Blackstone Inc (BX) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Performance Food Group second quarter 2005 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. (OPERATOR INSTRUCTIONS).

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 financial results for the second quarter of 2005.

I am joined this morning by Bob Sledd, our Chairman and CEO, and Steve Spinner, our President and COO.

This call is primarily intended to review the financial results for the second quarter.

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

I will briefly address our operating highlights for the quarter, and Bob will provide more insight into the quarter and certain expectations for the balance of '05.

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

Statements involve risks and are based on current expectations.

Actual results may differ materially.

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

And in addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures are also available on our website.

Looking at our financial highlights, net sales and continuing operations for the quarter were 1.5 billion.

This represents an increase of 13% from a year ago period.

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

Both of our continuing business segments contributed to the improvement in net sales, and a complete segment breakdown, as I mentioned, is included in the news release.

On a consolidated basis, inflation amounted to approximately 1% for the quarter.

Our gross profit from continuing operations increased 11.7% from the year ago quarter, while gross profit margin has decreased 11 basis points to 13.0% from 13.11% last year.

The decline was driven primarily by the increase in the mix of multiunit business in our Broadline segment versus the prior year period.

Operating expenses and continuing operations for the quarter were 167.4 million, or 11.49% of sales, which represents a decline of 13 basis points versus the prior year.

The decline in operating expense ratio for the quarter is due primarily to the increased mix of multiunit business, which has a lower operating expense ratio, and through improved operating efficiencies in our Broadline segment.

Customized operating expenses were negatively impacted by the incremental startup costs associated with opening our new Indiana distribution center, partially offset by the lapping (ph) of higher labor costs associated with a labor dispute in the prior year.

Higher fuel and insurance costs in each of our segments also offset some of the improvements in the operating expense ratio.

Operating profit from continuing operations in the quarter was 22 million, and our operating profit margin was 1.51%, reflecting an increase of 2 basis points versus the prior year quarter.

The increase in operating profit margin in the quarter is due primarily to the decline in the expense ratio, as I had mentioned in Broadline, and the reduction of corporate expenses as a percentage of sales.

Interest expense and the loss on sale of accounts receivable decreased to 2.8 million for the quarter versus 3.4 million in the prior year quarter, primarily as a result of the redemption of the convertible notes in October of 2004 and the replacement of those notes with lower interest rate debt funded on our revolver.

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

Other income was 641,000 in the quarter, consisting primarily of interest income, versus 230,000 in the prior year quarter.

Our effective income tax rate was approximately 38.2% for continuing operations.

We expect our tax rate to be approximately 38.5% for our distribution businesses for the balance of '05.

Net earnings from continuing operations in the quarter were 12.2 million or $0.26 per share diluted, compared to 9.7 million or $0.21 per share in the year ago quarter.

Net earnings from discontinued operations, which include a net gain of approximately 181 million on the sale of the fresh-cut segment were 191.5 million, or $4.02 per share diluted, compared to 9.1 million or $0.18 per share in the year earlier period.

Net earnings from discontinued operations reflect net income and a net gain on the sale of the fresh-cut business in the quarter.

As you know, on June 28th, we completed the previously owned (ph) sale of fresh-cut to Chiquita brands.

In accordance with GAAP, depreciation and amortization were discontinued as of the date we entered into the contract with Chiquita.

This resulted in a reduction of pre-tax expense for the Company of approximately 9.1 million, or $0.13 per diluted share, in the second quarter.

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

We paid off essentially all of our outstanding debt on the balance sheet with a portion of the net proceeds from the sale.

This brought our debt to capital ratio to less than 1% for the second quarter, which is down from 23% at the end of the first quarter.

This, however, excludes 130 million in interest -- in accounts receivable sold under our receivables purchase facility.

In addition, we have approximately 647 million of cash and cash equivalents on hand at the period end; however, 162.9 million of which will be used to pay current taxes payable.

