Blackstone Inc (BX) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Performance Food Group’s Fourth Quarter Fiscal Year 2004 Earnings Conference Call.

(OPERATOR INSTRUCTIONS.)

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

Thank you and good morning.

Welcome to Performance Food Group’s conference call and webcast to review the Company’s announcement earlier today of its financial results for the fourth quarter ended January 1st, 2005.

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

And this call is primarily intended to review financial results for the fourth quarter of 2004.

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

I will briefly address our operating highlights for the quarter, and then Bob will provide more insight into the quarter and discuss certain expectations for 2005.

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 contain 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 the comparable GAAP measures will be available on our website at pfgc.com.

Looking at our financial highlights, net sales for the quarter registered a strong 1.6 billion.

This represents an increase of 6% from the year ago period.

Adjusting for the 53rd week in our 2003 fiscal year, net sales for the quarter increased 13% over the same period last year.

Net sales for the year were 6.1 billion, an 11.4% increase over the prior year, and a 13.5% increase adjusted for the 53rd week in 2003.

All of our sales growth for the quarter and full year were generated through internal growth.

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

On a consolidated basis, inflation amounted to approximately 4% for the quarter and 5% for the year.

Our gross profit increased 4.3% from the year ago quarter, while gross profit margins decreased 19 basis points to 14.84% from 15.03% last year.

Gross profit for the year increased approximately 7.6%, while gross profit margins declined 52 basis points.

The decline was driven partly by our inability to leverage our cost infrastructure in the fresh-cut segment earlier in the year.

Gross profits margins were also negatively impacted by a shift in our sales mix toward more multi-unit business, and a shift in product mix to more center of the plate products in our broad line segment.

Gross profit margins were also impacted by food product inflation in both the customized and broad line segments.

The decline was also driven in part due to the impact of insurance proceeds in the prior year quarter related to the Springfield ammonia leak.

Operating expenses for the quarter were 207.4 million, or 13.12% of sales, which represents a decline of 26 basis points versus the prior year.

For the year, operating expenses were 806.9 million, or 13.12% of sales, which represents an increase of 15 basis points.

The decline in operating expense ratio in the quarter is due primarily to improved operating efficiencies in the broad line and customized segments.

Higher fuel and insurance costs in all of our business segments partially offset some of these improvements in the operating expense ratio for the year.

In addition, our fresh-cut segment experienced increased warehouse and delivery expenses related to--primarily to inefficiencies in our production and distribution network.

Broad line operating expenses were also affected by incremental start-up costs in the fourth quarter, with the roll out of a new multi-unit business.

Customized operating expenses were favorably impacted by the lacking of higher labor costs associated with the labor dispute in the prior year.

Operating profit for the quarter was 27.1 million, and our operating profit margin was 1.72%, reflecting an increase of six basis points versus the prior year quarter.

For the year, operating profit was 112.9 million, or 1.84%, a decrease of 67 basis points.

The decrease in operating profit margin in 2004 was due primarily to performance of all of our business segments, as well as higher corporate costs due to increased professional fees related mainly to our initiative related to Sarbanes-Oxley 404, increased audit and consulting fees, and increased insurance costs and personnel and severance costs.

Interest expense and the loss on sale of accounts receivable decreased to 3.4 million for the quarter versus 5.2 million in the prior year quarter, primarily as a result of the redemption of the Company’s convertible notes, and the replacement of those notes with lower interest debt on our revolving credit facility.

The decrease was partially offset by higher interest rates versus the prior year period.

And for the year, interest expense and the loss on sale of receivable amounted to 19.3 million, compared to 20.9 million in the prior year.

Other expense was 10.2 million for the quarter, compared to income of 209,000 in the same period for 2003.

The current period reflects the impact of the previously announced one-time charge of 10.1 million in the fourth quarter for the redemption of our convertible notes.

For the year other expenses amounted to 9 million, compared to income of 1.8 million in the prior year.

Our effective tax rate was 37% for the quarter.

And we expect our tax rate to be approximately 38.5% for our core distribution business in 2005.

Net earnings for the quarter were 8.5 million or 18 cents per share diluted.

Net earnings for the quarter excluding the impact of the one time charge were 14.9 million or 31 cents per share diluted, compared to 12.2 million or 26 cents per share in the year ago quarter.

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

Our debt to capital ratio was 24%, which is down from 25% at the end of the third quarter, and 31% at the prior year end.

This excludes 130 million of exposure under our accounts receivable purchase facility.

In looking at working capital, days sales outstanding and receivables were 22 days, compared to 23 days at the prior quarter.

