Blackstone Inc (BX) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen, welcomed to the Performance Food Group third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As reminder this conference is being recorded.

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

Thank you, Mr. Austin.

You may begin, sir.

Thank you, Dee, and good morning and welcome to the Performance Food Group conference call webcast to review the Company's announcement earlier today of the financial results of third quarter ended October 1st, 2005.

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

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

Our third 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 then Bob will provide more insight into quarter and discuss certain expectations for the balance of 2005.

Before we start I want to remind everybody that the certain statements we may make in the call are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks are based upon current expectations, actual result may differ materially.

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

In addition, certain remarks we make may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of those most directly comparable GAAP financial measures and a reconciliation to those non-GAAP measures are also available on website.

Looking at our financial highlights, net sales from continuing operations in the quarter were 1.4 billion.

This represents an increase of 7.3% from the year-ago period.

And 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 is included in our news release.

On consolidated basin inflation of nominal for the quarter.

The impact on sales as a result of the recent hurricanes was approximately 12 to 13 million in the third quarter.

Our gross profit from continuing operations increased 9% from the year-ago quarter, while gross profit margins increased 21 basis points to 13.26% from 13.05% last year.

The increase was driven by fuel surcharges, improvements related to procurement initiatives which were offset by an increased mix of multi-unit business versus the prior year quarter.

Operating expenses in continuing operations for the quarter were 168.2 million or 12% of sales which represents a 51 basis point increase versus the prior year.

The increase in the operating expense ratio in the quarter is due in part, to higher bad debt expense as a result of exposure to customers impacted by the hurricane, as well as an increase in the rate of customer bankruptcies.

Operating expenses were also negatively impacted by higher fuel costs.

Operating profit from continuing operation in the quarter was 17.6 million and our operating profit margin was 1.26%, reflecting a decrease of 30 basis points versus the prior year quarter.

Decrease in operating profit margin in the quarter is due primarily to the impact associated with hurricane Katrina as well as the increase in operating expense ratio we just discussed offset in part, by the fuel surcharges.

Interest expense and the loss on sales of accounts receivable decreased to 1.7 million for the quarter versus 3.1 million in the prior year quarter as a result of the redemption of the Company's convertible notes, in October of 2004.

The replacement of those notes with lower interest rate debt and the reduction of borrowings on the Company's revolving credit facility also drove that improvement.

This decrease was partially offset by higher interest rates in the quarter versus the prior year.

Other income of approximately 3.2 million in the quarter consisting primarily of interest income compared to 167,000 in the same period of 2004.

The increase in interest income relates to cash earnings from the cash proceeds from the gain of thrush cut segment.

Our effective income tax rate was approximately 38% for continuing operations in the quarter and we expect our tax rate to be approximately 38.2% for continuing operations for the balance of 2005.

That left net earnings from continuing operations in the quarter of 11.9 million or $0.28 per share compared to 10.8 million or $0.23 per share in the year-ago quarter.

Net loss per share from discontinued operations of $0.01 per share as result of the changes in an estimated effective tax rate, deferred taxes and the related gain associated with sale of Fresh Express.

At the end of the quarter our balance sheet remains extremely strong, our debt to capital ratio was less than 1% for the third quarter which is flat compared to the end of the second quarter.

This includes--excludes 130 million of interest under the accounts receivable purchase facility that we've had outstanding for some time.

In addition, we have approximately 149.5 million in cash and cash equivalence on the balance sheet at period end.

During the third quarter we successfully completed the previously announced Dutch tender offer to repurchase 10.1 million shares of our outstanding common stock.

Also in August, we announced $100 million stock repurchase program, this is consistent with our objective to return approximately 400 million of proceeds from the sale of Fresh Express to our shareholders.

This still leaves us with a very, very strong balance sheet with which to pursue our continued growth opportunities.

In working capital from continuing operations our day sales and outstanding receivables were 22 days compared to 20 days in the prior quarter.

Inventory turns amounted to 17 times compared to 18 times in the prior quarter, and accounts payable flow was 113% compared to 122% in the prior quarter.

For continuing operations depreciation amounted to 5.7 million and amortization amounted to 882,000 for the quarter.

Capital expenditures were 18.3 million versus 9.2 million in the prior year period.

