Blackstone Inc (BX) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Performance Food Group first quarter earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad.

As a reminder, this conference is being recorded.

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.

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 first quarter ending April 3, 2004.

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

This call is intended to review the results of the first quarter of 2004.

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

I'll briefly address our operating highlights for the quarter, and then Bob will provide more insight into the quarter and discuss certain expectations on upcoming 2004 operations.

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 based upon 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 regulation G of the SEC.

The presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to those comparable measures will be available on our website also.

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

This represents an increase of 15 % from the year ago period.

All of our sales growth for the quarter was generated through internal growth.

Each of our business segments contributed to improvements in net sales, and a complete segment break down is included in the news release.

On a consolidated basis, inflation amounted to 4% for the quarter.

Our gross profit increased 10% from year ago quarter, while gross profit margins declined 79 basis points to 14.2% from 15.71% last year.

The decline was driven primarily by our Fresh-Cut segment as result of higher contractor product costs that carried over from the fourth quarter and production capacity challenges.

Gross profit margins were also negatively impacted by inflation in our Broadline and customized business segments.

Operating expenses for the quarter were 201.8 million, or 13.77% of sales, which represents an increase of 46 basis points, versus the prior year.

Increases were due in part to an increase in Fresh-Cut delivery selling and G&A costs, higher temporary labor costs in our customized division, and higher workers' comp and insurance costs across all of our business segments.

Operating profit for the quarter was 16.8 million, and our operating profit margin was 1.14%, reflecting a decrease of 126 basis points for the quarter.

Interest expense in loss on sale of accounts receivable increased slightly to 5.2 million for the quarter versus 5.1 million for the prior year quarter.

Other income decreased 673,000 for the quarter compared for the same period in 2003, and that included a 956,000 gain on the sale of investment Fresh-Cut processing facility.

Our effective income tax rate was 38% for the quarter; however, we expect our tax rate to increase to approximately 38.1% for the balance of 2004 as the result of proposed changes in state tax laws become effective.

Net earnings for the quarter were 7.5 million, or 16 cents per diluted earnings per share, compared to 16.4 million, or 35 cents per diluted earnings per share on the year ago quarter.

At the end of the quarter, balance sheet remained strong.

Our debt to capital ratio was 28%.

Again, this excludes 110 million of exposure under our accounts receivable facility.

Looking at our working capital, day sales outstanding in receivables were 23 days, and inventory turns amounted to 18 times, which were flat versus the prior year quarter.

Accounts payable float was 137% compared to 133% for the prior period.

Depreciation amounted to 12 million and amortization to 2 million for the quarter.

Capital expenditures were 21 million in the first quarter versus 20 million in the year earlier period.

Free cash flow for the quarter was slightly positive.

As we told you in February, we expect the following for the full year 2004 -- We still expect depreciation to be approximately 50-55 million, amortization to be approximately 10 million, and capital expenditures to be in the 120-140 million range.

Before I turn things over to Bob, our earnings expectations for the second quarter of 2004 remain consistent with our previous announcements, and we anticipate earnings in the range of 50 cents to 54 cents for the second quarter of 2004.

With that, I'll turn the call over to Bob Sledd, our Chairman and CEO.

Good morning.

Welcome, and thanks for joining us today.

I'll briefly add to the comments John made regarding our first quarter results, discuss the operational highlights of each of our business segments, and our expectations going forward.

Being new to my old CEO job, my most immediate focus has been on gaining comfort with our guidance to the street for the year, to more closely evaluate where we are in each of our business areas, and to offer support and guidance as we move forward.

For the past two years, I've been working closely with our team in each segment -- excuse me.

For the past two months, I've been working closely with the team in each segment of our business.

I'm confident in our strategic direction, and our people.

As a team, we're very focused for both the short-term and the longer-term, managing the strong growth we are generating in our business, adding new capacity and driving operational improvement in each area of our divisions.

Our earnings per share of 16 cents for the quarter met our expectations, given the operational challenges were addressing.

The bar rises sharply from here, but we believe the expected improvements we have been and are making are making a difference, and we remain confident in the range we provided the street.

Our strong sales gains in each division continue to validate our growth strategy of deepening penetration with existing customers, focusing on product and service innovation, winning new customers, and capitalizing on our strategic acquisitions.

Going through each division starting with Broadline, the Broadline division produced strong sales growth for the quarter of 13% over the prior year period, to $724 million.

Internal real sales growth for the quarter was 8% adjusted for 5% inflation.

As a result of our focus on building sales to independent restaurants, our higher margin street sales grew 17% for the quarter compared to last year and contributed 50% of total Broadline sales.

Sales growth in our proprietary brands remained strong and were 24% of street sales for the quarter.

Operating margins declined as expected by 43 basis points versus last year, impacted by both the lower, though improving margins at our quality foods operation, the impact of inflation, and the transitioning out of $130 million of Wendy's business over the quarter.

During the quarter, we also incurred the expense of transitioning into $80 of replacement business at similar margins.

Recently, we have signed additional multi-unit customers will be phasing in another $50 million or so of annualized multi-unit business that will begin rolling out in the third quarter.

By the time this business rolls out, we will have replaced the Wendy's sales.

We are pleased at the improvements we've already seen this year at our Quality Foods operation.

Our street and overall sales for the first quarter exceeded sales in the same quarter last year, and our sales per delivery and gross profit per delivery continued to increase.

