year goes on?

Can you get into that type of detail?

Yeah, I probably can't give you that specific.

I think the one thing that you probably need to also take into account is the seasonal distribution of Fresh-Cut earnings.

You know, historically, we've always commented on the fact that the second quarter is the strongest for the Fresh-Cut business in general.

I think you also need to kind of factor in the production and network inefficiencies that we talked about in the last quarter or two.

And how they kind of flow through the year, by quarter.

Obviously, they will impact first quarter more so than second quarter, and the second quarter a little bit less, as we kind of ramp up the additional production capacity.

Okay.

Since it sounds like you see some encouraging points in terms of retail post-year-end, any chance that you might be a little too conservative with the assumptions heading into the first quarter?

Or, should we think about the profitability of the Fresh-Cut segment for now, the bar is just a little bit lower than where it might -- than where you might have thought about previously.

And then, if you could speak to that.

I mean, do you think you could revert eventually Fresh-Cut back to a 7 or 8 percent type of margin eventually?

Yeah, I think we feel comfortable, long-term, there is nothing systemic in that business that has changed our view of where that business can perform.

You know, I think our guidance for the year is how we see the numbers shaking out, given all of the various factors.

And obviously, there are a lot of moving parts there.

But, how all of those factors influence our budgets for the full year and each of the quarters.

Steve, too, the category at retail, 80 percent of the growth in packed salad is coming out of more profitable blends.

And the commoditized Iceberg lettuce category is the only category in packed sales that are declining.

So that bodes very will for our margins, going forward, too.

All right.

And, what percentage of your business, right now, would you say is Tender Leaf?

I don't have a good answer for your right off the top of my head, Steve, as far as the split between Tender Leaf and other value-added salads.

So, I guess 8 percent of the growth that is coming from that is -- I mean, I would probably guess a pretty low percentage at this point.

I don't know, is half too much?

Half of our volume in Tender Leaf?

Half of the Fresh-Cut volume, I guess?

At this point, that's too high.

That's too high -- okay.

Blends are a pretty large category of products, too.

Okay.

Great.

One other thing, if I could.

Just to clarify, did you say that the multi-unit business that you're bringing on within Broadline is annualized 80 million?

And all that you are bringing on in Q1?

We are phasing that throughout the quarter, yes -- correct.

Okay.

Great.

Thank you.

Eric Larson, Piper Jaffray.

Yeah, good morning, everyone.

My first question is on your guidance numbers.

If I add up the low end of all the quarters, I get $1.57.

So, is it really $1.57 to $1.72?

Or, is my calculator not working right?

No, your calculator is working right.

I think what we're implying there is that we don't expect to be at the bottom end of the range every quarter.

Oh I see.

Okay.

All right.

And the next question comes back to the customized side.

Obviously, we are seeing some slower growth there for the year, which was inevitable.

But, you also mentioned for the first time there is some capacity issues.

I guess my concern is, is there potential margin pressure in customized as you try to make sure -- well, you're going to have to service those customers, and you will service them because you have to.

Could there be margin pressure in there similar to what we saw in Fresh-Cut when demand exceeded supply, and you had to use high-cost Fresh to supply some of those customers?

I would not expect that to be the case; it's not the same situation.

No, Eric, our thought there is -- look, this last year we added about $410 million worth of new business that consumed a lot of our available capacity in our customized business.

The capacity that we are looking to add this year is really to provide additional capacity to bring on future new customers; not so much capacity constraints with servicing our existing business.

We have completed doubling our Elkton facility.

And when the Indiana facility comes online, it will take a lot of miles out of the system, because we will be transferring business into that facility, primarily at Lebanon, Tennessee.

It is really -- the whole point there is we really need to add capacity to fuel future growth, not so much providing capacity, or alleviating capacity constraints on our existing business.

If I can tack onto this answer, Steve, I found my slide on what percentage of our sales are in the Blends category.

It's 48 percent of Fresh Express sales are in Blends.

That's not necessarily Tender Leaf; it is just in the Blends category.

Thank you.

That helps.

Thanks.

Mitch Speiser, Lehman Brothers.

Thanks very much.

Good morning.

Two questions.

First, in Fresh-Cut, with the second quarter being the strongest quarter seasonally, it doesn't seem like you're going to have all of your Tender Leaf capacity up and running.

I'm just wondering, at this point, would you say no to some customers?