Also, we anticipate the completion of our previously announced Dutch tender offer for 10 million shares of our outstanding stock during the third quarter.

Based upon these factors, we expect interest expense and a loss on sale of accounts receivable net of interest income to be nominal during the third quarter and approximately 1.5 to 2 million in the fourth quarter of 2005.

Looking at working capital from continuing operations, our days sales outstanding and receivables were 20 days compared to 22 days in the prior year quarter -- or in the prior quarter, I'm sorry.

Inventory turns amounted to 18 times, which improved from 17 times at the prior quarter.

And then accounts payable float was 122% versus 119% at the end of the prior quarter.

For continuing operations, depreciation amounted to 5.7 million, and amortization to 904,000.

Capital expenditures for continuing operations were 19.8 million versus 7.2 million in the prior year period.

As a result, free cash flow -- again, as we define that, net income plus depreciation and amortization minus CapEx -- amounted to a use of free cash flow of 1 million compared to 8.6 million provided from continuing operations in the prior year.

This decrease was due primarily to our capital expenditure program at our Customized business, where we are adding a significant amount of capacity in the current year.

We continue to expect depreciation to be approximately 21 to 25 million for the full year; amortization to be approximately 3 to 4 million for the full year; and CapEx in the 80 to 100 million range.

Given where we are halfway through the year, we are trending toward the lower end of that range.

But we are still comfortable in that range.

Assuming the successful completion of our tender offer, we anticipated weighted average shares to be approximately 42 to 43 million shares for the third quarter and 37 to 38 million shares for the fourth quarter of 2005.

Looking ahead for the year, we continue to expect internal sales growth for our distribution businesses to be in the high singles to low double digits for the year.

As we discussed, we are continuing to experience higher trends in insurance costs, particularly health-care costs, in all of our business segments.

During the third quarter, we expect transition-related inefficiencies in our Broadline segment as the result of our exit of certain multiunit business and transition into new multiunit replacement business, which will negatively impact operating margin growth in the third quarter.

We also expect to complete most of our capacity expansion in our Customized segment by the end of the third quarter and early fourth quarter.

Despite these factors, we continue to expect our operating profit for our distribution businesses to be within the lower end of our previously disclosed range of 73 to 78 million.

And as we have previously discussed, that includes corporate overhead but excludes stock compensation expense of approximately 1 million to 1.5 million related to restricted stock grants for 2005.

Adjusted for that stock compensation expense, we expect operating profit from continuing operations to be toward that lower end of the range of 71.5 million to 77 million, adjusted to reflect the stock compensation expense.

And this reflect a mid-double-digit percentage improvement in operating profit compared to the prior year.

With that, I will turn it over to Bob Sledd, our Chairman and Chief Executive Officer.

Thanks, John.

Welcome, and thanks for joining us today.

I will briefly add to John's comments made regarding our second quarter results and discuss the operational highlights in each of our business segments.

We are very pleased with our performance in the second quarter, as we generated solid gains on our term sales and operating profit growth.

Our focus on operational excellence continues to support our growth and account penetration, and new business development.

Our operational improvement initiatives contributed favorably to our operating expense ratio in the quarter, particularly in our Broadline segment.

I will now review the results in each of our segments, beginning with our Broadline distribution segment.

Broadline segment achieved a strong 16% increase in sales to 896 million in the second quarter.

Internal real sales growth was a solid 14%, adjusted for approximately 2% inflation.

Our higher margin street sales grew at a rate of 6% year-to-date as a result of our strategy of account penetration with independent restaurant customers.

While our new business rollouts in the second half of 2004 have contributed to a faster rate of growth in multiunit business versus street business in the quarter, our focus to grow our Broadline street sales as a percentage of total sales remains an important part of our strategy to drive long-term operating margin improvements.

Our focus on operational excellence continues to support our sales growth with existing customers while driving steady improvement in our Broadline operating expenses.