We remain focused on driving steady improvements and the results of operations and are encouraged at the long-term prospects for this operation.

With these improvements, the new business added continuing implementation of our core strategies, and solid internal sales growth for the balance of the year, we expect to show good improvements in operating results year over year, primarily in the second half.

Our customized division achieved a very strong 21% increase in first quarter sales, which were the result of some new business not yet lapped and strong growth of our customers.

Quarterly sales growth, or real sales growth, excuse me, was 16% adjusted for approximately 5% inflation.

Operating margin for the quarter were in line with our expectations, declining 49 basis points.

This decline was the result of the Maryland labor dispute and the effects of it on margin.

We're pleased with the progress of Customized.

Our focus for Customized for 2004 through much of 2005 is to focus on efficiency and to add new warehouse capacity to handle future growth.

Our agressive construction program for the year includes a new 219,000 square foot facility in Indiana, which is scheduled to open in the fourth quarter of 2004.

Construction is also planned for new facilities for our California and Carolina operations.

Facility additions are also planned for Texas and Florida distribution centers.

These other expansions are expected to be completed during 2005 and should give us the capacity needed to handle a major new customer towards the end of 2005.

Profits are expected to significantly improve in the second quarter as the dynamics in our Maryland facility continue to improve.

We also expect real sales growth to continue at a good rate in the upper single digits as we lap new business.

The Fresh-Cut sales grew 13% during the quarter to $245 million.

Inflation for the quarter was nominal, resulting in strong real sales growth.

Operating profit margin was 4 1/2%.

As indicated earlier, margins were impacted by costs associated with the rapid growth and demand placed on on our production capacity, that are impacting results of the first half of 2004, as well as some raw product costs carry over in January.

As indicated earlier, we are also rationalizing some less attractive food service business.

We continue to see strong growing demand for our Fresh-Cut products, especially in our retail channels.

Our Fresh Express brand continues as the market leader.

All categories of our product mix -- of innovative products are growing, especially our blends and Tender Leaf products.

Premium salads in the quick service restaurant sector have grown dramatically over the last year as a result of increased consumer demand for healthy menu alternatives.

We're also exploring opportunities with other QSR customers.

We believe our continued innovation in new products and production methods will rein force our position as the innovative leader in the category.

Our innovation in the Fresh-Cut fruit category continues to progress as we fine tune our research and enhance our supply chain execution for this new product category.

The success of the sliced apple test with McDonald's apple dippers has resulted in McDonald's announcement of a 2004 national roll-out of program.

The roll-out was completed this month with our Fresh-Cut division participating extensively.

Also McDonald's recently announced the test of additional new fruit and walnut salad in which our Fresh-Cut division will participate.

We are placing a high priority in reducing to succeptable levels the potential earnings impact resulting from raw materials cost volatility created by periods of unusual weather.

While we've made progress, we're continuing to fine tune our contracting methods, promotions management, and pricing policy.

More specifically, we're increasing the quantity of contracted crop acreage during historically higher risk times of year.

Accordingly we expect less spot market purchases during these periods.

Because the weather has the potential to reduce crop yield, we also use other tools to help mitigate the need to purchase product on the spot market.

In collaboration with our customers, we are working to better define supply expectations during the periods of supply disruption, developing pre-determined processes to evaluate promotion activity, and substitution options to products less effected by the supply disruption.

We expect the combination of all of these tools will have a favorable impact on our ability to mitigate the risks associated with agricultural raw product costs.

We are proceeding with the installation of new Tender Leaf production capacity.

We now have adequate capacity to handle forecasted near term growth and are adding more capacity to handle future growth.

We continue to make excellent strides in improving the production through-put of these lines as well as the overall efficiency of our supply chain.

Our planned warehouse expansion in Georgia has proceeded as planned, and we're beginning to utilize this addition to our facilities.

So we are making good progress in the focus areas of our Fresh-Cut division.

To recap company wide, sales were strong in the quarter.

We believe we are effectively dealing with the issues effecting the fourth and the First quarters, and we are cautiously optimistic about the balance of the year.

And with that, we're now ready to take any questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

If you would like to ask a question, please press star one on your telephone keypad.

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One moment, please while we poll for questions .

Our first question comes from Bill Shatell with SunTrust Robinson Humphrey.

Please state your question.

Good morning.

Couple of quick questions.

First on the costs in the quarter both from labor and from start-up costs on the customized side, can you talk a little bit about what, if anything, going to drag what's into the second quarter and throughout the year for those costs?

Is it customized division you're talking about?

Yes.

Well, we didn't really have any start-up costs in the customized division.

The new business was in Broadline.

As relates to the new business, there was some costs associated with that.

John?

Bill, we haven't specifically broken out kind of the start-up costs.

Obviously as you're rolling -- exiting Wendy's business and rolling out other new business, it tends to make your distribution operations, you know, less efficient and profitable, but we have not specifically quantified those.

The costs of the strike in customized, as you know from the release, was 1.8 million.

We are continuing to minimize the costs of those, or the impact of those, but do expect them to continue for, you know, through the second quarter, for a portion of the second quarter.

So I would expect the costs to be less in the fourth quarter.

That's probably about as much color as I could give you.

So --

Lot of it depends on how quickly we can, you know, hire replacement workers and get out of the temporary work.