This results in free cash flow from continuing operations of approximately 745,000 versus 8.2 million in the prior year quarter.

To remind you free cash flow includes net income, plus depreciation and amortization, as well as the add back of non-cash stock compensation expense, less capital expenditures.

Our increase in capital expenditures relate primarily to our customized segment, which we've talked about previously, adding a significant new amount of capacity for this year.

We continue to except depreciation to be approximately 21 to 25 million for the full year, amortization to be between 3 and 4 million for the full year, and CapEx to be toward the lower end of our previous rage, in the 80 to 85 million range.

Looking ahead for the remainder of year we continue to expect internal sales growth from continuing operations to be in the high single digit to low double digits for the year.

We expect the impact of recent hurricanes to impact operating profit by approximately 500,000 to $1 million in the fourth quarter, and as we disclosed in the press release the impact the third quarter of 2.4 million.

In addition we've been aggressively addressing our overall insurance costs including higher healthcare costs which we spoke about last quarter.

We've started to see some moderation in those higher trends at this point.

Based on the current trends in our business we're expecting operating profit from continuing operations to be in the range of 69.5 to 71 million, obviously that includes the impact of hurricanes.

Again, this includes corporate overhead and stock compensation expense of about 1 to 1.5 million for the full year.

With that I'd like to turn it over to Bob Sledd, who can comment more qualitatively on the results of the quarter and our expectations for the balance of the year.

Thanks, John.

Good morning for thanks joining us today.

I'll add to the comments John's made regarding our third quarter results and discuss the operational highlights.

The third quarter performance outside of the hurricanes developed assess expected and more importantly positioned us for solid earnings improvement in the future.

We achieved continued growth in our internal sales and net profit.

We're proud of the efforts and dedication of our associates in meeting the needs of customers and the community during and after the hurricanes.

Review of results and each of to other areas beginning with broadline distribution.

Broadline distribution achieved a 7.5% increase in sales to $857 million in the third quarter.

Internal real sales growth was 6.5% adjusted for approximately 1% inflation.

Our higher margin street sales grew at a rate of 4.2% year-to-date as we maintain our strategy of account penetration with independent restaurants.

We saw some industry softness during the quarter but we are cautiously optimistic based on more positive trends late in the quarter of some better growth.

As part of our strategy to grow street sales to independent restaurants we have a successfully completed our previously announced expansion of sales force about 10% for the year.

This effort will support our long-term focus on driving profitable new business in the broadline segment.

Our previously disclosed new multi-unit business rollouts were delayed somewhat as a result of hurricane Katrina, but we are expected to be completed with these during the fourth quarter.

Also during the quarter we will begin exiting approximately $150 million of annual as multi-unit sales.

The vast majority of this business in transition is as a result of our own initiative to rationalize business that does not meet our profit objectives.

The reminder of year we will lap the addition of new multi-business rollouts conducted in the latter part of 2004 which will slow the overall rate of sales growth.

Broadline operating margins are expected to progress at higher levels during the fourth quarter.

We expect broadline internal sales growth in the mid-single digits in the fourth quarter and to be in the upper single to low double digits for the full 2005 year.

With the objective of delivering attractive long-term returns to our shareholders we are optimistic that the execution of our core strategies will enable us to drive profitable future sales and earnings growth in broadline distribution.

Customized distribution generated a solid sales increase of 7% to $545 million in the quarter, with the deflation of approximately 1%.

The increase of sales of result of continued growth with existing customers.

Operating margins increased by 3 basis points for the quarter.

As we anticipated, the start-up costs for the new distribution facilities impacted operating margins although only slightly in the quarter because some of the facility openings were moved back to the fourth quarter.

We do expect start-up costs associated with the new California facility, as well as the transfer between facilities in the fourth quarter, to impact customized operating margins during that quarter.

We also continue to expect customized internal sales growth to be in the mid-to upper single digits for the year.

These expansions to capacity in customized, will be utilized and improve efficiency and take cost out of the system.

This new capacity will also position us for growth with potential new customers in 2006.

To recap, Company-wide we generated a solid sales earnings performance during the third quarter despite hurricane related disruptions.

As many of you saw at our recent investor conference, we have many exciting new initiatives under way, we have a strong team and we are making major strides in implementing core strategies to drive short and long-term sales earning growth.