The combination of previously disclosed new multiunit business and our efforts to improve the efficiency of our operations has resulted in a 59 basis point improvement in operating expenses during the quarter.

Operating margins have continued to improve slightly in the quarter by 1 basis point versus the prior quarter -- year.

Operating margins were up slightly due to the higher percentage of multiunit business when compared to the prior year period, and also the additional cost of health-care.

During the third quarter, we are experiencing some transition-related inefficiencies resulting from our exit of certain multiunit business in one region of the country and the transitioning into new multiunit replacement business in another region.

We will work through our business transition initiatives during third quarter, and expect to produce solid results in the fourth quarter.

We continue to expect strong top line growth in Broadline as a result of the addition of new multiunit business rollouts in the latter part of 2004, and are continuing to focus on growing our street sales.

We continue to expect internal sales growth to be in the low double digits for the year.

Sales growth will slow, particularly in the fourth quarter, as we lap the multiunit business.

As we discussed previously, we expect Broadline operating margins to be impacted in the third quarter by the transition of certain multiunit business, and progress at higher levels in the fourth quarter as we lap the addition of new multiunit business in late '04.

Our Customized segment generated a solid sales increase of 8% to 561 million in the quarter, with nominal inflation.

The increase in sales was the result of continued growth with existing customers.

Operating margins decreased by 9 basis points for the quarter, due in part to costs associated with the opening of the new Indiana distribution center during the quarter, as well as higher insurance costs.

We are maintaining our focus on achieving efficiency improvements in Customized while continuing the expansion of our warehouse capacity throughout the country.

Our capacity expansion includes the previously disclosed opening of the Indiana distribution center in the second quarter, along with construction of replacement facilities in California and South Carolina, and the expansion of our Texas and Florida distribution centers.

We expect the majority of these to be completed by the end of the third quarter, with the remainder early in the fourth quarter of '05.

As we discussed earlier, we continue to expect operating profit in Customized to be negatively impacted over the balance of this year as we incur the costs associated with the opening of these new distribution centers.

The new capacity will facilitate our growth with existing customers and enable us to pursue potential new customers.

We are pleased to have completed the sale of the fresh-cut segment on June 28, 2005.

As a result, net earnings for discontinued operations, including the gain on the sale of fresh-cut of $181 million, were up $191.5 million.

To recap Company-wide, we see (ph) (technical difficulty) this solid sales and earnings performance during the second quarter.

We remain focused on the continued execution of our core strategies to drive our future sales and earnings growth.

I am very pleased with our recent organizational changes we have made, including the promotion of Steve Spinner to President and COO.

Steve has proven himself to be a very bright and capable leader.

We have an exceptionally talented team, and together we are moving forward in implementing our strategic initiatives very aggressively.

Although competition is as tough as ever, we all have high expectations for the future.

We now have achieved three straight quarters of solid earnings improvement, and continue to experience strong sales growth.

During the third quarter, we will incur significant expenses related to facility openings and transitioning of some customers combined with higher insurance costs.

However -- and we do believe it is possible that operating profit in the third quarter will not increase.

We expect, however, for the year to end on a high note with a solid fourth quarter, and we remain comfortable that we will be on the lower end of our previously disclosed range for operating profit in the full year.

In addition, although it is too early to provide specifics, we are optimistic that 2006 will be a very solid year.

With that, we will gladly answer any questions you have today.

And we hope you will attend our investor conference in September to see and hear more specifically about our current growth strategies and new initiatives that are the basis for our optimism.

We are now ready to take any questions.

(OPERATOR INSTRUCTIONS) John Heinbockel, Goldman Sachs.

This is Simeon Gutman (ph) for John.

With respect to your Customized performance, when will the buildup in capacity lead to a volume pickup?

I know you said the end of third quarter, maybe beginning of fourth, the capacity will be on board.

But when should we see an increase in the top line there?

Well, we will have the capacity onboard -- yes, before the end of the year.