Inventory turns amounted to 17 times, which remained flat versus the prior quarter.

And accounts payable float was 126%, compared to 125% in the prior quarter.

Depreciation amounted to 50.6 million and amortization amounted to 8.1 million for the year.

CapEx was 83.5 million in 2004, versus 112.8 million in the year earlier period.

This resulted in free cash flow for the year of 29.2 million.

We’ve completed our testing and evaluation of our internal controls as required by Sarbanes-Oxley.

Our assessment indicates no material weaknesses in our controls over financial reporting.

We will include our certification in our form 10K that will be filed by tomorrow.

Looking ahead for the year, assuming the sale of our fresh-cut business is closed in the second quarter, we expect the following in 2005 from continuing operations; depreciation to be approximately 21 to 25 million, amortization approximately 3 to 4 million, and capital expenditures to be in the 80 to 100 million range.

In addition, we expect the following from discontinued operations which represents our fresh-cut business; depreciation to be approximately 10 to 12 million, amortization of approximately 1.5 million, and CapEx of roughly 4 to 5 million.

As we disclosed in our form 8K, our Company through the compensation committee of the board of directors, accelerated vesting of certain unvested stock options which had exercise prices greater than the closing price of our company stock on February 22nd.

As a result of this, we expect stock compensation expense of approximately 2 to 2.5 million to be incurred in the second half of 2005.

We also expect internal sales growth for the consolidated distribution business to be in the high single to low double digits for the year.

And our previous guidance for our core distribution business was operating profit of 73 to 78 million.

And as we noted when we disclosed that, that excludes any stock compensation expense, but includes corporate overhead.

This represents a 15% to 22% increase in operating profit versus the prior year.

With that, I’ll turn it over to Bob, our Chairman and CEO.

Great.

Thanks, John.

Welcome and thanks for joining us.

I’ll add to the comments John’s made regarding our fourth quarter results and discuss the operational highlights in each of our business segments for the quarter.

We’re pleased with the steady progress we’ve made in our operating performance.

The variance in operating profit versus the prior year improved quarter by quarter, and our fourth quarter represented a solid increase year-over-year.

We’re very pleased with our strong quarterly sales performance, and we’re proud of how our associates have remained focused on driving improvements in each of our business segments.

The strong growth of our business in a very competitive food service environment is a further validation that our business strategies are sound and effective.

Our ability to add value through solid execution with customers is helping us capitalize on new growth opportunities in the market.

An important initiative for us continues to be our drive to increase the accuracy and efficiency of our operations to further improve the customers’ experience.

We’re also very pleased with our recently announced sale of the fresh-cut segment of our business.

We’re looking forward to focusing exclusively on our broad line and customized distribution businesses.

At the same time, I believe that Chiquita is a great fit for Fresh Express and provides the opportunities for their continued strong growth.

Also, we’re pleased with the completion of our Company’s audit committee’s independent investigation into accounting practices in our broad line segment.

The thorough investigation found no basis for any change to our Company’s previously issued financial statements.

We will continue to work with the SEC in its informal inquire until its completion.

As John mentioned, we did complete the assessment of internal controls during 2004, as required by Sarbanes-Oxley.

A tremendous effort was put into this project.

The result is that we do have a high level of confidence in our financial controls.

Maintaining strong internal controls is something we take very seriously, and we’ll continue to strive to have the best possible controls in place.

As a company, we remain focused aggressively on both our short-term and long-term goals; managing the strong growth of our business, improving operational excellence, and investing in capacity for the future.

We’re confident in our ability to achieve solid earnings growth and improvements in our key operating ratios.

Going through each segment, starting with our broad line distribution business.

The broad line segment generated strong sales of 825 million, an increase of 15% in the quarter, adjusted for the 53rd week in the Company’s 2003 fiscal year.

Prior to the adjustment, sales reflected a 7% increase for the quarter.

Internal real sales growth was a strong 12%, adjusted for 3% inflation.

For the full year, sales adjusted for the 53rd week grew 13%, with real internal sales growth of 8%, adjusted for 5% inflation.

Our aggressive focus on account penetration with independent restaurants has enabled us to achieve an 11% growth of our higher margin street sales throughout 2004.

Operating margins declined 23% for the full year, but were flat in the quarter versus the same period last year.

Operating profit in the segment increased in both the quarter and the full year.

Our previously disclosed new business roll-outs in the second half of the year contributed to a faster rate of growth in chain business versus street business.