Based on the current trends in our business, we do believe that we will be with in the disclosed operating profit range of 69.5 to 71 million in the full year.

We are in the process of developing our budgets for the coming year and remain optimistic about our prospects for a solid performance in 2006.

We're now ready to take questions.

Thank you sir.

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

We ask that you limit your questions to one per person to allow all parties an opportunity to participate in the Q&A portion.

[OPERATOR INSTRUCTIONS]

One moment please ladies and gentlemen while we poll for questions.

Our first question is coming from [indiscernible] of Goldman Sachs.

This is Simeon Gutman of Goldman Sachs.

One question, I'll say it in two parts here.

Hey, Bob, first how much did the impact sales and EBIT beyond the deductible?

And then the second part is, can you talk about the EBIT margin attached to that 115 million in sales you're giving up?

Was it unprofitable?

And then will there be any impact on loss fixed leverage there?

John, why don't you address the first one.

Sure.

Simeon, hey,how are you?

In regards to hurricane you know the deductible as we talked about in our analysts conference we thought would be somewhere between 2 and 2.5 million.

It actually really depends on each individual operating company and losses of that operating company.

We're right at the bubble of where our deductible is.

We're continuing to work with our insurance carriers to look at what we can claim and will recover but at this point we're kind of right on the bubble of being able to recover anything.

As it relates to this business we're giving up, if you took--take it in total, it's about neutral to earnings, pretty much neutral earning.

There isn't any significant impact, it might be just a very -- might cover a modest amount of fixed overhead, but in general, it's pretty neutral.

Would you say that, ex all the hurricane impact, how would you characterize the performance of your broadline EBIT performance?

How would we with characterize it?

Yes.

I mean the core performance because we're seeing it through whatever happened during the quarter vis-a-vis the hurricane.

Because of the things we talked about it's where we expected it to be.

I mean, obviously, we're not happy with it, we expected it to improve significantly in the fourth quarter.

But it's where we expected it to be based on not just the hurricane but the transition of going into the multi-unit business, going out of some others.

In fact, because of the hurricane, as we've said, we didn't really complete that transition.

There was bad debt, you know, in the quarter related--both related to the hurricane and some outside the hurricane directly that was incurred during the quarter.

We don't expect that trend to continue but it did have some impact on the third quarter as well.

If you take under consideration you know we're satisfied with the progress we made in the third quarter.

You know, we also talked before and I don't want to go down the laundry list, higher insurance cost that John alluded to, things like that.

We're making progress, we're aggressively attacking those areas.

We've got all these initiatives, we did a lot of investment spending in sales reps, and in a lot of these programs we're still doing investment spending to roll these out and we're just starting to see the benefits of those.

We think we're building momentum, we think we'll have some momentum going into the fourth quarter, and that's one of the things that excites me about 2006, I think we'll have some pretty good momentum going into 2006.

Great, and then lastly, how much visibility do you have with respect to new customized business and its ability to soak up capacity earlier or some time next year?

Until we get a new customer, we really don't expect margin expansion.

I do expect--well we did this reshuffling of customers between facilities to better service the customers number one, and to make the facilities more efficient.

We will continue to grow internally with those customers.

We think -- we have not done the budgets for next year so it's really too early to tell.

We do not expect much in the way of margin expansion until we get a new customer for 2006 in that segment of our business.

So we are pursuing new customers in that area and, you know, just time will tell.

Great, thank you.

Okay.

Thank you.

Thanks.

Thank you next question is from Mr. Eric Larson of PiperJaffray.

Please proceed with your question.

Good morning, everyone.

A couple question questions.

First, on your restricted stock expensing for the year, will you have--can you explain what additional stuff you might have in 2006 or is that sort of an annual event?

Eric, we haven't given guidance for '06, but let me qualitatively about that.

The 1 million to 1.5 million that we've guided you to this year, includes this year's, you know, grants as we previously disclosed, you know, we had changed our stock compensation program to be more restricted stock base and that's what's driving this year's expense.

Next year with FAS 123R that'll add some cost related to options as well as layering on new grants.

It's still premature to give you specific guidance as far as what we think that cost will be, but it will go up because of those two factors.