What we are going to be doing probably -- in the fourth quarter, once we complete the capacity, is kind of reshuffling customers to optimize the way that we serve the customers, both from our perspective of managing operating expenses as well as what is best for the customer.

So that process will go on over the course of the year.

Late fourth quarter, we would be in a position to add a customer.

And we are in conversations with customers, but quite frankly, nothing is imminent.

And so for us to give you any kind of a timetable in terms of picking up new customers, it is very premature.

But we do expect to continue to grow with existing customers at a steady clip.

And hopefully, we will have a new customer sometime early next year.

But again, there is certainly nothing imminent.

Okay, and then what was the incremental cost, if any?

I think you did suggest that there was some cost in the second quarter here from adding that capacity.

Can you quantify it?

We are estimating that to be about $300,000, related to the Indiana facility.

That facility has been a little slow opening so there were some impacts, obviously, in the first quarter which we talked about, and then the second quarter as well -- about 300,000 in the second quarter.

And there is a few hundred additional thousand of that related to taking business out of Tennessee and moving it up there.

And then, when we move business, we do not just automatically fire a bunch of people.

We kind of let attrition take its course.

And so there is the cost of moving products up there and shifting some of that.

So if you add that altogether, it is something north of 300,000.

Okay.

And then with respect to Broadline margins, they have been stable now for about 3 quarters, but they are still depressed relative to your peers.

So anything being done new now that Fresh Express is gone?

I know the Dutch is still not done yet.

And how quickly will we start to see improvement here?

And then (technical difficulty)

We have a setback now in the third quarter it appears.

Will those small type of setbacks be masked by your improvement in future quarters?

I'm sorry; what was the last part of that question?

The last part is you have a little bit of a minor setback with your margins next quarter, given some of the transitions you are going through.

Will the improvement that you guys expect to achieve cover up some of these minor issues going forward?

Right, okay.

Well, I will tell you what -- we have talked about some of the initiatives.

Steve Spinner has joined us today, and so I'm going to ask Steve to give a little more flavor for some of those initiatives.

And he will do that, but we will get actually into a lot more depth at the investor conference.

So, anyway -- Steve, go ahead.

On the margin improvement -- it is something that we are very focused on.

And there are several primary initiatives that we think are going to get us where we need to be.

Number one is to continue to focus on increasing our percentage of higher margin street sales.

As we mentioned earlier, street sales grew at a pretty good clip in the first half of 2005, and we are going to remain very focused on hiring, training and retaining the right street sales people.

Our goal over time is to continue to increase our sales force by approximately 8 to 10% per year.

And, in line with a strategy to continue to improve our street sales, we are also going to continue our strategy of account penetration.

And that is to continue to increase sales and gross profit for delivery at the same time helping our customers succeed in their own business.

And in addition to improving our strategy of account penetration, we are continuing to prioritize our customers and an AVC classification system, getting us to the point where we can actually provide a higher level of service to our letter A street customers than to our C's.

We also continue to compensate our sales staff on gross profit for delivery.

The second primary initiative that we think will continue to drive improvement in our margin is category management.

And we are beginning to now utilize our data warehouse that has been fully implemented to aggregate our purchasing scale, which puts us in a position to better manage our supplier programs.

And the third primary focus for us is on operational excellence.

We have talked about that before.

And what operational excellence will provide us is the ability to continue to reduce our operating expenses by improving the accuracy and efficiency of our operations through quite a few standardized programs now, in effect.

We will also be able to improve our product throughput costs through our continued enhancement of our warehouse management systems.

We think we will continue to improve our transportation efficiency by a continued rollout of our fleet routing system, as well as new onboard computers that we're in the process of rolling out.

We also now have implemented several of our operating companies on our new activity-based compensation programs for drivers and warehouse workers.

They specifically reward order accuracy in our warehouse, and complete deliveries and perfect orders to our customer.