While we were opportunistic with the addition of certain chain business in 2004, we remained focused in our strategy to grow our higher margin street sales as a percentage of total sales in broad line.

Our successful efforts to date to increase our center of the plate product mix will remain an important part of our strategy to grow street sales.

The growth of our center of the plate categories had an impact on our margins.

Although the sales pace is much higher than other products, the relative margin is lower due to the fact that these products are sold on a cost per pound basis rather than a percentage of market.

We’re also pleased with the growth of our proprietary brands, which represented 25% of our 2004 street sales, compared to 23% in 2003.

We will continue to refine our proprietary brand offerings to provide further market differentiation and add value.

Our growth strategy calls for an ongoing focus on account penetration with existing customers, while being an effective partner in helping customers succeed in their business.

Our broad line sales associates are trained to understand the customers’ needs, and regularly consult with customers on menu development, new product introductions, and internal management of their business.

Operationally, we’re pleased with continuing improvements we’ve made in our broad line segment.

Over the past year, through the institution of additional finance and operations management staff, we’ve continued to move broad line toward a more standardized and supportive infrastructure, while giving our broad line operating company sufficient flexibility to respond to customer needs.

Our efforts in driving industry best practices, improving our warehouse management systems, and standardizing staff training programs are better positioning us to assure a customer experience which is very positive.

And at the same time, improve our cost management by improving the accuracy and efficiency of our operations.

For the 2005 year, we’re expecting strong top line growth as a result of the addition of new multi-unit business in the latter part of ’04, and our continued efforts in growing street sales in broad line.

As a result, we expect sales growth to be in the high single digits to low double digits for the year.

We expect operating margins to improve modestly for most of the year, and progressive higher levels at year end as we [inaudible] the new multi-unit business.

For the year as a whole, we expect operating margins to improve in the low double digits.

Our customized division sales of 524 million reflect an increase of approximately 16% for the quarter, adjusted for the 53rd week in 2003.

Sales prior to the adjustment for the 53rd week reflect an increase of approximately 7% in the fourth quarter.

Internal real sales growth was 10% adjusted, for approximately 6% inflation.

The increase was the result of growth with existing customers.

For the full year, sales adjusted for the 53rd week grew approximately 17%, while real sales internally was 11%, adjusted for 6% inflation.

Operating margins for the quarter increased 50 basis points.

A significant part of this margin improvement was the result of the resolution of a labor dispute that began in the fourth quarter of ’03, and was resolved in the third quarter of ’04.

Operating profit in the customized segment increased in both the quarter and the year.

Our continued growth with existing customers and our new restaurant concepts contributed favorably to sales growth in the fourth quarter.

We remain focused on achieving efficiency improvements and expanding our warehouse capacity in the customized segments.

Our capacity initiatives include the construction of replacement facilities at our California and Carolina operations, as well as additions to our Texas and Florida facilities.

These expansions are planned for completion by the end of 2005, and should provide us the capacity needed to take on new customers during ’06.

We’re also scheduled to begin shipping from our new Indiana distribution center in the second quarter of 2005.

Internal sales growth in 2005 is expected to continue to be in the upper single digit to mid-single digits.

In the second quarter, as the first quarter, will be [inaudible] the costs associated with the resolve of the labor dispute from the prior year period.

But beginning in the second quarter, customized operating margins are expected to be negatively impacted, as we incur the costs associated with the opening of new distribution centers.

As a result of this, we do not expect operating margins to increase in 2005 compared to the previous year in our customized division.

In fresh-cut, sales of $234 million reflected an increase of 4% in the quarter, adjusted for the 53rd week in 2003.

Sales for the quarter prior to the adjustment reflected a decline of 3% during the quarter.

Real internal growth was 2%, adjusted for 2% inflation.

Fresh-cut retail sales showed solid gains in the quarter while food service sales declined as a result of our transition away from certain food service customers during the year.

Sales for the year, adjusted for the 53rd week, increased 8%, while real sales growth was 7%, adjusted for 1% inflation.

Operating profit margin was 3.8%, an increase of 18 basis points versus the prior year quarter.

Fresh-cut results have been affected, as previously disclosed, by the impact of the transition in our fresh-cut customer mix as we refocus the production and logistics infrastructure towards a more stable, high volume retail and food service business.

This category growth of retail package sales remained stable during the quarter, but the Fresh Express brand continued to gain market share, growing well ahead of the category.

To recap, company-wide, our sales continued to grow at a strong pace at both the quarter and the year.

We continue to make operational improvements in each of our business segments to enhance both the short and long-term earnings growth.