Do you expect any further kind of start-up costs in the second quarter, or has that pretty much completed the exit--

The new customers in Broadline -- we've got one customer still rolling out.

There will be a slight amount of that, but, again, we've -- we feel comfortable we'll be in the range we gave the street and we don't see it as a significant cost.

Okay.

Just as a follow-up, on the Fresh-Cut business, that business is historically done 8% kind of operating margin.

Will the Tender Leaf lines up and running, where do you that -- see the potential for those margins?

I think we've told we expect to get back in the 8% range by the end of the year, and it is progressing nicely.

The Tender Leaf production is up.

They have told us they have made significant improvements.

The productivity numbers are up like 25% of where they were just a month or two ago.

So they continue to make good improvements.

They feel really good about where we are there, and we expect that process to continue during the second quarter, and we think by the end of the second quarter, we should be, we should have those lines running extremely efficiently.

So we feel the second half of the year, we should be rocking and rolling.

That being said, the second quarter is generally our best quarter in terms of sales in Fresh-Cut.

So that also has a tendency to help operating margins.

Great.

Thank you.

Okay.

Thank you.

Thank you, Bill.

Our next question comes from John Hindackle with Goldman Sachs.

Please state your question.

This is [INAUDIBLE] for John.

Aside from the items you guys mentioned that impacted Fresh Express EBIT margin, it's still -- the absolute level still appeared somewhat weak in light of a fairly favorable lettuce pricing market.

Can you elaborate on that?

Yeah.

I think it has to do with raw product cost carry over, which we talked about earlier.

There was some raw product cost carry over from the fourth quarter that went into the month of January.

I think the other thing, if you kind of look at the USDA spot market costs, you know, those have tracked fairly similarly with the prior year quarter, so I wouldn't say there was favorable lettuce costs on the spot market versus the prior year.

They were about normal.

Okay, and did you control any more acreage ahead of time?

Yeah, we're contracting more acreage.

We're making a lot of -- you know, if you're going to say if we had really great spot market, I mean our whole goal here is to get away from the spot market and contract and basically 100% of our needs in a normalized market.

Unless we have really extreme weather, we feel like that we'll be in pretty good shape.

We've got all these other tools we're putting in place to address that.

Not sure you have it, but in terms of the percentage that you contracted ahead of versus the total mix?

We've basically gone to 100% contracting during the course of the year now.

That 100% is 100% under normal circumstances.

In other words, if you have poor yields, then, you know, then you may still have to go to the spot market.

To prevent, or reduce our alliance on the spot market, then we've put in these other tools for managing our promotional policies and promoting items that are not short and then therefore reducing some of the volume on the products that are short.

So we do have other tools in place to manage that.

Then we also have the pricing tool, particularly at food service, but we still have the ability now to put that in place and retail if we need to.

Okay.

Secondly, can you guys walk through the dynamics in the jump in EBITDA margin and EPS in first quarter and second quarter.

I know we've been through it, but can you quantify how much is seasonal and how much relates to any initiatives you guys are taking on?

The first quarter in all of our business, both retail and food service, retail at Fresh and food service at Fresh and just our overall distribution business, it's always weaker in the first quarter.

It's just the winter months, less people eat at restaurants and less people eat salad.

So first quarter historically is our slowest quarter of the year.

It ramps up nicely the second half of the year, so a fair amount is going to be a pickup from the time of year.

But that being said, there are other things that we're lapping, which include, you know, the strike at, in Customized, in Broadline continuing to improve in Quality Foods, and having significant -- showing significant progress there.

Wendy's -- transitioning out of the Wendy's business, transitioning into this new business in Broadline, all of those things are effecting Broadline and have worked through most of that during the second quarter, and that will continue to improve as the year goes along -- I mean excuse me, the first quarter.

Then in Fresh-Cut, we had the raw product carry over in January.

We were still working through Tender Leaf, which will effect modestly the second quarter, but by the end of the second quarter, we file like we'll be rocking along in that area of our business and have got ample capacity to handle future growth in that area.

Lastly, I know we're only one month into the quarter, but how good is the visibility into you're 50-54 cent outlook for the second quarter?

We're comfortable with that.

Let's say we're cautiously optimistic, but we're comfortable at this stage with that.

Okay.

Thanks.

Okay.

Our next question comes from Mark Husson with Merrill Lynch.

Please state your question.

Hi.

This is Chris George for Mark.

Just wanted to get a little more information.

Could you walk us through how the inflation is actually hurting the customized and Broadline?

I mean, why can't you pass that through?

It seems like Sisco's been able to do that.

Yeah, to touch on that, the time we were not able to pass that through was just the time that it ran up very quickly.

And we feel at this point in time that we have -- we believe that we have passed that, that through.

It's really -- it's not an issue of effecting our operating profit dollars.

It's effected some of our gross margin dollars because, for example, with our chain business, it is -- we have contracts that call for -- mostly, say, a cents per case deliver cost.

So it doesn't effect our operating profit dollars, but it does effect our operating profit margins and our gross margins to some degree, because, let's say we're charging, I don't know, I hate to put a number out there, but depending on the customer, if you were charging $2 a case, let's say, and the case cost goes from $30 to $32, we're still charging $2 a case to deliver it.

So as a percent, our gross margin goes down, but, our profitable remains the same.