Continue (indiscernible) best practices throughout all of our operating companies, and we are also doing a very good job managing our service level.

And managing our service level, we know, leads us to higher margins and increased sales.

The two things that maybe will have the most impact going even from Q3 to Q4 is our continued effort in operations and getting people on our automated warehousing systems and upgrading those systems, number one.

And number two is this data warehouse Steve alluded to, having the common codes (ph), utilizing our -- and being able for the first time to do a better job of leveraging our purchasing power.

And we have got some indication that as a result of that, we will see some benefit to the bottom line in the fourth quarter.

Okay.

And then I guess lastly, what is your view on acquisition policy?

Has that changed?

And then, maybe, Steve, if you could comment -- how does that fit into your initiatives of growing that EBIT margin?

I think that we are going to look at -- we are going to be opportunistic with acquisitions.

I think we are going to be pretty specific in the type of acquisitions that make sense for us to take a look at.

And I think that we are now in a situation where making the right acquisition, and given the standardized systems and programs that we now have in place, we will be able to integrate those companies at a very, very fast pace.

That being said, we are still only looking to do no more than a couple of acquisitions a year.

Our goal is to continue to -- we have done a great job of getting focused on our core business, and I am really proud of our team here and the effort that has been put in that direction.

And (technical difficulty) we do want to lose that focus.

And so I think we don't want to really pursue more than a couple of acquisitions in any given year.

Steve, lastly, those initiatives you mentioned -- on paper, they absolutely seem great.

But how much of a distraction have the Fresh Express transaction have those things caused in the past year, causing you not to be able to focus on these things.

Or have these been a focus all long, and you are just enhancing that?

(technical difficulty) No (ph), it has absolutely been -- taken no focus off our own initiatives.

The Fresh and Broadline have been completely separate.

Yes, I think that has really been driven more by Bob and myself.

But as far as Steve's initiatives in Broadline, it has really not been a distraction.

Bill Leach, Neuberger Berman.

I have a balance sheet question.

It seems to me after you complete all of your transactions, you will still end up basically debt free with like $180 million of cash.

Is that correct?

And if so --

Bill, we will have still have some after the -- assuming the completion of the Dutch and it is completely successful, the full 10 million shares.

We will evaluate what the next step is on the completion of that.

But until that is complete, that is a little premature to talk about.

But that is correct -- you will still have a lot of cash and no debt?

That is correct.

Didn't you guys have some modest interest expense in the fourth quarter?

Why would that be?

Why wouldn't you have interest income?

We will have a little bit of interest income.

But remember, we still have the loss on sale of accounts receivable.

And that is where really most of that net interest expense is coming from.

I see.

So that is just there irrespective of what happens going on with the balance sheet.

That's correct.

And that is like $1 to $2 million per quarter?

Yes, 1.5 to 2.

Right.

Okay.

The other question I had is the stock compensation expense.

What is that, and where will that show up?

Is that in third or fourth quarter?

And why should we --

Actually, there was a little bit in the second quarter, about $300,000 in the second quarter.

We expect roughly 500,000 or so in both the third and the fourth.

So when we did our grants this year, they were primarily restricted stock grants which, irrespective of the new FAS 123R, that requires stock compensation expense.

So we began expensing that effective in the second quarter.

Is there any reason we should exclude that?

Well, it is not excluded.

It is in our numbers.

Right, but why do you break it out separately in your guidance?

Because that was our original guidance.

If you remember, the guidance that we gave at the beginning of the year, there was still a lot of uncertainty about when FAS 123R would be effective.

So as we were still sorting through that, during the course of that, we did a fairly lengthy study and looked at our overall equity compensation programs.

We spent a lot of time looking at what the right mix to be efficient and appropriately align our associates with shareholders.

And we ultimately adopted a program that was more restricted stock-based.

And so regardless of when FAS 123R was effective, that requires expense.