We anticipate solid operating earnings improvement in the first quarter and in the remainder of ’05.

And with that, we’ll take questions.

(OPERATOR INSTRUCTIONS.) Bill Chappell of SunTrust.

Good morning.

Just a question on the fresh-cut divesture.

Maybe you can, on the timing this year and your expectations for paying down debt, any estimate for kind of annual interest expense and--and what costs will be with that.

And with that, just trying to understand the difference between the $850 million sale price and I guess the $799 million--or actually it’s lower than that, in net proceeds.

If you can kind of walk through that for us as well.

Sure.

Bill, let me respond to that.

I guess timing--the first part of your question was around timing.

We do expect that to close in the--in the second quarter.

It’s difficult to give you any guidance on interest expense for the year, primarily because of the use of proceeds discussion which we are not prepared to talk about at this point in time.

We do expect to give you better guidance on capital structure, use of proceeds at the time the--the deal does close.

As it relates to kind of the--the difference between the $855 million purchase price and the--the net proceeds that we previously disclosed of I think it was $695 million, that’s primarily related to tax and other costs associated with the transaction.

There are transaction costs, some compensation related costs related to success fees to some of the management team in the division.

But the--the biggest piece of that difference is really the tax on the gain of the fresh--fresh sale.

John Heinbockel of Goldman Sachs.

This is Simeon Guttman (ph) for John.

Bob, I guess a two part question here.

First, and something that we’ve talked about in the past.

What are the principle drivers as you see them, between your broad lines profitability and vis-à-vis Sysco.

I know you alluded to center of the plate and some proprietary brands, but what do you see narrowing that gap?

And then my second question is how high a priority are additional acquisitions to you and when--when would we expect them to ramp up again?

Thanks.

Good deal, Simeon.

The first question has to do with our growth maybe versus Sysco.

What’s driving our growth.

First, I will tell you that we have tremendous respect for Sysco.

They’re a--a great company.

They do a lot of things right and I think are well respected throughout the industry.

We take a little bit different approach.

I guess in--and it’s two things.

I think the fact that we’re a smaller company, we have the ability to just have a faster growth rate from taking business away from other competitors in the marketplace, as well as the markets we’re in, most all of them are pretty good markets.

So we can grow with the markets, as well as take business away.

So that’s kind of an overview of the industry as it relates to our specific business.

There’s certain key factors as we’ve surveyed the industry and surveyed customers, that drive a customers’ decision to buy.

And we’re keyed in on those key factors, which is the sales rep--the professionalism of the sales rep, the training of the sales rep, and we’ve put a tremendous amount of effort with those sales reps.

Again, I’m not saying Sysco doesn’t, I’m just saying we take a little bit different approach and have a little bit different training program.

And secondly is just operational excellence.

We put a tremendous amount of effort into operational excellence, continue to focus on that so that we make the customers dealings with us very pleasant and simple.

And so that’s our goal and we give them what they want when they want it.

And again, that takes nothing away from any of our competitors.

I think the fact of the matter is not every customers wants to buy from the same person.

I mean they choose different people based on different reasons.

And so, we think the people that choose us, choose us because we do a good job for them and we make their life easier.

That’s our goal.

And our goal also is to help them grow their business.

Lastly is this priority on acquisitions.

We will--we already have the ability to do acquisitions.

I don’t know if we’re going to change that, but now being strictly focused on distribution we are going to be even more proactive in the area of--of acquisitions and raise the bar on that some.

But that being said, we still have to have the discipline of making the right acquisitions for our company.

So, we will be pursuing that aggressively.

Ajay Jain of UBS.

Good morning.

I just had one question on the increase in the corporate overhead expense.

It looks like it was around $28 million last year, which was an increase of around 65%.

I know, John, you touched on some of the drivers behind the increase like Sarbanes-Oxley compliance, but can you talk about what you’re expecting this year in terms of overhead expense and how you’re planning to allocate the overhead costs across the different components?

Yes.

As we’ve probably talked about before, Ajay, you’re right.

And costs that are directly related to any of our segments are--are currently borne in those segments P&Ls.

The costs to incorporate are really the costs of being a public company, being--public filings, treasury, some risk management, corporate IT.

And as you’ve mentioned, they are up a fair amount in ’04 versus ’03.

A lot of that was Sarbanes-Oxley related.

I think in 2004 we spent in excess of $3 million in just direct out of pocket costs related to Sarbanes-Oxley.

Our view going forward is--and a lot of this will evolve as we continue to maintain all the work that we did in 404, so we do not anticipate any significant declines in corporate costs.