Or try and just get it done like you did in the second, I think the third quarters, where there might be some margin pressures?

Just your philosophy on that second quarter and the fact that it seems like most of your capacity, or some of your capacity, will not be at peak efficiency.

Then, I have a follow-up.

I think our philosophy has, and will continue to be, to service customers.

We don't want to lose the opportunity to have the market share, have the shelf space and the customer on the product line.

We historically, whether it has been Customized or whatever, have borne the extra expense of taking care of the customer and continuing to get the sales.

So I think we will continue to do that.

And I think, Mitch, as it relates to the second quarter, we will be continuing to make significant progress on our production efficiencies and things like that.

So, while that may be -- might have a little bit (technical difficulty), I think to Michael's point, we will continue to work very hard in servicing the customer.

Okay.

On real internal sales, the target is up to single digits, companywide.

It was upper-single to low-double, it has been more in the low-double-digit range.

Does that have to do with the customized piece?

Or, is it perhaps in the Broadline area there has been some weakness?

Or Quality Foods, in particular?

No, we're not seeing weakness in Broadline.

I think it is primarily the flattening out of Customized sales as we lap the new business in first and second quarter of '03, and until we get the capacity ramped back up to add some additional new business.

Okay.

And, at Quality Foods, I was wondering if you could comment a little bit further on what really were some of the issues there?

And, it seems like now you want to add multi-unit customers.

I am wondering why you would not want to add three more street customers?

Or, is it because you don't have the capacity in Customized, where Quality Foods is going to have to service these potential multi-unit customers?

Well, let me just back up and say that, when we made the acquisition, I think we told you then it was going to be a fixer-upper.

And it was probably going to be a three-year process to get them where we want them to be with our Broadline average.

Unfortunately, we are a little bit behind the plan.

We are making progress, but we are behind that plan.

And in conjunction with that, we have wound up having to make a lot of management changes to get the best practices and a lot of the changes that we wanted to install, installed.

We are focusing on growing street sales very effectively, and have a lot of training going on.

And, are making some inroads in growing street sales.

However, in going in and making some of the changes that we had to in profitizing the business, we (indiscernible) some customers that were unprofitable.

We went in and tried to do more effective truck routing.

In some cases, they were delivering to customers five days a week that should have been delivered twice a week or three times a week.

So, we had to make some of those changes to get our pieces-per-route and pieces-per-stop in line.

And consequently -- and we also had to change the pay system for the salespeople.

And throughout all of that, there was a lot of change and not having the effective leadership in place to guide people through all those changes, we wound of losing some street sales people.

And that had an impact on the sales there.

But we have (indiscernible); we have a very stable sales force now, and we are very proud of them and are working with them to better train them and get our brands installed.

We've got a better management information system now to help them guide their way through improving margins and improving street sales.

We feel very comfortable where we are going.

We are adding some pieces of chain business, because it comes in large chunks.

It gives us the opportunity to cover a major piece of the overhead in one big piece of business.

And, we have three wonderful distribution centers in Quality Foods.

That was a very strategic acquisition for us, because it (indiscernible) against our western edge of our distribution network.

And, they have wonderful distribution facilities.

We have a 10-plus (ph) year relationship with that company, and we know that it is going to be a strong contributor to us in the future.

I think the other thing, you had mentioned the issue about the multi-unit business and were there capacity constraints in Customized, and any bearing on why we put that in Quality, and the answer is no.

As you know, in our Customized business, we focus on national casual theme restaurant concepts.

And all of this -- the $80 million in business that we referred to -- is a couple of different customers.

But, that would not necessarily fit the profile of Quality Food.

Customized, anyway.

That is definitely Broadline-type chain business.

Okay.

Also, just with the December period, it just seemed like there was a lot of disappointment at the end of December.

I'm wondering if you could particularly identify what actually went wrong at the end of December?

I know there were a lot of product cost issues, but it just seemed like sales were below targets in Broadline and Fresh-Cut.

And, if there was just anything, in particular, that you might identify in late December as to why this occurred?

I think, you know, you are right.

You had mentioned there were (technical difficulty) moving parts there late in the quarter.

Obviously, some of the issues we talk about in-depth in our Fresh-Cut business and our raw product-related costs.

And the resulting impact on some of our sales volumes there.

In our Broadline business, sales growth was still reasonably strong.