I think, Chris, the -- I think the point is with our chain business is that it is a direct pass through, and that typically the chain negotiates directly with the manufacturer, so all of that product cost gets passed directly through, and our fee, or our gross profit is a delivery fee.

So as we've talked about, you know, previously with you folks is that inflation in our chain business and customized business can dilute our gross margin percentage, but does not impact our gross profit dollars.

Okay.

I think --

So in chain business being, you know, 50% of our Broadline business and 100% of our Customized business, you know, it would have some impact on our -- our margins.

But again, not our ability to make our bottom line numbers.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from A.J.

Jane with UBS.

Please state your question.

Yes.

I know that your participation level is extensive for the apple dipper roll out at McDonald's, but could you talk about how material your involvement is expected to be in terms of the nationwide roll out going forward, and would you be able to quantify any earnings impact for this year?

The apple dippers, we're doing in a roughly 7,000 stores for McDonald's, and --

That's slightly more than half.

Slightly more than half.

We don't want-- we're reluctant to quantify the profitability of that.

We've worked very closely with McDonald's in this whole process and, you know, we're excited about the product.

I think they're excited about it.

It's just too early to quantify, you know, what profitability that would be.

And we're reluctant anyway to do that on any individual item.

But obviously it certainly will help us some and give us greater comfort level as we work towards achieving this range that we've given the street.

A.J., the think the other point I would make in that regards is our budgets and forecasts when we go through the planning process, obviously product innovation is a part of our focus in Fresh-Cut.

We do factor in new product development and growth with customers into our normal guidance anyway.

Right.

So I caution you that we don't think that's going to be an add-on over and above what our outlook is.

We did anticipate that this rollout would occur, so some of those numbers were already in our '04 plan.

I was just wondering to the extent it might be slightly accretive or dilutive, if you could speak to that.

It will definitely be accretive, but it won't be hugely accretive.

Okay.

Now that you've confirmed the guidance for the second quarter in the news release, could you also discuss your current thinking about the previously issued quarterly guidance that was -- I know there were some ranges provided in the last earnings release.

Yeah, we're-- as we said, we're always -- we're comfortable with it, but we always prefer for an lists to look at the lower end of the range than the higher end.

But we still continue to be comfortable with the range given.

I think we -- we talked about in our previous comments and, you know, can't second quarter is a significant step up.

We think we've got the right plan of action in addressing some of our business challenges that we went through in the fourth quarter and still working through in the first quarter.

So we're, you know, we're comfortable with the range that we've given for the second quarter.

Yeah, I was just talking about for the back half of the year.

Are you effectively backing away from those explicit ranges?

Obviously we gave -- given the issues that we were working through, we probably gave you more guidance than we would historically give anyway.

So obviously if something would change, we would, you know --

Update.

-- update you as appropriate.

Okay.

Great.

One last question.

I don't know if you can go into these things by line item, but since the under-performance at Quality Foods accounted for most of the weaker sales trends throughout December relative to the 4 cent earnings impact you had in the fourth quarter, would you be able to quantify the incremental costs related to the riches at Quality Foods and-- in the first quarter and how you see this ramping up in the second quarter?

We don't quantify by company.

We just have a practice of not doing that.

But, you know, we can tell you that sales have improved there, that we did have costs associated with, you know.

As we, as we dealt with the issues last year, we had to go back and go through some cost reduction, which is always painful in an organization.

But even with that done, you know, they have made some great progress in both sales improvements there and that continues to be the case.

We've -- we're getting some good news auto oh out of there now on an ongoing basis, so we are, again, maybe cautiously optimistic that that operation has turned the corner, and -- and we'll continue to steadily improve over the course of the year.

They have got a committed management team.

The sales force, we believe, has settled down in the routine.

As we said have lapped and made slight improvements on the same quarter last year in terms of street sales and overall sales.

So, you know, as we rolled out new chain business, that was one of the places we had start-up costs.

We actually feel good about where quality is and where they are going for the balance of the year.

Great.

Thank you.

Thank you.

Thanks, A.J.

Our next question comes from Edward Alban with Deutsche Banc.

Please state your question.

Yeah, good morning.

Bob, if you take a step back, what would you say has been your main surprise in terms of PFGC Food Service businesses since you have been appointed CEO?

Where do you see your strength and weaknesses?

And where do you think you have the most upside, you know, medium to long-term?

Is it benchmarking?

Is it systems?

Is it price procurement?

Yes.

Actually, there haven't been any major surprises.

You know, my goal really has been to sit down with all of our operating division heads and all of our key staff in our Richmond head quarters and find out exactly what has gone on, what the opportunities are, what they are focus order, what our short and long-term strategies are, and how we're going to continue to drive this business forward.

You know there, are a lot of good things going on.

I haven't really had any surprises.

I've been close enough, even though it's been from a 30,000 foot level to know that we didn't have any core issues with this business.

But that being said, we have huge opportunities, and we just need to make sure we continue to focus on those opportunities, and those opportunities, you mentioned some of them, we think we've got continued opportunities from a purchasing standpoint.

Our systems, although we have made great strides in our systems and we have good systems now, we think we have terrific opportunities there.

We've got -- we're cross referencing product codes now in Broadline, and our goal is to go towards common code system, which will enable us to continue to get better information, negotiate better programs with our vendors, track those programs better with vendors and work more closely with vendors in driving both sales and profit growth, and also supply better information to our chains that we work with.

So there's a lot of advantage to common codes.