We will continue to evaluate our overall infrastructure and things like that and try to be as efficient and cost effective as possible, but also maintain the right control environment.

So our expectation is that there won’t be a significant change in those corporate costs.

Maybe a modest--a very, very modest decrease post closing of fresh.

But that will take some time to work through.

Jeff Omohundro of Wachovia.

Good morning.

I wonder if you could refresh us a little bit on your--perhaps your longer term growth expectations in the two remaining divisions.

Particularly in light of the capital allocation to customized.

Maybe you can address your visible pipeline there relative to reinvestment opportunities in the broad line side.

I’ve got the first two questions.

Can you clarify that last question just a little bit for me, Jeff?

Okay.

Just if you’re prioritizing investments in customized over broad line, is that a reflection of your new business there?

Yeah.

Let me--just to back up.

Let me answer that third question first.

Is that in customized it’s just that we continue to have the opportunities in the business.

We’re also investing in broad line as we outgrow facilities.

We will be adding to our broad line facilities as well.

It’s just that we really grew a little quicker than was expected, I think, a couple of years ago.

We grew at like 30 something percent in customized in one year.

And so we outgrew those--the facilities that we had more rapidly than was anticipated.

And so as we ran out of space and now we’re facing the situation we’ve got to do a multitude of expansions, and basically they’re all hitting in ’05.

So, that’s what has happened to that.

But we will--you know, as the customized--we don’t anticipate out into the future.

Obviously we added a very, very large customer then we’d be faced again with doing--continue to do some expansions in--in customized.

But we anticipate steady additions and new facilities for companies in both divisions as is needed to continue to grow the business aggressively.

The growth plans long term for broad line that we’ve said historically and are still very comfortable with is that we can grow our top line in the low single digits and--and possibly low--excuse me, high single digits to low double digits, with improving operating margins 25 to 30 basis points.

Obviously we haven’t done that recently and this current year we’ve said more in the--we’re going to have we expect, probably a little higher sales growth and a little lower operating margin growth as a result of the addition of so much more chain business, with the pick up specifically of Compass.

But longer term, we are comfortable with those goals that I mentioned.

And then secondly, in customized, historically we’ve actually growth the business even more rapidly than the mid-teens, but going forward we--we’re comfortable that we can grow top line sales in the area of the mid-teens with a five basis, maybe as much as 10 basis point improvement in operating margins as we go forward.

And then just our overall corporate costs.

Again, our goal obviously is to manage that closely while continuing to invest in the controls, as John mentioned earlier, that we need to have as a public company or as--just for good governance in general.

So--but we think that we do have that structure in place and we do not anticipate major increases year over year in our overall corporate costs going forward.

We think--we do believe we’ll be able to keep that pretty moderate growth in the--in our overall corporate costs.

Andrew Wolf of BB Capital Market.

Good morning.

On your $80 to $100 million of capital expenditure for this year, from continuing ops--.

--Uh-huh--.

--Like this is sort of a follow up to Jeff’s question there.

Could you maybe give it a little more specific on how that breaks out between the two segments?

Yes.

And you know, maybe you can tie in some capacity utilization figures to it.

Assuming you’re pretty close to 100% in customized.

But what post building a--build-out of the customized infrastructure, what the capacity utilization gets to.

Yes.

I think directionally, Andy, that $80 to $100 million is going to be much more weighted toward customized this year.

With all of the facility expansions that we-- we had talked about, both Indiana, new facilities in California and in South Carolina.

And then additions in Florida and Texas.

That CapEx will be much more heavily weighted in customized versus broad line.

I think longer term, as Bob had mentioned, I think our plan and our challenge is really to make sure--you know, we’re playing a little bit of catch up as it relates to that capacity.

So we wouldn’t expect that level of continued investment all in one year.

And just more kind of steady planned new facility additions within customized.

And that would probably bring that back into a more balanced distribution between customized and broad line.

Okay.

Do you have--can you give us the capacity utilization figure there?

I would assume some of those distribution centers are turning away business at this point.

Yes.

We would say with the addition of that space, it would put us in kind of the 60% to 70% capacity range.

We are--you know, with the addition to add another 30% to 40% of volume.

And the very--variance there you know, we had the back-up slots, the question is when you add customers, kind of what is the make-up of that customer and how many proprietary items or how many new items do you have to have in the warehouse.

And it’s really kind of a question of pick slot.

So that’s why there is some variation there in that number.

So, did I hear you right?

You’re going to add 30% to 40% in you know, square footage or allocations--allocable space in the warehouse?