That's not to say that just a couple of companies were short of their (indiscernible) forecast, but there were really more operational-related issues as well -- getting the effect of all the inflation pass-through properly had a significant impact.

I think some of the operation expenses at one or two of our companies missed their forecast on operation expenses.

You had the impact of some additional workman's compensation and auto-related insurance accruals.

So, there were a lot of those issues that kind of came together there in the fourth quarter.

Got it.

Thanks.

Edouard Aubin, Deutsche Bank.

Good morning.

I have a follow-up question on the Quality Foodservice.

Could you tell us how many people salespeople have left the company in Quality Foods over the last four months?

I don't have the number for the last four months.

As we mentioned, there were two sales regions.

Some were planned turnovers.

I mean, we have had to -- I guess the reduction of some unproductive salespeople.

We've also added a lot of new salespeople.

So, the force is very stabilized.

I don't think that we have had a major decline in the number of salespeople, because we have replaced people that have left.

Right.

Okay.

And just a longer-term question regarding your business model as you are expected to resume acquisitions of Broadline segment in the medium-term.

I was just wondering how long does it take you to integrate acquisitions from a (indiscernible) systems and logistics standpoint?

And if you could just explain the synergies you have been generating over the past two or three years, basically?

Well, it really depends on what state the acquisition is in.

And, over the years, we have acquired several companies that were affiliated with our Pocahontas Foods USA marketing buying group.

And those transitions come quite easily because they are using a lot of our brands.

In some cases, they are on the Foodstar operating system.

As the Middendorf acquisition, they were already on our computer system.

So, that was a lot easier.

And Virginia Foodservice Group was the same way.

So, it is just not a hard and fast rule.

Generally, we have a pretty strong transition plan that rolls in over the course of one year.

But, moves very quickly in the first few months to get our brands installed, get them on our financial reporting system, and start picking up synergies and procurement, and reduction in cost of goods, and additional profitability from selling our brands.

And, we give synergies in insurance, and internally in the warehouse, as we go in and install best practices and improve the productivity in labor-per-piece and pieces-per-route, pieces-per-stop -- focus on just putting some discipline in the business.

Right.

And just maybe a more specific question related to that.

Where do you stand in terms of (indiscernible) on the Broadline division?

We are -- we have developed a single-item strategy that has been rolled out to two operating companies at this point.

And do plan to move very aggressively with that in '04.

So, it could be in '04?

Completed in '04?

I think it'll be a continuing process, Edouard.

I don't know if you ever completely finish that, but we will be making a lot of progress in 2004, as we release that.

Okay.

Great.

Mark Husson, Merrill Lynch.

I want to take a step back a little bit now and have a look at the whole business.

The last four quarters, I guess including the first quarter, which is a surprisingly weak number -- are the problems to do with the controls you've got inside the business?

Or with regional management using those controls?

Or are we seeing the management using those controls?

No, Mark, we don't think so.

We are constantly looking at our control mechanisms and reporting and revisiting those.

Obviously, the fourth quarter, there were a few issues that the company did not react to quickly enough.

So, we are revisiting those as it relates to whether it's pass-through inflation and responding quick enough in our Broadline businesses there, looking at controls and processes related to raw product procurement policies and how we respond to unusual market conditions with customers.

Obviously, (indiscernible) we meet their needs.

But, the key is to make sure we are aligned with our internal expectations with what our customers' expectations are.

So, I guess what I'm trying to say is we are will constantly look at improving controls and management mechanisms there and learn from prior experiences.

Through our evaluation, we have already added a lot of information to our control network.

And we have, I guess, put a lot of pressure down the line on people to manage those controls and look at the information more diligently and be on top of things.

But, I would be hesitant to really place any blame on any particular (indiscernible) down the line.

But, we do have the controls, and we are more focused on using them, and improving them, and getting more effective.

It is difficult, given that you have a major competitor that has faced the same problems in beef, for instance, (indiscernible), where they have had the same kind of market conditions, and yet, without the volatility.

Well, they do sell a lot more beef then we do because they are further along in that category.

I think they did have some problems with the inflation; they did not get it all passed along.

I recall from their announcements they said that they had some difficulty passing it along because it was larger than normal, and they did struggle a little bit with devaluation at the end of the quarter.

It seems to be that their contracts are one-week (indiscernible) on their contracts and they are perhaps big enough and strong enough to enforce them.