So there are a lot of moving parts as we went through our guidance versus what we were doing --

So as we are building our model for 2006, should we exclude that charge, or is that sort of an ongoing charge?

I think when all the dust settles, I think it will all be included.

I think for a period of time, you are probably going to want a look at both our reported numbers as well as excluding that, because if you look at any of our history, obviously, that is not in there.

So I think you're going to have to kind of balance that.

Okay.

Another question I have is assuming capital spending is like 90 million this year, where do you see that going in 2006?

Does it go back down to a more normal level?

Again, that is a premature to really give '06 guidance.

I will say that we have a fairly high level of CapEx in our Customized business.

But we are still very, very early in the planning process for 2006.

So it is a little premature to give you guidance on '06.

But would you expect it to be down?

Again -- it seems like it is awfully high this year.

Again, that is a little premature.

I think Customized is a little bit higher than normal this year.

But until we really go through the planning process, look at all our capacity needs in Broadline and Customized, it is too premature to talk about that.

We do have some capacity -- we are going to be in need of some additional disabilities (ph) at Broadline.

The question is how many of those are going to happen in '06, and how many -- how much of that is going to happen in '07.

So we just haven't made that determination yet.

Ajay Jain, UBS.

I just had a quick question.

I know that the full year EBIT guidance includes overhead.

But I wanted to clarify if the flat Q3 guidance is before or after corporate overhead, because -- the reason I am asking is it looks like your run rate on corporate overhead is again trending higher this year; looks like you are up about 10% year-to-date compared to last year.

So I just want to be clear on how we should be reading the Q3 guidance --

All of our guidance is inclusive of corporate overhead.

Jeff Omohundro, Wachovia Securities.

I just want to go back to Steve's three primary initiatives on Broadline margins.

I am just curious -- where does your private brand initiatives fall within that?

And maybe you can give us an update on your current thinking behind your efforts in that area?

Sure, Jeff.

The brand initiatives rolls up under category management.

And our dollar sales volume in PFG brands has grown, but our percentage of sales in our PFG brands to our street customers is 24% for the year versus 25% in the prior year.

And that was impacted by a couple of things, primarily deflation in the dairy and poultry categories.

And those two categories carry a large number of PFG-branded products.

As relates to kind of our branded focus in the future, we are still focused on looking at the brands, refining the brands, and making sure that those products that we ultimately rollout are differentiating, and that they add value to our customers.

So we are kind in the process of really taking a hard look at the PFG brands.

And when you say taking a hard look, can we expect you to be entering new categories with private-label brands to help drive that mix?

Or are there other efforts?

I think we are going to rollout brands that make sense.

We are going to rollout brands that will add value to the customer.

And if that increases our percentage of brand sales, then so be it.

And when I say we are taking a hard look at it, we are taking a hard look at it from a customer and a category management perspective.

And then looking at the Broadline growth in the quarter, can you give it to us ex the new Compass business?

We generally -- Compass has not met the level of disclosure as a percentage of total sales.

So we really have not gotten into disclosing specific sales by customer.

Obviously, that was a significant part of that gross.

I think if you go back to the previous disclosures we made, that was roughly 200 to 250 million in sales from Compass.

So you could make some pretty reasonable guesstimates there based upon the previous disclosure.

Eric Larson, Piper Jaffray.

Going back to your general corporate expenses, excluding any kind of the onetime charges that might be customary in that line, now with the divestiture of Fresh Express, which is arguably a significantly different business and maybe more stand-alone than your distribution side, why should we not see more of a general down trend over the next two, three, four quarters in general corporate rather than up?

I think generally -- and I think we have made this comment before, Eric, as well, is most of our corporate costs are the cost of being a public Company -- treasury, tax, public reporting, those sorts of things, things that were division-specific, and in particular with the Fresh division, those were all born at the segment level.

So it is not like you can just kind of lop off a significant chunk of the corporate costs.

Obviously, we are very focused on trying to make sure we are as efficient as possible in driving costs out of the business.