Other programs that we're working on, just our overall strategies, kind of our ABC program with our customers and making sure that we're focusing on our best customers in giving them service and ways that we're doing that.

Growing our street sales versus our chain and opportunities kind of how do you blend the two?

We want to grow our street sales, but there may be some opportunities with chains.

So, you know, what do we do there?

I guess we've reached decision if good opportunities with chains come open, we will pursue those opportunities even if it changes our mix a little bit.

Some of those changes may not become available for a little while.

So they are different things like that we're looking at.

In Fresh, we're looking at kind of where we are, this whole issue of volatility and how do manage that volatility?

We're put ago lot of emphasis and focus on that volatility issue, and, you know, when we first bought Fresh Express, wend we're not even going to make this acquisition if we can't manage the volatility because it has an effect on the overall business.

We went through a very difficult year last year with a lot of just wild, extreme weather.

And, you know, we don't expect that kind of weather going forward, but any kind of weather we need to figure out how to handle.

So we're working very diligently on improving and modifying the tools we have and looking for additional tools to reduce that volatility to acceptable levels.

So that's another focus area.

And then just continuing to talk about how do we continue to drive, you know, sales and earnings growth in Fresh, and there's a lot of great ideas there and a lot of very innovative people, so we're excited about that side of our business.

And then in Customized, we've got a great team there that has a wonderful track record and, you know, just how do we continue that and adding the capacity that we need to grow the business.

How do we continue to, you know, to get more efficient in the business so we can service our customer, provide them with value, but continue to improve our operating margin?

So there's just a lot of things.

And then, you know, in Richmond, our support staff, what should our focus be?

How can we help our operations get better?

I mean, that's the whole purpose of our team at Richmond.

And how do we work more closely with our guys in the field and make sure that, you know, we're working together all in the same page and just to make that happen.

So I've asked a million questions, been in a lot, a lot of discussions, and, you know, and am excited about our future.

Right.

And finally, you know, coming back on the short-term to medium-term view for the food services businesses, is your focus on improving the (INAUDIBLE) of the current business, or do you think that PFGC could be in a position to make any substantial acquisition over the next six months?

Do you have anything on the screen right now, or what's the focus?

We have -- I think we've got our current business to the position now where if opportunities came available and they were good opportunities that we would pursue those.

There are always folks that we are talking to and some discussions with.

To this point in time, we hven't seen any recently that have really met our criteria.

But quite frankly, we haven't been aggressively pursuing those either, just because we've had so many opportunities internally that we've been pursuing.

We probably will be a little more -- I don't know if aggressive is the right word, but proactive in going out and talking with potential acquisition candidates, and there are certainly opportunities in the marketplace.

Great.

Thanks.

Thank you.

Our next question comes from Eric Larson with Piper Jaffray.

Please state your question.

Yeah, good morning, everyone.

Good morning.

Bob, you may have stated this, but I don't have the number.

What is the loss sales from Wendy's?

How much is it?

It was about shy of 130 million.

130 million.

And could you help me walk through the unallocated portion of your expenses in this?

If you look at your -- your corporate overhead for the quarter, what was in there that's not allocated back?

Was that the workmen's comp?

Can you give me a little flavor for what that was?

Yeah.

Most of our corporate infrastructure that is not allocated to the divisions, we have overwriting, you know IT-related costs.

Finance infrastructure in Richmond, you know, planning and analysis, control function, lot of our Sarbanes-Oxley work, you know, all those kind of things.

Other than that, most of the other activities, even if they are in Richmond, that pertain to a specific division be it some IT-related costs, some merchandising and procurement services, those kinds of things, those were already allocated to the divisions.

So it-- is 8 million a quarter then your run rate -- your corporate run rate for expenses, corporate overhead?

I don't know that I would anticipate a run rate at that level.

No.

There are a fair amount of costs related to Sarbanes-Oxley.

Obviously we've got a whole lot of focus around that area right now, which are unusual and I would not anticipate to continue beyond '04.

Obviously there will be some costs to maintaining those activities, but certainly not at the rate we're running at 2004.

Okay.

All right.

But you would expect that would probably be a more substantial rate for the next couple of quarters?

Would that be a fair way to characterize it?

Probably, yes.

More significant than the prior year.

That's-- it should be still somewhat below $8 million number.

Okay.

All right.

Thank you, everyone.

Thank you.

Our next question comes from Steve Chick with J.P. Morgan.

Please state your question.

Hi, thanks.

Well, I guess most of my questions have been answered, but I would like to dig into the Broadline sales performance a little bit for the quarter.

It was pretty good, and I had thought that with the loss of the Wendy's contract, which I guess was 130 million or so and the bringing of 80 million of new multi-unit business that the sales performance would have dampened a little bit and it didn't.

Is the difference additional penetration in street?

And can you give us the percentage of what your street business is now?

Well, the street business did ramp up a little bit.

It was up 17% for the quarter.

We've hired a number of sales people and I think over the last couple of years and as their non-competes kind of run out, that's, you know, helping us make those sales people more productive, and we expect that trend to continue.

So we expect, you know, pretty solid sales increases for the balance of the year.

And fortunately, the industry is also showing some good sales growth as an industry.

So that's encouraging as well.

Okay.

And I think the 80 million that you won, that just started to come in, was it throughout the quarter or more towards like the second half of the quarter?