Okay and then just a little more flavor for the exiting of the multi-unit business.

I think Bob eluded a little bit to the timing of it.

Is it mainly fourth quarter that it will be transitioned out, or will it move into 2006?

Yes, Steve, why why don't you take that one.

The majority of the business will transition out in the fourth quarter.

So we won't have that business throughout 2006.

Okay.

And so what I'm assuming then in your guidance of 69.5 to 71 million of operating profit for the year, any impact from that exit of multi-unit businesses is in that guidance as well?

That's correct.

Correct, Eric.

Thank you.

Thank you.

Thank you, our next question is coming from Mr. Bill Chappell of Sun Trust.

Two quick questions.

First, on the exiting of the multi-unit business is that included in your guidance of high single to low double digit revenue growth for next year, or is that excluding that?

We haven't given guidance for next year the guidance for the balance of 2005, yes, that's included.

What we said in broadline was, you know, kind of mid-single digits for the fourth quarter and for the year and broadline kind of -- the '05 year and broadline, high single digits to low double.

Correct.

Got you.

Second, on the other income that you said I guess you had a better interest proceeds from the Fresh-cut sale.

What should we model that go forward I guess some of the cash has been used for the tender offer.

Actually, a very significant portion of that cash was used to execute the tender.

Our previous guidance was about a million and a half in roughly net interest expense that's interest expense net of interest income.

And I think that's still a fair number to model for the fourth quarter.

This was just kind of the surprise for this quarter or this was in your expectations?

Well, we were pretty conservative in the guidance we gave as far as our interest earnings.

Obviously we didn't know at the time we gave you that guidance, when the Dutch tender was going to be executed and that sort of thing, so we were fairly conservative in our guidance there.

And to just follow-up there, what's the share count now, and did you do any share repurchase under that new $100 million facility?

That's a good question.

Our share count for the quarter, obviously, is 42 million.

That only has about half of the waiting on the Dutch tender, so shares will go down by about another 5 million for the fourth quarter.

When we announced -- speaking now about the 100 million open market repurchase program that we announced in August.

When we announced that the hurricane happened right after we announced that.

So we didn't feel it was a appropriate open window to commence the program.

We haven't done anything yet on the 100 million.

Our stated intention, obviously, is to return the 100 million to the shareholders.

So, I can't really speak about our timing or things going forward but we do intend to return that to shareholders.

Okay, thank you.

Thank you.

Thank you next question coming from Mr. Jeff Omohundro of Wachovia Securities.

Please proceed with your question.

Thanks.

Mine's really some what of a follow up to Simeon's.

I'm still a little bit confused on the EBIT guidance.

Because I think previously you had excluded the 1 to 1.5 million restricted stock grants.

I think on an apples to apples basis if you included the prior guidance was 71.5 to 76.5 million for the fiscal year now it's 69 to 71.

There's, I think 2.4 million in the Q3 period for hurricane Katrina and another 400 or 500, I think you said for Wilma, for Q4.

I guess my question is where's the GAAP on the upper end that will bring it down to the 71 since if you put those together there'd be about 3 million and another 2.5 million.

What's that component?

Let me speak to that, Jeff.

If you remember our guidance at the last quarter which was inclusive of the stock compensation expense, was 71.5 to actually 77 million and we had guided everybody that we would be the lower end of that range on our last quarterly call.

I think you're starting at the lower end of that range.

You're right you picked up the 2.4 million impact in the third quarter related to Katrina and the impact in the fourth quarter, as I mentioned in my comments this quarter, is probably going to be between 500,000 and 1 million.

That's both the continuing impact of Katrina as well as Wilma.

So that gives you an impact of the hurricanes somewhere between $2.9 and $3.4 million.

Correct.

The lower end of 71 million which we previously had that was pre-hurricane.

Actually the bottom line we're giving you a higher range than the bottom of the previous range if you put into -- build into this the effects of the hurricane.

Correct.

Hurricanes, excuse me.

Okay, that's helpful.

And then when do you actually think you'll be giving '06 guidance?

Right now, Jeff, we're still in the midst of our planning process.

We're doing operating company reviews all the way through early to mid-December.

We do expect to be able to complete that somewhere around the end of year to early 2006 and we've talked about--once we finish that process we're comfortable with our '06 guidance trying to communicate that as quickly as we possibly can to you.