Yes.

We think the capacity will add--enough capacity to add 30% to 40% of additional volume.

And is that based on the demand you see with current customers or is there sort of some spec in there that you’ll be able to add one or two other new customers?

Well, obviously, we’re confident we can grow with our existing customers and fill that space up over time.

But we will be pursuing additional customers.

There’s obviously nothing imminent at the moment, but we are having discussions with other customers.

Okay.

And last question.

To tie it back to your long term guidance for the five to 10 basis points increase in the segments’ margins, is that something we can look to in ’06 as the CapEx ramp is behind us in ’05?

I would say yes, with the exception of you know, if we roll up--if we roll out new customers, there are start up costs for new customers.

And so you know, what you would have is a significant--might--if we got a new customer, it would be a significant ramp up in volume according to whoever that customer was, with probably no profit on that customer for the first few months.

Probably kind of a neutral kind of profitability.

And then the profitability would ramp up after probably the first you know, 60 to 90 days of that customer coming on board.

So, this is a question of how much new volume we add.

But you’ll either have one or the other.

I mean we expect a good profit improvement.

The question becomes you know, do you get it through new customers or growing through existing business.

Okay.

Great.

Just two other quick questions, really more follow-ups.

Are you planning on fresh-cut, is that going to be reported this year as a discontinued op or are you going to continue to record it in the operations until you sell it?

Oh, no.

We would--in the period we made the decision, which is in the first quarter, we would expect to report it as discontinued ops.

Bob Cummins of Shields & Company.

Thank you.

Again on the subject of the divestiture, you’ve indicated I think, that you plan to pay down your--pay down all of your debt out of the proceeds.

And I’m wondering if there aren’t restrictions on the early retirement of debt and to what extent will you have to pay a penalty in doing that, if you have any kind of estimate about what that charge might be.

And also as to the use of remaining proceeds, I know you’ve indicated the possibility of share repurchases, but I’m wondering also if establishing a cash dividend is a high priority at this time.

Yes.

Bob, they’re good questions.

As mentioned, we announced that we do plan to pay down all of our debt that is on balance sheet.

That primarily consists of debt under the revolver, which is all floating rate debts.

So there are no prepayment penalties associated with that.

Okay.

We do have $50 million of senior notes and old private placement that we’ve had outstanding for quite some time.

There will probably be a small prepayment penalty on that.

That is included in our estimate of what those net proceeds will be.

And that--it all depends on what the interest rate is at the time we do it, and we’re currently working through that.

So it’ll be more than likely something in the $3 to $5 million range.

But that is anticipated in the guidance that we previously gave you as far as those proceeds.

And the second part of your question about the remaining proceeds and our use there, we’re currently evaluating all of our options.

At this point we’re not prepared to comment on stock buy-back versus dividends.

But obviously, we are considering all of the appropriate uses of proceeds and--and we’ll have some further guidance on that when we close the deal.

Steven Battle (ph) of Bank of America.

Good morning.

I was just interested if you had had recently any key customer wins or you see any or anticipate any in ’05.

Steve, as we’ve mentioned, we picked up Compass in the latter part of ’04 which we were very pleased with that.

We think that that was a win/win for us and them.

You know, we have--you know, we don’t have any major customer wins, and in fact, we don’t have the capacity for it in customized as we mentioned.

And in broad line, we do want to grow with chains and continue to add good chains.

But our primary focus is the smaller, independent restaurants and we’re putting a tremendous focus on that area and growing that.

So that’s really--you know, so there’s a combination of both of those.

We think it’s to our investors’ best interests for us to be more aggressive in this area of growing our street sales with independent customers.

Or small chains.

Bill Chappell of SunTrust.

Yes.

I just want to make sure I understood the numbers for this year versus last year on a comparable basis.

You’re saying that the--I mean the broad line and customized business on a combined basis did about--I think they did about $90 million in operating profit for 2004.

And you’re comparing that to what? 2005?

No.

I think, Bill, you--what you may not be including there is corporate costs because I believe on a comparable basis, we are--it was more like $64 million?

It was $63.7 million, and what we’re saying this year is we’ll be $73 to $78 million which is a increase of 15% to 22%.

Okay.

And then just understanding what’s the inner segment numbers that will go out in terms of revenue?

Well, see if you look at the full year 2004 segment disclosure, the bulk of our inner segment sales were from our fresh-cut business--were within our fresh-cut business.

So that will all go away.

There’s very minor inner segment sales related to broad line and customized.

Andrew Wolf of BB Capital Market.

