Blackstone Inc (BX) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Performance Food Group fourth quarter and year-end 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.

Great, thank you, Dan, and good morning and welcome to the Performance Food Group call and webcast to review our announcement earlier today of its financial results for the fourth quarter and full year ended December 31, 2005.

This morning I am joined by Bob Sledd, our chairman and CEO, and Steve Spinner, our president and COO.

Our call today is intended primarily to review financial results for the fourth quarter and full year of 2005.

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

I'll briefly address our operating highlights for the quarter and full year as well as certain expectations for 2006, and then Bob and Steve will provide more insight into our results and expectations.

Before we start, let me say that certain of the statements we 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 result may differ materially.

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

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

Net sales and continuing operations for the quarter were $1.4 billion, an increase of 6.8% from the year-ago quarter.

Net sales for the year were $5.7 billion, 10.6% increase over the prior year.

We generated all our sales growth for the quarter and the year 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 a consolidated basis, inflation amounted to approximately 1.2% for the quarter and 1.5% for the full year.

Our gross profit from continuing operations increased 7.5% from the year-ago quarter while gross profit margins increased 9 basis points to 13.35% from 13.26% in the same quarter last year.

The increase was driven primarily by improvements related to our procurement initiatives.

Gross profit for the year increased approximately 10% while gross profit margins declined 3 basis points.

This decline was primarily the result of our increased mix of multi-unit business with the addition of a major new customer in late 2004.

Operating expenses and continuing operations for the quarter were $170.8 million, or 11.86% of sales, which represents a decline of 4 basis points versus the prior-year quarter.

For the year, operating expenses were $676.9 million, or 11.83% of sales, which represents a decline of 3 basis points.

The decline in operating expense ratio for the year is due primarily to our higher mix of multi-unit business in the broadline segment, which has a lower gross profit but lower expense ratio and through improved operating efficiencies in our broadline segment.

Higher fuel and insurance costs in both segments as well as higher occupancy costs in our customized segment partially offset some of the improvements in operating expense ratio for the year.

Operating profit from continuing operations in the quarter was $21.5 million, and our operating profit margin was 1.49% reflecting an increase of 13 basis points versus the prior-year quarter.

For the year, operating profit was $70.5 million, which was in line with our previous guidance of $69.5 million to $71 million.

Our operating profit margin was a 1.3%, which flat versus the prior year.

Interest expense and loss on sale of accounts receivable increased to $2 million for the quarter versus $1.9 million in the prior-year quarter as a result of higher interest rates versus the prior-year period, partially offset by the reduction in borrowings in the company's revolving credit facility versus the prior-year quarter.

For the year, interest expense and loss on sales of accounts receivable amounted to $8.4 million compared to $10.7 million in the prior year.

Decline for the year was primarily the result of the redemption of the company's convertible notes in the fourth quarter of 2004 and the replacement of those notes with lower interest rate debt and the reduction of borrowings in the company's revolving credit facilities offset by those higher interest rates.

Other income was $964,000 for the quarter consisting primarily of interest income compared to $99,000 for the same period of 2004.

For the year, other income amounted to $5 million compared to $481,000 in the prior year.

Again, that increase in interest income relates to earnings on the remaining cash proceeds from the sale of the Fresh Express segment.

Our effective income tax rate was slightly less than expected at 37.8% for the full year and benefited from our tax-planning strategies associated with the sale of our Fresh Cut business.

We continue to expect our tax rate to be approximately 39% for continuing operations in 2006.

Net earnings from continuing operations in the quarter were $12.9 million, or $0.35 per share diluted compared to $3.9 million, or $0.08 per share diluted for the prior-year quarter.

This includes the impact of the one-time $6.1 million after-tax charge in the 2004 quarter related to the redemption of the company's convertible notes.

Excluding this charge, net earnings from continuing operations in the prior-year quarter were $10 million, or $0.21 per share.

Net earnings from continuing operations for the full year were $41.8 million, or $0.95 per share compared to $26.6 million, or $0.56 per share in the prior year.

Excluding the impact of the one-time charge in '04, net earnings from continuing operations in '04 were $32.8 million, or $0.69 per share diluted.

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

Our debt-to-capital ratio was less than 1%, which was flat compared to the end of the third quarter and down from 23% at the prior year-end.

This excludes the $130 million of interest in accounts receivable sold under our accounts receivable purchase facility.

Working capital for continuing operations consisted of day sales outstanding in receivables at 21 days compared to 22 days in the prior quarter.

Inventory turns amounted to 16 times compared to 17 times at the prior quarter and accounts payable float was 118% compared to 113% in the prior quarter.

For continuing operations, depreciation amounted to $22.8 million, and amortization to $3.6 million for the year.

Capital expenditures were at $77.6 million in 2005 versus $40.6 million in the year-earlier period.