We will more lan likely have some sort of earnings -- not earnings call but guidance -- 2006 guidance call probably by the beginning of 2006.

And earlier if possible.

Very good, thank you.

Okay, thank you.

Thank you our next question is from Meredith Adler of Lehman Brothers.

Please proceed with your question, ma'am.

I would like to try to understand a little better the 51 basis point increase in SG&A.

You talked about bad debt expense, is that something that you sort of see as being one time a lot of it was related to the hurricane.

Where is the costs of the hurricanes?

Is that in the SG&A?

I'm trying to figure out how much of the increase we're seeing is likely to be continuing.

I think there's a couple of things as it relates to bad debt expense normally our bad debt provision as we look at customer credit and manage customer credit we typically range somewhere around 10 to 15 basis points of consolidated sales.

In the third quarter based on trends we're seeing obviously a big chunk was related to the hurricanes that was 20 basis points of sales.

We were seeing current trends that we thought appropriate to provide for.

So hopefully that gives you some color around the bad debt expense.

Fuel cost was other big driver associated with our operating expense ratio.

Where in the fuel line last year's quarter we were at 66 basis points of sales.

That was up about 15 basis points.

We're right about 81 basis points of sales in the operating expense line.

So those were two components of that.

Now that being said, we did recover the cost of the fuel, the extra costs of the fuel, as John eluded to earlier.

So when you get the operating expense line the fuel service charges are up in the expense line.

On an operating profit basis that was offset but.

And then you talked about healthcare and insurance, other kinds of insurance, could you maybe just review with us again what you've done to manage those cost?

Yes.

Sure.

There are a number of safety programs, you know, obviously, the two big components of that are property casualty insurance as well as healthcare insurance.

There's a number of things we've worked on implementing from a safety perspective, both in the warehouse, transportation and those sorts of things.

We are seeing some benefit or moderation of those trends on the property casualty side.

Healthcare costs are still up significantly, and we talked about that last quarter year-over-year.

That we have not seen as much moderation in yet, but we've got a number of programs in place to focus on, we've got wellness programs and looking at the design of our healthcare programs to try to better manage those costs.

Actually, the healthcare will help modify the healthcare program some, and those changes will be made effective the first of the year.

But the risk management safety side of it, that's just something that's going to progress over time.

We're self-insured if that area and we have this IBNR runout not to get too complicated.

There has been a tremendous amount of effort in the safety programs and staffing in the putting safety people in the each opco.

Just a lot more emphasis put in that than we've ever had before and I guess that program's been in place now for about a year, a little over a year, and we have seen some significant improvements as a result of that.

So those trends are, although still higher than we like, are starting to moderate and we think that will be beneficial for 2006.

If I could just be greedy and ask one more question.

You talked about seeing some softness in the industry earlier in the quarter and then it picked up later in the quarter.

Can you just talk about you know kind of what you think is going on out there with consumers higher fuel costs for them?

Maybe anything anecdotal or kind of what you're hearing about the industry.

Yes.

Meredith, I think what we saw especially around the hurricane, you know, the industry got fairly soft across the country.

You know we attribute that to some degree to the drastic increase in the price of [inaudible] not going out to eat as much as they were.

As well as a lot of people kind of staying close to the TV to watch the news and everything that was developing.

What's optimistic is we have seen some improvement in the overall sales number across our operating companies in October.

We're cautiously optimistic that that's going to continue through the end of the year.

Good, thank you.

Our next question is coming from Ajay Jain of UBS.

Please proceed with your question, sir.

Good morning.

I had a quick question on your warehouse capacity expansion process.

Since you've had higher cost in California and Indiana can you just comment on whether overall this process is likely to still be complete by year end and whether the new facilities are on budget or could we expect to see any residual impact into next?.

The facilities are on budget.

We did push back just because of some challenges with local governments in getting certain things done.

We've -- the projects moved a long a little slower than we would have hoped.

So a couple of those projects, the expansion in Florida, and new facility in California both were pushed back to the fourth quarter and we completed in October, this transitioning of the majority of the accounts between these different facilities and the rest of country.

So I don't expect going into next year you know any significant changes other than what we already told you.