I think Bob had alluded to some of our corporate alignment.

And you do see some costs in this quarter related to the consolidation of our corporate infrastructure and our Broadline infrastructure.

So we are looking to get a little bit more efficient there in the short-term.

That does add a little bit of cost as you are realigning people and things like that.

But ultimately, we think that will help contribute to it being a little bit more efficient.

As I mentioned, you also have in the current quarter stock compensation expense which previously wasn't there.

So there were some things like that that -- or things we're going to have to be dealing with on a go forward basis.

Yes.

Those are going to go into corporate costs.

So that will affect the increased corporate costs.

But excluding those sort of things, the basic corporate costs should moderate.

We have invested a dramatic amount of money in 404 implementation and things like that over the last couple of years, beefing up our corporate financial structure to strengthen it and so forth.

So I think we are about where we need to be there.

And I do not see the need for significant increases in those areas.

So I think we will -- you will see corporate costs moderate, with the exception of some things that are -- like the new expensing rule and so forth.

Our goal is really to invest in our operating segments, not in growing corporate.

And our opportunity, obviously, is to leverage what our infrastructure is.

So I think we are well positioned to deal with any future growth.

As Bob had mentioned, over the last few years, we have invested a lot in infrastructure from a public reporting perspective, from a Sarbanes-Oxley perspective, and those sorts of things.

So you shouldn't see that kind of ramp-up going forward.

And we will continue to invest in things aggressively, such as IT to raise our technology to the levels that we need to aggressively move us forward.

But those are going to be incurred primarily, again, in the operating segments.

And then just a quick follow-up.

You talked about strong street sales in the quarter.

But maybe I missed it.

Did you give a percentage of what your street sales increased in either the quarter or the half or both?

We -- 6% street sales growth in the quarter.

Okay.

And then private-label sales as a percent of your Broadline sales, have you disclosed that at all recently?

Yes.

We -- 24% for the year versus 25% of street sales in the prior year.

Andrew Wolf, BB&T Capital Markets.

Just a few -- some are follow-ups.

First, on the Broadline margins coming down in the third quarter, I'm sort of taking away at this point that it is mainly in inefficient labor rates.

And I think, Bob, you spoke --

Broadline margins -- we didn't say they were coming down.

I think what we said that was that overall, we expect profitability of the Company to be relatively -- probably not growth.

That would mean that corporate costs are up some, part of that related to this expensing of options and so forth.

Secondly is Customized because of all the openings of facilities.

Their operating profit will actually be down, which will significantly affect their operating profit dollars.

And then Broadline profit should be up some, and operating margins may be down slightly to kind of flattish, maybe up a hair.

So we are kind of in a small range there.

Thanks for that clarification.

But on Broadline specifically, on the margin as clarified, from what you might have been expecting or certainly what I was expecting or the Street, you mentioned labor rates were inefficient.

And then you said look to attrition more than severance packages or something.

How do you sort of get a sense that this attrition you are expecting will occur by the fourth quarter?

I think in Broadline, the primary factor in Q3 is the transition of this multiunit business, where we are exiting certain chain business, picking it up in another location.

So we have the transition costs in and out that we are picking up.

The net effect is about a $35 million loss in total sales.

And some of that turnover was caused by some competitive situations that we did at rates that we were comfortable with, and ultimately were not awarded that business.

And then the pickup was that we were able to obviously get that at rates we were -- that fell within our profitability requirements.

But as relates to this other area you are talking about, that is not related to Broadline.

Okay, so these are added costs in Broadline to move product and change racking (ph) and all that stuff.

I understand that. (multiple speakers) Where are the extra labor costs, and how do you know those are going to come down?

I am not sure where you are coming up with the labor costs coming (ph).

I think the comment was really about the transition costs and the extra cost of winding down business with a customer you are exiting, and winding business up with a customer you are picking up.