And do you -- are you seeing an acceleration of the second quarter, I guess?

I think it's throughout the quarter and a little bit of it will continue to roll out in the -- rolled out in April.

Okay.

That's helpful.

All right.

One other thing, within the customized division, I guess your inflation of 5%, I think was a little bigger or it was a lot bigger impact than last quarter, which I think was only one.

I was wondering if you could speak to that a little bit.

Yeah, Steve, as we've talked about in the past, you know, most of our customized customers negotiate directly with those manufacturers, so as people, you know, they are, you know, contracted with those suppliers at all times.

So again, that's kind of a direct pass-through, so it's -- but, yes, there was an increase in the inflation rate in that division.

The first quarter versus where we've trended in the forth.

It didn't effect us.

I just meant that some of their contracts they had with I guess some of their vendors lapped or ran out.

Okay.

Got you.

Okay.

Great.

Thank you.

Okay.

Our next question comes from Jeff Omohundro with Wachovia.

Please state your question.

Yeah, thanks.

Two questions.

First, regarding the business mix, how should we think about chamber street and Broadline after you finish replacing the Wendy's business?

Do you see the focus on chain continuing?

And if so, how does that impact your margin outlook for that business?

And then, second, if you could just remind us what, if any, additional union contracts are coming up, say, in the next year?

The first question, I'm sorry, you -- you were talking about the sales growth in chain versus street, what our expectations there?

Yeah, it sounds to me -- it looks to me like your focusing on replacing the Wendy's business, ramping up that chain component.

I'm wondering if you continue on that or step back a bit on that and refocus more on the street side.

We are extremely focused on the street side, Jeff, as we've indicated.

And our goal long-term is to get our street sales up to about 55% over overall sales, so we are focused on that.

We strictly were replacing the Wendy's business, and the additional volume, we've added or signed will do that through the third quarter.

That being said, there do seem to be a few opportunities out there that are some pretty good opportunities with some good chain customers at some, you know, at some reasonably respectable operating margins.

And so, you know, we -- we'll continue to be opportunistic and pursue those, and we'll see what happens with those opportunities.

But they don't always come up.

And so when you get a good chain customer that, you know, that shows promise, you know, we don't want to pass those opportunities up, but at the same time, we don't want to do an expensive overall earnings and margin growth.

So we will be opportunistic as we look at some chains.

And that being said, we do not expect it to have a negative impact on our focus on growing our street sales and improving our overall margin profitability.

Okay.

Good.

And then as it relates to union contracts, you know, we've pretty much been through that.

We've successfully negotiated I guess three this year, three -- we've successfully negotiated three contracts this year and I don't think we have any on the horizon.

So I think we're done for a while.

Do you know, John--

I don't think there are any more that are due in 2004.

I think there might be one or two in '05, one or two in '06, but nothing else for the remainder of the year.

Very good.

Thank you.

Okay.

Thank you.

Our next question comes from Ken Saslow with Morgan Stanley.

Please state your question.

Good morning, everybody.

Good morning.

Just more global question, I guess.

There is significant opportunity in terms of margins and loyalty for label products.

I know your stated goal of 30% of street sales --

Right.

If I calculate what we have right now -- what you guys have right now in owned label business as a percentage of food service sales, 5-10%, is that 30% goal a big enough push to really move the dial in terms of margins?

Or do you really have to ramp it up to -- you know, seems like there's about $3-400 million of sales there, but can it ever get to be a billion dollars?

It just seems like that 30% of street sales is not a big push.

Let me tell you, what we're really focused on is ways to have product categories that differentiate us in the marketplace with our customers and can make us a little bit different.

So if -- and also add to profitability.

And if that happens with private label or, excuse me, not private label, but our own brands that we may pursue and go past that 30% number.

The 30% number is more of a 3-4 year goal.

That being said, you know, what we're also finding interesting is that, that national companies with their own brands are looking for partners, and they are becoming fewer partners out there because of some of our competitors' focus on their own private label.

So that may create some very good opportunities for us to partner with some of those customers and their brands, and have some positive impact on our operating profit margins there.

So we're kind of evaluating both of those opportunities and looking at it and deciding, you know, the direction that we want to go in the longer term, and who we want to partner wit,h and what makes sense for our customers, and what makes sense for our operating margin profit bottom line.

That's a good question, and it's kind of an ongoing evaluation on our part.

So -- to say we're going to stop when we get to 30%, you know, I would be surprised if we actually stopped there.

That is more of, a you know, the goal we're looking at for the next few years.

I would almost go the other way of saying that the 30% goal is something maybe you can achieve earlier just because there's so much opportunity there.

That's the only reason.

There is plenty of opportunity.

No question about it.

Okay.

The -- I guess the other question I have is more on the near-term outlook.

What are your goals or objectives, you know, in terms of sales growth or margins in terms of Quality Foods?

And where are you along that spectrum?

Well, I think as we've indicated, Quality Foods was not profitability last year.

They were roughly a 1% operating company when we acquired them.

We would love to be tracking at that level by the end of the year.

But longer-term, our goal, is you know, we think they can be -- one of the reasons we acquired Quality Foods, their focus had been growing sales and they had done a great job of that, you know, even though they didn't focus very well on operating profit margins.

But they did a great job of growing sales, and the vast majority of their sales are street sales, which, you know, potentially are very profitable sales.