Okay the fact that you're pointing to the lower end of the CAPEX guidance, that shouldn't Imply anything so the spillover effect?

Ajay, it should not.

Our CAPEX guidance we give is conservative we historically come in the towards the lower end of range.

I think we guided at the second quarter that we're going to be at the lower end of range and obviously you see that in our remarks today.

So I would not take anything unusual or changes in what we're doing in that context.

Okay and just one to get some clarification last question.

John, you may have mentioned previously the 3.2 million in interest income, I'm assuming it's not included in your operating income guidance.

Correct.

It's below the line.

Below the operating line.

Thank you next question is coming from Mr. Mark Husson of HSBC.

Please proceed with your question, sir.

Good morning, gentleman.

Ask you questions about sales force, I'm trying to recall the last time you really stepped up the recruitment.

I guess when alliance was put together with U.S.

Food Service, there was a bunch of fallout there and you recruited a lost of those.

What did you learn about how long it took those sales people to come up to speed, and what are you seeing in your current experience in this big bulging hiring?

Mark, we've never had a formal corporate-wide hiring initiative.

That's always been at the opco level.

As we announced in the September analysts meeting, this was really the first time that we had an overall corporate initiative to increase our head count by 10% which we have just about completed.

Generally speaking we see the improvement in the sales over a course of time.

And we do that through a variety of ways, perhaps turning business over to one salesperson to another but generally takes about a year to start to see some significant improvement from newly hired reps.

If we take somebody from a competitor it might be a little quicker than that that, it's more cost going in but the transition is a little quicker, it depends on the non-compete that we're working with, obviously we want to honor the non-competes.

We have a blend of competitive salesmen once a week we speak with.

I would say the vast majority of our hires, the majority of our hires certainly have been new sales reps that are inexperienced, and to Steve's point, it's about a year kind of pay back time on those.

The only other comment I would make is, it's one thing to roll out a corporate initiative, but you've got to do a pretty good job of training them, retaining them so in conjunction with the hiring goals, you now have corporate trainers throughout our operating companies.

We're retaining them and training them all in the common methodology, so it's optimistic.

And then does that actually lead to -- I mean if it all works, does it lead to broadline sales growing at a significantly faster rate than it had done before?

We won't sit here and commit that to you.

Obviously what we do in the '05 particularly in the latter part of '05 you won't see the significant benefits of until the latter part of '06.

We don't want you to sit here and ramp up our numbers for '06.

If everything works right you should see gradual increase in street sales as '06 progresses and hopefully that will drive an even stronger '07.

We are doing some investment spending in that area and we're optimistic of the results.

Mark, you weren't at the investment conference but there are some really good initiatives going on that area.

I have a lot of confidence in our folks in implementing those.

And they transition off salary into commission over the balance of the year; is that right?

What's the course of the step down?

It happens over a period of a year.

Okay, great, thank you very much.

Thank you.

Thank you our next question is coming from Andrew Wolf, BB&T Capital Markets.

Please proceed with your question, sir.

Morning.

A lot of my questions were posed in one way or another.

I'm interested in a laundry list, I realize you don't want to give a lot of excuses but it helps me understand.

On the fuel, you talked about 15 basis points lift and specifically, if you're able to pass that through I could see with the contracts, but how is that being passed through to independents?

Do your operating companies have a surcharge or do you think there's market-wide pricing and everybody is basically taking some pricing?

Andy, we did initiative fuel surcharges on many of our street customers during the quarter.

And we are seeing that in--

Is that being followed in the market?

Yes.

We've seen that as a pretty common practice.

Got it.

Thanks.

And John, would you give us the year-ago bad debt number you said it was a 20 bips this quarter do you anticipate because of Wilma you could see a little bit in fourth quarter a little higher than normal?

Actually we provided within the quarter a big part of increase in the third quarter as related to Wilma.

That's part of the driver of that 20 bits.

Year-to-date we're at 15 basis points.

Prior year historically, we range between 10 to 15 basis points of sales and 2004 was 15 basis points of sales.

We were seeing some decent trends early in the year.

Third quarter was 20 basis points but right now we're at year-to-date 15 basis points.

Lastly, is the facility in Jackson, Mississippi where you said that FEMA was using it or half of it, did that have any impact on -- what was the impact on sales and profits and customer service and those kind of things?