Yes.

Thanks.

In the fourth quarter, I don’t think I heard, did you give a--your increase in street sales?

I think you gave it 11% adjusted for the year, but I--.

--For the year.

It slowed down a little bit in the fourth quarter.

It was more in the range of 4% or 5%.

That was primarily due just to the focus on the chain sales in the quarter.

The roll out of Compass.

We’re seeing that starting to pick back up as the first quarter goes along.

(OPERATOR INSTRUCTIONS.)

Dana Walker of Kalmar Investments.

Good morning.

Could you talk about two long sighted initiatives that ought to improve operating margins in broad line, those being purchasing and ongoing growth in the proprietary brands?

Yes.

Absolutely, Dana.

The area of purchasing, right now we are doing consolidated negotiating of deals with vendors.

The challenge we have at the moment is that we don’t have standardized or common codes throughout all of our companies.

And so for us to pull that information here together, look at it, being able to get reports back to vendors and effectively manage those deals is difficult and challenging at best.

So--and for our [unintelligible] in fact to share information and deals between operations is at this point in time, impossible.

And so that project will be completed over the course of 2005.

And so this--again, this is a longer term project.

But starting in 2006, we think we’ll be in a even better position to negotiate, work with vendors, make sure all of our companies are getting the deals they need to get, and help drive profitability through purchasing.

For me to put a number on that, you know, what the actual benefit of that would be, I really can’t do that at this point in time.

But we feel good about that opportunity.

Secondly, in proprietary brands, we have increased our proprietary brands.

Our opportunity there I think has continued to increase proprietary brands, but again to--as we are standardizing our codes, going to common codes, get a better handle even than we have no won the profitability of the proprietary brands on this, as we grow the sales in the proprietary brands, you know, to be able to work with vendors to drive costs out of the cost of the proprietary brands to make both our vendors and us more money on the proprietary brands going forward.

So, we think that’s the opportunity.

Again, that’s a more longer term opportunity.

We don’t expect that to have a significant benefit in 2005, but probably more in 2006 and--and beyond.

Kevin Collins of Fred Alger Management.

Good morning gentlemen.

Thanks for taking my call.

I had a question about the operating income guidance, $73 to $78 million.

That’s before stock compensation expense.

Could you repeat what that expense would be?

Yes.

That’s correct, Kevin.

It’s--the $73 to $78 is prior to stock compensation expense.

We do expect to implement the new stock compensation rules effective July 1st.

So, for the second half of ’05, we expect stock compensation expense in the $2 to $2.5 million range.

David Sachs of Hockey (ph) Capital.

Two questions.

First, the AR securitization level today and then post the sale.

Is that level going to be paid down or are we leaving the AR securitization as part of a permanent financing portion [unintelligible]?

Yes, David.

Good question.

We are leaving that in place.

So, our current exposure right now is $130 million.

Total securitized receivables are in excess of that and I’ll refer you to our disclosure in our 10K.

But the amount we have outstanding in our exposure externally is $130 million.

There are no fresh-cut receivables in that.

So they--that all relates to our broad line and customized business.

And so that will remain outstanding post sale.

And then just to follow up on a question asked earlier about comparing Sysco to Performance Food.

Bob talked about the revenue growth differential and how we were growing the top line faster, but I think he skipped over or didn’t discuss the spread in operating margins, which is about 300 basis points, or a little over 300 basis points between Sysco today and PFG.

Could you just address sort of how--how that gap closes?

I know Bob was talking about 25 basis points a year hopefully.

That’ll take us 10 years plus.

It just seems like there’s a big opportunity to get margin relative to your biggest competitor.

Yes, there is.

There--I mean that is definitely an opportunity.

We’re happy for Sysco and we’re anxious to get where they are.

You know, there are a number of things.

One is just the size of the Sysco facilities.

And we experienced the same thing ourselves.

As our facilities--as our sales get bigger, particularly our street sales, you know, as it relates to overall sales in an individual operation, our operating margins are higher.

And so just the economies of scale I think helps Sysco versus us.

And their average facility is significantly larger than our average facility.

Secondly, the issues that--or the questions that Dana brought up regarding purchasing and priority products, you know, priority brand products--excuse me, proprietary products are both areas that we can continue to help drive margins.

And then thirdly is things such as focus on kind of A, B, C customers.

Meaning that if you try to be all things to all people, you basically put yourself out of business.

And we just need to continue to have the discipline and work diligently to give outstanding service to our best customers and look for ways to become more efficient in our operations.