Is there a problem with the contracts (indiscernible) with PFGC, maybe on the salad side as well as on the beef side?

I don't believe that there is, particularly on the salad side.

Part of the problem in salads is that you have those months where you don't fully contract because you expect there to be spot lettuce available.

And the odd thing was this past year that the spot lettuce market just disappeared.

So, we have adjusted in those periods, and will be contracting for 100 percent, or maybe a little more than 100 percent in those periods when we normally would not have before.

So, we have made adjustments there.

We are the largest contractor of lettuce, so I don't believe that we have any problems in that area.

Obviously, we are not buying the same volume of beef as Sysco would, and quite possibly, they do a better job than us.

That is something that we need to evaluate, and if we determine that to be so, then we need to push hard to improve ourselves.

Okay.

Thank you.

Jeff Omohundro, Wachovia Securities.

I've got two questions.

First, could you touch on strategically how these issues impact your appetite for potential M&A and potential new significant customized business, whether it slows?

I would appreciate it if you could give us some color on that.

And also, if you could give us an update just in general on where you are in turnover -- not just at Quality Foods, but at your other DC?

Okay, we are certainly not backing off from acquisitions.

We have continued to look at the ones that have come along.

They have not met our expectations, or have not been the type of company that we are interested in.

We, I think, have done an effective job with transitioning the acquisitions of Middendorf and TPC.

They have come along very nicely.

And I would not say that we are disappointed, entirely, with Quality Foods.

It has been a good addition for us in terms of shoring up that distribution area in Mississippi and Little Rock.

It is a little bit behind our plan, but we will get it adjusted and back on-plan very quickly.

And all three of those will turn out to be good additions and (indiscernible) to our company.

Our plan, I think as you know, is to add 2 to $300 million a year in Broadline acquisitions.

And, because of 404, we already know that we are going to have a much more disciplined due diligence process.

It's going to require it.

And so, we would expect to know any potential acquired company a lot better before bringing them into (indiscernible).

We will have a much better transition plan, because we will know that much more about them and a lot more detail about them.

In terms of Customized business, we do have some capacity to add regional pieces of Customized business right now.

It's just a matter of finding a customer that would match up with that capacity.

But, obviously, as I mentioned, these expansions and the new California facility and the new Carolina facility -- we're expecting to very aggressively pursue additional business for the Customized division.

And, are actively working with several potential customers right now.

In terms of turnover, I believe you're probably referring to sales turnover -- salespeople?

Yes.

That's right.

And, we generally experience about 10 percent turnover.

And it's in the newer less-experienced salespeople that we bring on through the training phase.

We are still seeing that; it has not changed.

We have many things in place to keep our sales force satisfied.

We have a good compensation system, and good award and recognition programs, and we make them feel very important to the company, and we rely heavily on them as a link to our customers.

And, because of that, we've had very little turnover, historically.

Very good.

Thank you.

Dirk Winger (ph), Jefferies & Company.

Just a clarification on the depreciation and amortization figures for the year.

I thought it was 42.9 and 8.3.

And then, the gross interest expense for the year -- I'm not sure if interest expense recorded is netting out interest income.

Interest expense is not out netting out interest income.

Interest income is in other income line.

Okay.

And the G&A for the year?

G&A for 2004?

2003 -- the full-year, yes.

The full year 2003, yes -- its 42.3 -- pull that number out real quick -- 42.9 in depreciation for the full-year 2003, and 8.3 million for the full year of amortization.

A total of 51.2.

Okay, thank you.

Bill Chappell, SunTrust Robinson Humphrey.

Good morning.

Just a couple of things on clarification on the onetime items in fourth quarter.

As you look forward on the higher insurance benefits, is that going to cost about 2.5 cents per quarter for the next two quarters?

And then the same thing on the labor dispute side.

That was 3 cents last quarter, should that be about a penny and a half, is what you are projecting for impact for first quarter?

You know, we have factored in what we think is appropriate for insurance costs, as well as the labor dispute.

Obviously, the insurance cost we expect to carry through for the full year.

And that is embedded in our numbers for the full year.

The labor dispute, while we are continuing to work with the bargaining unit in negotiating a contract, we would like to reach a mutually-satisfactory resolution of that as early as possible.

And, we have factored some cost in for that, primarily in the first half of the year.