And is FEMA still using the facility?

FEMA is no longer at the facility.

We did have some impact in the McGee facility as relates to service levels and those numbers are included in hurricane guidance.

That facility is back on line.

We're bringing the customers back and doing quite well.

Thank you.

Good, thank you.

Our next question is coming from Bill Leach, Neuberger Berman.

Please proceed with your question, sir.

Good morning.

Morning.

If I calculate correctly, your full year operating income guidance implies a 15 to 20% gain in the fourth quarter, and I'm just wondering why your so optimistic about achieving such a large gain given the hurricanes and the higher fuel costs and also considering that, I believe the base is quite difficult, I think you're up about 30% last year in the fourth quarter.

Yes year-over-year, Bill, I think that, one is, we're lapping there is a nice improvement in operating margins that we are anticipating in the fourth quarter.

A big part of that is kind of lapping, we will be fully lapped on all the compass business that was rolled out last year and rolled out by the end of third quarter, and completely rolled out by the end of fourth quarter, that's a big component of that driver.

And we had costs associated with the rollout.

The other components are that we're really starting to see some traction on the three primary initiatives that we talked about in September.

The category management and utilization of our new common codes being able to aggregate our purchase volume and negotiate with vendors and supply our partners based upon that information.

Continued expansion of our street sales and continued rollout on our operational excellence initiatives which are centered around our warehouse management systems, warehouse productivity and activity based pay.

A lot of those installations will continue.

They did throughout the third quarter and will continue throughout the fourth as well.

Okay, thanks.

Thank you next question is coming from Dana Walker of Kalmar Investments.

Please proceed with your question.

I will, good morning.

Morning.

Meredith attempted to ask this question earlier, I'm not sure if she got the response she was seeking.

John, is the 2.4 million hurricane effects on EBIT is that in SG&A or costs of goods?

Primarily SG&A all the bad debt expense associated with that, the direct costs, there's a little bit that's up in the gross profit.

We had about $400 or $500,000 of inventory writeoffs, that's up in the gross profit lines.

Sales were impacted as I had mentioned, $12 to $13 million, that's on the sales line.

As far as the bulk of the costs other than the lost gross profit as well as the inventory writeoff all of that's in SG&A.

Does the 2.4 million try to capture what the profit might have been on the 12 to13 million of lost revenue?

Yes, yes that's the total impact of what we think the impact of the hurricane both in lost business as well as direct out of pocket costs.

Your working capital statistics deteriorated slightly in the quarter.

Anything to point to there and do we expect to see them recover?

We think they will recover.

Some of the softness that we saw, I think Bob talked about some of the softness in sales obviously are DSOs just as a measure will deteriorate a little bit when your sales line deteriorates a little bit.

Obviously the impact on lost sales from the hurricane and all of those components.

So, no we do not believe that that's a continuing trend.

The fourth quarter though this $500,000 to $1 million range we gave you is primarily gross profit I mean dollars.

It's more lost sales opportunity.

Obviously the impact--the areas that were significantly impacted in some of those regions were still fairly slow to come back.

Obviously south Florida--a good part of south Florida is still without power, so those kind of impacts would bel more sales and lost opportunity related.

Two final questions.

You talked at your investment meeting about addressing your proprietary brand strategy, but you hadn't made any judgements yet, perhaps if you could update us on anything you might have elected to do.

And finally, assuming that you hadn't phased in all of this salesperson increase in all locations at the same time are there any early regions where you can speak to any type of effect you're having in the market?

Hi, Dana.

In regard to the proprietary brands, we have completed our analysis of the brands specifically moving forward, our brands will be categorized into three different tiers.

With that complete we'll spend the better part of next year making sure that all the existing brands fall into one of those tiers and moving some of the products that may be in an incorrect tier into the correct one.

Educating the sales force as it relates to which tier is appropriate, and then making sure at the same time that those brands do add real value to the customer base.

So our brand sales has been relatively flat.

From a percentage basis.

A percentage of street sales.

I think over time we'll start to see that percentage begin increasing again.

As it relates to the question about sales increase, we did have an initiative corporate-wide to grow our street sales by 10% over the last 13 weeks.