And because of their customer mix, we think they have got the potential be a 4% operating profit company over the next, you know, 4-5 years.

And so that's why we're -- one of the main reasons we're excited about Quality Foods is because we really do believe they have that potential.

And that's our goal, is to get them there over the next four to five years.

My final question, Fresh-Cut volume numbers were pretty strong actually.

They were stronger than I expected.

Is this-- would you say the turning point of where you say the Fresh-Cut volume should remain for a little bit?

Is this something of aberration?

Where do you put this quarter in terms of, you know, longevity?

You mean that type of sales growth?

Yeah, volume growth.

Inflation I'm not as worried about because you can't forecast that as well just because every quarter is something different.

But on a volume basis, do you think that's the, a right run rate?

Is that -- is it aberrational?

We've told the street, or the low double digits, I believe, and, you know, up to maybe the low teens.

And, you know, we, we are rationalizing some food service business, and that's the only thing that may -- that won't -- we don't think that will really hurt profits to any significant degree short-term, but will certainly help profits long-term.

But it may cause sales to be slightly below that for the -- the sales growth to be slightly below that over the balance of the year.

We'll just have to wait and see.

You know, it's a little difficult to forecast exactly what the sales growth is going to be for the balance of the year, but the trends are very positive, and, you know, we're optimistic that we will have a good sales growth continuing on for the balance of the year and beyond that.

Great.

Thank you very much.

Okay.

Thank you.

Our next question comes from Ann Girkin with Davenport.

Please state your question.

Good morning.

Good morning.

Just wondered if I could get more detail on the fresh fruit roll out.

Okay.

You talk about retail?

Retail, yes.

At retail, the fresh fruit roll out we are now in, on the west coast, working with customers out there.

We are in the Midwest out of Chicago, and we've just recently started in Atlanta.

And although the main focus there at this point in time is working with McDonald's, we're just starting to pursue some customers out of the Atlanta market.

So it's continuing to proceed.

I mean as we've indicated, we have kind of back tracked a little bit.

Our initial research had indicated that, you know, that there was going to be a demand for both the small sizes and the larger sizes, but as we got into the market, we found that because of experiences that customers had had in fruit, that the category -- it's just a learning process they have to go through, and that they weren't picking up the smaller fruit cups, that they were still -- that the larger size was where the volume was, so we've kind of back tracked.

We're not doing the smaller size right now with McDonald's.

We've gone to the 16-ounce and larger sizes.

And we are making progress and continuing to work with customers.

We've got a couple of new customers we're working with around the country on that.

So it's a slow process.

You know, it took Fresh-Cut lettuce years and years before it got consumer acceptance, and we've really got to re-educate the consumer on fruit, because their experience with fruit to this point in time has been they're buying it, product was cut in the back of the grocery store or from some regional processor.

The product only last as few days when they buy it that days, and so a lot of times of the consumer experience is not very good.

Hopefully overtime as they try our product, they see it's more consistent.

They have a better experience, that our product will, you know, will continue to grow in sales.

But we are making progress there, but it's just slower than we originally anticipated.

But, you know, we're on track in terms of, you know, where we expect to be for the year from a profitability or lack thereof.

You know, we budgeted a small loss in fruit for the year and we expect to be able to achieve that small loss.

Okay.

And then just to clarify, have you brought two additional Tender Leaf lines on now?

We've got -- the lines that we thought we would have are in place, and we've got adequate capacity.

We've got another line that we're looking at adding, but we're not sure that we're going to need it any time soon because we've been able to improve the productivity so much and meet the customers' demand.

So we've got one that's -- one more that's coming on I think in -- is it April or May?

I'm trying to remember the exact date, but it's pretty much -- A lot more focus there has been improving the productivity of existing lines.

Right.

We actually had about a 25% improvement in productivity throughputs on existing lines.

So a lot of our initiatives have been there as well.

We think we've got the right capacity to handle the near-term demand and we'll continue to add additional capacity as we go through the year.

Okay.

Great.

Thanks very much.

We think we're in good shape there.

Our next question comes from Andrew Wolf with BBT Capital Markets.

Please state your question.

Thank you.

Bob, your 17% street sales growth was a fine number.

Is that an acceleration from trend, and how is it trending as quarter's going on as independent customer getting stronger?

We think the trends are good.

As I mentioned, we have added sales people, and they come off their non-competes with other distributors.

We think that's helped.

The fact we've kind of -- we've turned the corner at Quality, we think has helped.

And we are seeing -- you know, there's been a -- your comments that there's been concern that a change or, you know, or dominating and that independents are struggling, and the reality is at least from the last survey that I saw is that independents are actually doing very well, holding their own and growing.

And one of the main reasons for that is the professionalism of the independents.

So that varies from city to city, but in a number of cities across the country, independent restaurants are doing very well because of the professionalism of those independents and their -- and the products they are putting out.

The independents then may become a small chain of two or three or four or five stores, but that's still a very attractive customer to us.

And you alluded this, but I guess I should assume by your statements that it is broad-based recovery, not just skewed by the quick recovery of business at Quality?

Yes.

And my last question is just on the guidance for the quarter, at least from what I was aware of, I think you widened the range a bit, 50-54.

I think it was 52-54.

No, that's not correct, Andy.

Okay.

That's the existing guidance out there.

What are you factoring in for the impact from the labor dispute?

And could you just p date us on what, you know, what the situation is there?