But I mean, for the insurance cost, should it be similar to the charge you took in fourth quarter for 2004?

Directionally, yes.

Maybe not quite that magnitude, but yes, we do expect significantly higher insurance cost to continue throughout all of '04.

And just one final question.

Any further effective devaluation on beef inventory?

Or is that all gone?

You know, who knows where meat price will go.

I think we saw some improvement in meat prices and improvement in demand after the initial announcement of BSE.

Your crystal ball is probably as good as ours is as far as forecasting where meat might ultimately go.

Gotcha.

Thanks.

Thank you.

Gentlemen, we are still showing questions in queue, if you would like to continue today's question-and-answer session.

Okay.

We will go two more minutes.

Thank you.

Bob Cummins, Shields & Company.

I almost missed my chance. (laughter).

I had a question on the Customized division.

If you could expand a little more on the labor issues that you have there.

Is this the first contract at the Maryland division that you are negotiating?

Are the other locations organized?

And is it likely that the same union will proceed to try to organize at your other Customized locations as well?

And also, what is the union -- is it the Teamsters Union, or is it something else?

It is a local unit of the Teamsters.

It is the first organization.

And, we have been negotiating with them throughout '03.

And, as you know, we had a lockout.

And the costs are associated with us continuing to have temporary drivers to service our customers near the end of the lockout.

But all the drivers did not return to work.

So, we are continuing with those temporary drivers.

As far as -- we don't have any other facilities that are unionized in Customized.

And, whether or not another local would choose to try to organize the facility, I guess that -- we don't know that, but we certainly are taking all the measures that we can take with management training and through our HR departments to ensure that we show our associates that they are important to us, and have channels of communication with them and do all the things that we can to prevent it from happening.

Are you confident that you can maintain continuing service to your customers in the area that is serviced out of Maryland?

In particular, if your drivers went back on strike again?

Yes, we are -- certain.

Okay.

Thank you.

Ajay Jain, UBS.

I just wanted to also get some clarification on the current status of the lockout.

I mean, obviously, you're still relying on replacement drivers, to some extent.

Can you quantify the earnings impact you are expecting for Q1, relative to the 3 cent impact in the fourth quarter?

I think it would be directionally in the same neighborhood, Ajay.

Okay.

So, is it fair to assume, then, that in terms of drivers that were invited back to resume work, they did not do so?

We had some that did return.

We know of some who have formally resigned.

And we are still working through whether the remainder are going to come back, or whether they have just gone on to do other things.

We do not know that at this point.

Okay.

I have a follow-up question.

I know you don't want to quantify it, but in terms of the start-up expenses for the ramp-up in your multi-unit sales, is this new multi-unit business something that you have planned on for a while?

Or are you basically reacting to a very recent increase in demand?

And if it is based on an uptick in demand, can you provide some more color as far as whether this increases is for new customers, or for existing customers?

It is a little bit of both.

Some that we expect to add is coming from additional business with customers that we have previously serviced, either out of the facility or out of another facility.

And some of it is brand-new customers.

And it is business that we have been working on for several months.

Multi-unit business just doesn't drop in overnight; it is a long process to work with them to move the business in.

And, it does come in stages; it's not all coming in at one time.

Okay.

And also, just sort of related to that, your quarterly guidance seems to imply kind of a sharp recovery after the first quarter.

And, it seems as if you are having lead times of 6 to 12 months at your Tender Leaf production line through your salad businesses.

Is it reasonable to expect some spillover effect from your start-up costs from your multi-unit sales (indiscernible) your distribution capacity and at the (indiscernible) facility, for example, to spill over into the back half of the year?

Ajay, if I understood your question, it's kind of like you are combining a lot of different factors.

As you look at each of the business segments -- for instance, the seasonality of the Fresh-Cut business -- anyway, the improvement in the second quarter is probably the strongest quarter in Fresh-Cut.

So, while we are working through some of the productivity and network efficiency issues, that is certainly improving in the first second quarter versus where it is in the first quarter.

If you lay that on top of the fact that that is seasonally their strongest quarter, anyway, that is creating some of those challenges.

And, I think the rollout of the additional multi-unit business -- that phases out primarily in the first quarter -- phases in, I'm sorry -- primarily in the first quarter.

So there are certainly more inefficiencies and start-up costs in the Broadline segment in the first quarter related to that transitioning of business.