We do have enough history that demonstrates to us that, you know, a percentage increase in head count relates to a very similar increase in street sales a year later.

Does that answer your question?

It does.

So you didn't address--you didn't take any of these steps earlier in the year in some parts of your operating structure?

Well everybody had goals, but a lot of people kind of waited towards the latter part of the year and you know to hire the sales people.

So a lot of the hires were done in the latter half the year, second half of the year.

The other thing I would add is when you are transitionings a lot of business in and a lot of business out in the operating company it's very difficult to stay focused on growing your street sales at the same time.

From that perspective picking up that big chunk of chain business towards the latter part of last year did slow down our street sales efforts because it was all consuming to these opcos and so it did kind of cause us to take our eye off the ball a little bit in growing street sales and I think we're seeing a little bit of the result of that now.

So we are you know as we said street sales have slowed down a little bit.

Part of that however is softness in overall industry.

Part of it is we took our eye off the ball as we picked up this chain business.

So we think it is the right strategy to aggressively grow the street sales and so we have our eye on the ball and we expect to head down that path very aggressively.

Thank you.

Thank you.

Thank you our next question from Bob Cummins of Shields & Company.

Please proceed with your question.

Good morning, everybody.

I had some financial questions.

First to just clear up what I think was a comment you made earlier.

Is it correct that your average diluted shares in the fourth quarter will be 5 million less than the third quarter?

Yes, that should be the case, Bob.

Versus that 42.9 million in the third quarter we should reduce that another 5 million shares?

Somewhere in the 37 to 38 million range, correct.

Great, thank you.

And secondly, given your strong financial condition I'm a little surprised that you have not yet bought back any stock under your $100 million buy back program.

Can you give us a little more insight into why your so slow getting started there?

Yes, absolutely.

We announced a buy back right after our Board meeting which we discussed with the Board in late August.

As you remember the hurricane impacted us right at the beginning of September.

So, in our view, and we talked about it at the analyst conference, that we are still assessing the impact of the hurricane, and until we really came out with that guidance our view was that it really was not an appropriate window for us to be in the market buying or initiating that program.

So again, we do anticipate returning that to shareholders and we'll execute or do intend to execute the 100 million repurchase program but we just didn't feel it was appropriate given the timing of disclosures and when we approved that program.

Without actually making any forecasts, are there any impediments now to initiating that $100 million program?

Yes, I'm not sure how to respond to that.

I mean obviously, having our earnings release we would typically have an open window post earnings release so you know hopefully that answers your question.

Right, I understand.

Following up on that, I'm wondering if upon completing this buy back program you might adopt this as an ongoing financial strategy to repurchase shares on a regular basis going forward?

I -- it's -- we will continue to evaluate our capital structure.

Obviously, we're very well positioned and very well capitalized to execute any sort of growth strategy we want to pursue.

We will continue to look at what the right mix of debt and equity are on an ongoing basis and then react accordingly.

We are -- obviously continue to be the in acquisition game I guess you could call it.

So probably significant part of that will depend on how active we are in you know in acquisitions.

And we are you know pursuing--continuing to pursue some opportunities there.

Right, that was actually going to be my final question what you're--how aggressively you're looking for acquisitions.

Now it would seem that following the acquisition of Fresh Express your acquisitions in the food service distribution business slowed to 0 and now you're in a perfect financial situation.

I'm just wondering if in fact you have stepped up your efforts in that regard?

Well, you know as we've related to you earlier, I mean that's true.

Well, we did a number of acquisitions.

We've completed integration of those acquisitions and I guess you could say gone through some pretty good learning curves as well.

But we have--we feel like we are in a position now to you know get back in that area and continue to pursue some new opportunities.

Okay, thanks very much keep up the good work.

Thank you, Bob, appreciate it.

Gentleman at this time we have no further questions in queue.

Okay first I guess we would like to thank you for joining us.

There are many exciting initiatives going on at PFG.

I have a high degree of confidence in our team and our ability to execute to the core strategies that will generate solid earnings growth for our shareholders both short and long-term.

Thanks for being with us.

Thanks for your interest in our company and have a great day.

Thank you ladies and gentlemen.

This does conclude today's teleconference.

Thank you all for your participation and you may disconnect your lines at this time.