And there is obviously some inefficiencies associated with that, both from a labor and stocking and miles and --

Yes.

In Customized, my comment had to do with -- as we move product from Tennessee, let's say, up to Indiana, we had some additional labor costs in Tennessee that we were incurring, as well as the cost of gearing up Indiana.

And in the third quarter, we will continue to have some of that carryover.

And then at the same time, as we open up California, California was being done by a -- being handled by actually by a public warehousing Company.

So we are up hiring people out there, and have that cost associated with opening up California in the third and some of the fourth quarter.

And in South Carolina, again, we have got the cost of moving product to a new facility, gearing that new facility up, also some costs associated with double rents.

I do not want to get into too much detail.

But there are costs associated with the opening of these facilities and so forth, both labor costs and costs of buildings and so forth, costs of shifting product around, etc.

I stand corrected.

It definitely was Customized (multiple speakers).

Do you feel the plan, Bob, is pretty tight?

And the one that doesn't net -- do you feel pretty confident --

I feel extremely confident that we will make it happen.

How efficiently it happens is always a little bit of a challenge.

And we would -- we are more worried about making sure the customer is taken care of.

And if it costs us a few extra dollars to make sure that that happens, we will spend a few extra dollars.

But that is really our primary concern is that it is invisible to customers and they continue to get outstanding service.

I think it has been well planned out from what I can see.

And I think it will be well implemented, knowing our guys and our folks and the way they have done it historically.

But again, it if it costs us a little extra money in the third quarter and a little extra money in the fourth quarter, we think that is more important to take care of the customer and suck up a little extra cost.

Okay.

Two other quick follow-ups.

Have July sales trends or demand trends changed at all or appreciably?

The trends on the foodservice industry continue to remain pretty good through June.

I think the sales increased about 6.8%.

We are seeing a little softness in certain customers.

We are seeing a little softness in certain areas.

The Midwest, for example, at the moment seems to be a little soft, where there is strength in other markets such as Florida.

So -- I am talking about in a macro sort of a way.

But we seem to be having pretty good traffic.

And overall, we continue to be optimistic.

But there are different opinions out there as to how the balance of the year is going to shakeout.

And lastly, on one of the initiatives Steve talked about with category management and procurement, in the past the Company had put out a pretty aggressive sort of get-to goal of adding 1% to Broadline profitability over time.

Is that something that still is a reasonable expectation, given that you are still at the beginning of this process?

Well, I am not sure we necessarily put out a 1% type target.

I think our overall strategies have not fundamentally changed.

But I am not sure where you are coming up with the (multiple speakers) --

I think what we said is that we figured we thought we could increase operating profit margins in Broadline about 20 to 30 basis points a year.

We said that this year it would be impacted by the addition of all this low margin chain business, that we expect the margins only to be up slightly until the fourth quarter.

And then we expect them to go up in that 20 to 30 basis point range in the fourth quarter.

So -- or somewhere, something like that.

Long-term though, we do still feel comfortable that we can get our operating profit margin up in Broadline in that 20 to 30 basis point area.

So yes, that's a yes.

And I guess if we had -- if you say -- we get up 1 point over five years, certainly, we think we can.

Four, five years.

Louie Sykes (ph), Pennant Capital.

My question has been answered.

Thank you.

There are no further questions at this time.

I will now turn the conference back over to your host to conclude.

Okay, great.

Well, we appreciate you being with us today.

Thank you for your questions and your interest in our Company.

Whether you have followed us for some time or are a newcomer to our Company, we are very pleased with the strength of our results today, and will remain focused on continuing to deliver solid earnings growth for our shareholders in key metrics improvements, both short- and long-term.

We are fortunate to be in a good industry, and we are excited about the efforts of our team.

I am optimistic that working together, we will finish 2005 on a high note and enter 2006 with good momentum.

We hope to see you at our investor conference in September.

Thanks for joining us, and have a great day.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you all for your participation.