In terms of Customized, we don't have any real impact there other than the labor dispute, because we already handling (indiscernible) out of the distribution centers where they are.

So, as each facility comes online, it will actually take a lot of cost out of the system.

Initially, as we roll the business in there, it won't.

But once it is rolled in and underway, it will take cost out of the system.

I mentioned in my comments, our Morrow, Georgia expansion comes online early in the second quarter, and that should have a pretty good impact on productivity as well.

And there is a Tender Leaf line going in there.

Okay.

Thank you.

Andy Wolf, BB&T Capital.

Good morning.

What was the amount of the insurance into the Broadline segment?

I'm sorry, the -- (multiple speakers) (multiple speakers)

The insurance payment.

Recovery -- $2 million.

Okay.

When you factor that in, it looks like there was, versus last year's fourth quarter, Broadline was down $7 (ph) million in dollars.

The three sort of big buckets you have mentioned where you had impact were inflation issues, the Quality acquisitions, and insurance costs.

You can add other ones that (indiscernible).

Can you give us a sense, either in dollars or proportionally, where these biggest impacts were?

I think he biggest impacts were really in three areas.

One was the performance of Quality Foods.

Two was the impact of inflation.

And the erosion in gross margin related to not effectively passing all that through quickly enough.

And then, three was additional costs related to the additional self-insurance accrual.

Okay, were they in the order of magnitude that you just described?

Yeah, I mean they were all fairly significant.

Yes, I would put them in that directional.

Okay.

Thank you.

And just onto the Fresh-Cut, a couple of follow-up questions to some that were asked.

First, on fresh fruit, your earlier guidance was that fresh fruit would approach break-even sometime around now.

Could you just comment on that and what you expect -- and then, what -- I'm sorry -- what the earnings impact was on a net basis this year, and what you expect it to be -- or last year -- and what you expect it to be in '04?

We did not quite make it to break-even, which was our target, but we came pretty close.

And we are very pleased with (indiscernible).

We had done a lot of tweaking to the pipeline, the packaging, and the production throughout the year.

We are seeing good results from that.

We are continuing to get increased store placements.

And, we are seeing volume begin to grow now, and feel very comfortable with it.

Next year -- do you have that number, John, as to what the investments are going to be next year.

Andy, if you remember, the guidance we had originally given was that '03 would be similar to what our net investment was in '02.

And, we came in just inside of that.

And so, for 2004, while we have not specifically disclosed that net investment, I think, directionally, you could think of something on the order of magnitude of half of what our net investment was in 2003.

And that is driven, primarily, by some of these initiatives that Michael talked about -- tweaking the product line and things like that and continuing to work on volume.

But also, moving capacity into the Southeast and being able to produce fruit in an additional region this next year.

So, you think you had about a 4 to $6 million positive swing just in fresh fruit here?

Probably a little on the lighter side of that, yeah.

But -- (multiple speakers)

-- factored into our numbers.

That's included in our numbers -- right.

Right -- I just wanted to understand that.

Just lastly, on the Southern California strike and the impact on Fresh-Cut.

Has there been any change in trend?

I think you indicated it was a little over a penny in the fourth quarter.

But, has that been going up or down in terms of impact and sellthrough into those stores?

I think overall, we are seeing rebound in volume in the retail category -- retail channel.

I don't have specific numbers by region to give you any kind of indication on whether that particular region is rebounding any more than just retail in general.

Okay.

Thank you.

Thank you.

At this time, we are showing no further time for questions.

I would like to turn the floor back over to management for any additional or closing comments.

Okay.

I am not going to offer you anymore apologies for our shortfall.

I will, however, tell you that we have all felt the pain.

Not only is it against our culture to disappoint people, but the executives of PFG and most associates are shareholders either through our (indiscernible), our 401(k) match, or our employee stock purchase plan.

The senior staff, myself included, has most of their wealth tied up in PFC stock.

Over time, we require all officers of the corporation, division officers and operating company Presidents to invest 175,000 personally in PFG stock, not including options.

We have always wanted alignment between shareholder interest and management interest.

And, I assure you that we are analyzing every control, every signal, and every strategy to ensure that we put these issues behind us and return quickly to solid earnings growth.

I hope you believe us and have confidence in us, and thank you for joining us.

Ladies and gentlemen, thank you for your participation.

This concludes today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.