But for our C customers, I mean we’re typically not their primary supplier anyway.

And so for a C customer, if we--you know, we don’t need and should not be giving them outstanding service.

If we short them then we should short them.

So just to have those sorts--types of discipline within our organization, as well as focus on our purchasing area, our proprietary brands and this A, B, C focus in terms of our customer base, gaining economies of scale, implementing operational excellence.

And we’ve got a number of initiatives in place that help us to fill our trucks better with our new warehouse management system, [unintelligible] trucks better, roadmap systems that more efficiently send our trucks out and in a more efficient basis with customers.

And just help our operations in all be better.

Less order error so that we don’t have recovery costs, etc., etc.

All those things are things that we’re highly focused on within our operations.

And so I think those would help us--I don’t know how we’ll close that gap over time.

Sysco may continue to improve their operating margins and certainly we expect our operating margins to improve significantly.

John Heinbockel of Goldman Sachs.

It’s Simeon again with another two parter.

The first part is to John actually.

We talked about the cash CapEx next year, $80 to $100 with the bulk being allocated to customized.

Can you quantify the dollar operating costs?

I know you said it’s going to have some impact in the second, third and perhaps fourth quarter.

Can you touch on that?

And then just second, to Bob, just to drill down on that same question again.

You know, there is about a 380 basis point gap.

And assuming that that scale factor is not truly recoverable right away, what is tangible?

I know there is the private label opportunity, some of it is customer mix.

But what is a kind of a bucket, a ballpark number that you are, you know, foreseeing that you’re going to get?

You also have the catch up or the recovery margin that you lost, I guess in the past year that’s--that’s still left on the table.

So what is the realistic amount you can see in the next two to three, four years or so?

Why don’t I, Simeon, try to first address your--the CapEx and the operating costs associated with that.

While I can’t quantify that for you dollar-wise, I think the--the directional guidance that I can give you is as we--as we talked about in the first quarter you’re going to see improved year over year margins because of the labor costs in the prior year first quarter.

And I think we’ve quantified those for you back then.

I think it was what, $1.8 million or $1.9 million in the first quarter of 2004 of temporary labor costs.

We had about $1.1 million of temporary labor costs in the second quarter.

So we’re going to be lapping those.

And then beginning in the second quarter of this year, as we roll out this new business, you know there’s going to be start up costs that offset some of those gains.

So when you build your model for broad--or I’m sorry, for customized, I would expect zero operating margin growth versus this year’s which is what we’ve guided you to.

So that’s probably the best directional indication I can give you there.

And Simeon, in distribution, I mean in customized we had a good year this past year.

We grew nicely and we increased our operating margins there.

So we felt good about customized.

In broad line our operating profit, you know, was pretty flat to up slightly for the year.

So we didn’t have a horrible year.

The big thing that impacted our operating margins, in addition to, you know, like we’ve talked about, some of the challenges we’ve faced in--in fresh, particularly early in the year, which did progressively overcome and they’re on a very positive trend now.

But it was just the costs associated with implementing Sarbanes-Oxley, corporate overhead and all those sorts of things.

So to say that we’ve kind of backtracked, the only backtracking that we’ve--you know, we’ve had some of these new companies that came on board and we have worked to kind of get them up to speed on our--the way we do business and--and into the family.

So I don’t expect a big pick up as a result of you know, just--you know, we were in hole because we really weren’t in a hole.

But we--but we certainly have lots of room for improvement.

And I’ve--I’ve mentioned those.

So if you’re asking me for kind of a number, I’m going to stick to what I said before which is a 25 to 30 basis point improvement, longer term and--and this coming year in the mid-teens, as a result of all the chain business we’ve picked up.

So you know, I have no idea how fast our competition’s going to improve their operating margins.

We’re going to close the gap, but we’re certainly going to improve our numbers.

And--and we think in doing that we’ll be able to present to our investors, the 15%--or excuse me, I shouldn’t--I’m not supposed to use specific numbers.

But kind of the 15%, you know, earnings growth that--that we’ve historically said.

Gentlemen, we have no further questions in the queue at this time.

Okay.

In closing, we’d just like to thank you for your participation today and for the interest in our company.

We believe that we’ve found a good home for Fresh Express.

We’ve had numerous distractions over the last year.

However, despite that we’ve made good progress and I believe we’re better positioned than ever to aggressively execute our strategies to drive sales growth and deliver strong earnings growth to our shareholders.

Thanks and have a great day.

Thank you ladies and gentlemen for your participation in today’s teleconference.

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

Thank you, Megan.

Thank you.