The labor dispute in Maryland, you mean?

Yeah.

I don't know that we've quantified.

John, do you have a quantify the street impact on that?

No, we have not.

As you recall, Andy, we had about a million and a half impact in the fourth quarter, which really only concluded two months during the quarter.

Then the first quarter was about million eight on a pre-tax basis.

That has trended and has started to have -- decrease as far as a run rate goes.

So we do expect some costs in the second quarter.

It won't be of the same magnitude that we experienced in the first quarter, but we are still continuing to hire those permanent replacements, and as we, you know, go through time.

Yeah, we had a number of drivers that were out.

Most of those drivers have come back.

There is still a handful that are out, so we've still got a few temporary drivers in place, but it's just a handful that are out there.

So the impact to the second quarter should be fairly minimal, and we think continue to improve over the course of the quarter.

The negotiations continue with the union, and, you know, at this point in time, we are negotiating good faith and hope to see progress, you know, in contract there.

So we'll see what -- we'll see what develops.

Thank you.

Thank you.

Our next question comes from Howard Glacier with Metropolitan West.

Please state your question.

Hi, thanks.

Just a quick point of clarification.

When you were talking about the customized segment and you're adding after new warehouse facilities to facilitate growth in '05, you mentioned something about a new customer in that segment in late '05.

Is that something that you have contracted?

Is that something that you need to pursue?

And therefore will that business be there when the warehouses basically are open for business?

Thanks.

That's a good question.

No.

We -- what we're saying is that, you know, we're doing all these additions, building new facilities, and so forth that during the course of '05 we will have the capacity to handle a regional player probably if we -- if one comes available, but we may hold out for a national player, you know, as we kind of complete all of these processes and facilities.

So we're saying we have the capacity to handle a major customer should one become available, which may or may not occur, but obviously we'll be talking to people over the course of the next couple of years with the hope that something may develop.

And is this customer or customers?

Obviously they're going switch from someone to you.

How do you go about enticing them to do that if they are large customer, if they are using one of the larger players currently?

Actually, I don't -- without sounding arrogant, I mean we've done such a great job in the marketplace of taking care of our customers, we have developed a very good reputation.

And so we have a number of people that if they're kind of considering where they are now and the job that's being done for them, they typically approach us and ask us if we, you know -- ask us if we would be interested in pursuing their business.

And so then we get into discussions with them, and the reason that they may come to us versus somebody else, there is a variety of reasons.

Either they are unhappy with the service, or, you know, some other reasons.

But usually it's a service issue, which is what prompts them to look around.

Great.

Thank you very much.

Thank you.

Our final question comes from Mark Husson with Merrill Lynch.

Please state your question.

Yes.

Thank you very much.

The question has to do with the pricing environment.

We heard from Sisco, I guess you had intimated during the conference last month that U.S. food service has started to raise prices or be a little bit less aggressive than it had in the past.

Certainly in Europe a number of analysts are expecting U.S.

Food Service to actually stop making money, which would be novel.

Can you just talk about what you're seeing in the market right now?

Well, we have heard on the street that the new CEO there has told them that they need to profitize that business, and we are beginning to see some more rationalized pricing, rational pricing, maybe I should say, from them on the street, and with some change.

So that is a very positive step as far as we're concerned and hopefully that will continue.

Okay.

Then final thing, is you know, obviously McDonald's revolutionized the QS salad business last year, and there was no year-over-year comparisons.

No one really had a map.

As you a cycling up against the McDonald's business, is your experience sort of year over year against the beginning of the roll out, is that providing you a useful guideline or is it really still very different?

I'm not sure I follow you.

I'm sorry.

Are you saying that they are -- guideline for what they -- we expect from them this year?

Exactly, yeah.

Okay.

Well, they aggressively promoted that product starting out and so we saw a rapid ramp-up of their sales as they started that.

So we expect probably, unless they promote it again, that the sales will probably be fairly flat in the premium salad in the second -- for the next couple quarters.

That being said, they may promote it again.

If they do, that will probably, you know, that will probably help some.

And the, the other part of that, however, is that they are rolling out the, you know, the apple dippers.

So that volume will-- we expect to add nicely to that, to them as a customer.

But as far as the growers are concerned, obviously as a processor, you've got to think year over year, and the growers are now not off guard, I guess in terms of year-over-year comparisons in terms of what to put in the ground?

Right, yeah.

That's a very good point.

So we've got better information this year in terms of what to contract.

You know, we've rolled -- we did most of the roll-outs last year of some of these new product categories, and -- and I think have a much better handle on what to contract.

So that should help us in terms, again, of having, you know, reducing any possible surprises from that area of what we need to contractor we have to go out on the spot market and buy.

So yeah.

That's a very good point.

Very helpful.

Thanks very much.

Thank you.

Thanks, Mark.

Gentlemen, there are no further questions at this time.

Okay.

Well, great.

We very much appreciate you guys being with us today.

In closing, we would like to thank you for our interest in our company and the time you spent with us.

We appreciate your participation and your questions.

Over the course of the year, we're very focused on executing strategies we've outlined in our business, we will continue to drive sales growth and deliver solid and reasonably consistent earnings growth to our shareholders.

It's still early, but we're confident we're making progress and continue to have confident in the guidance we provide at the street.

Thanks, and have a great day.

Thank you.

This concludes today's conference.

Thank you all for your participation.