This resulted in the use of free cash flow of $7.7 million for the year due primarily to our capital expenditures related to the expansion of the capacity in the customized segment.

Looking ahead for the year, we expect the following in 2006 from continuing operations -- we expect internal sales growth on a consolidated basis to be in the range of approximately 4% to 6% for the year; depreciation to be approximately $25 million to $29 million; amortization to be $3 million to $4 million; and capital expenditures to be in the $60 million to $70 million range.

We expect pretax stock compensation expense at approximately $5 million to $5.5 million to be incurred for the full year 2006.

Net earnings per share including stock compensation expense are still projected to be in the $1.20 to $1.30 per-share-diluted, or $1.29 to $1.40 excluding the stock compensation expense.

Our projections anticipate the completion of our previously disclosed program to repurchase up to 100 million of our outstanding common stock.

For the year -- or for the first quarter, sorry, we continue to expect net earnings per share to be in the range of $0.11 to $0.15 per share.

With that, I'll now turn it over to Bob Sledd for his comments.

Great, thanks, John.

Welcome and thanks for joining us.

We've just completed a very significant year in our company's history.

I am pleased that we did what we said we would do.

We had a year of good earnings and sales growth.

Our operating margins improved as we expected at the end of the year as we lacked the addition of a major multi-unit customer and focused on our more profitable street sales.

We successfully sold the Fresh Cut segment of our business, paid off the debt on our balance sheet, and returned proceeds from the sale of Fresh Cut to shareholders.

We completed a very successful Dutch tender offer for 10 million shares of our stock, and we initiated an additional $100 million stock repurchase program that we expect to complete shortly.

Throughout the year, we strengthened our infrastructure, implemented standardization and new technology programs, and consolidated our corporate and broadline infrastructure.

Operational excellence initiatives in the broadline segment have driven improvements in the accuracy and efficiency of our service to customers.

We also expanded our customer capacity by approximately 45% in customized.

To summarize the year, we achieved what we set out to accomplish in meeting our sales and earnings goals and strengthening and realigning our organization to support the future growth of our company, and with the renewed singular focus on our core distribution business, we are financially sound, our infrastructure is strong, our leadership team is strong and experienced, and we are well positioned to drive solid, long-term returns for our shareholders.

Now we'll review the results of the quarter and the full year in each segment beginning with broadline.

The broadline segments generated sales of approximately $869 million, an increase of 5.3% in the quarter.

Inflation was approximately 2% during the quarter.

For the full year, sales increased 11.5% with real internal sales growth of 9.4% adjusted for approximately 2% inflation.

Our higher-margin street sales grew at a rate of 5.3% for the full 2005 year.

Operating margins improved by 27 basis points in the fourth quarter versus the prior-year quarter and declined by 4 basis points for the full year as a result of the addition of a major multi-unit customer and hurricane-related costs.

Operating profit in broadline increased nicely in both the quarter and the full year.

As it relates to sales growth, we are changing our focus to more profitable sales growth and are pleased with our progress.

Last year the addition of a major multi-unit customer drove strong top-line sales but slowed the overall growth rate of our street sales.

This year we are confident that our aggressive focus on growing street sales will provide increasing benefits to earnings as the year progresses.

In the second half of last year and throughout 2006, we are investing in the expansion of our sales force as well as sales support to drive this effort.

Also, from the fourth quarter of 2005 through the first quarter of this year, we are implementing our planned exit of certain multi-unit business in the broadline segment, much of which did not meet our private criteria.

At the same time, we have not forecasted the addition of any major new multi-unit customers in 2006, but we'll be opportunistic in pursuing a moderate amount of profitable multi-unit business.

In a moment, Steve Spinner will provide additional details regarding our 2006 initiatives in the broadline segment.

We are expecting a good year in broadline.

We are optimistic that we'll see growth momentum in street sales and earnings over the course of the year.

Our customized segment generated sales of $572 million, an increase of 9% for the quarter.

Internal real sales growth was 9.2% with slight deflation in the quarter.

The increase of sales was the result of new unit growth with existing customers.

Customized sales for the full year increased 9.2%, while real internal growth was 8.6% adjusted for approximately 1% of inflation.

Operating margins increased slightly for the quarter and increased 6 basis points for the year.

During the quarter, we complete the expansion of new capacity in the customized segment.

With this new capacity we are now able to more efficiently serve customers by transferring existing business between facilities and reducing driving miles.

This is partially offsetting the cost of the additional capacity.

Our new capacity also positions us to grow the existing customers and positions us favorably for potential new business in 2006, which we will continue to pursue.

To recap, company wide, our sales continue to grow at a solid pace in both the quarter and the year along with our earnings.

We accomplished a number of significant objectives in the 2005 year that strengthened our operating platform for the future.

We will maintain our focus on executing our core strategies to drive our short and long-term earnings growth.

At this point, I'll ask Steve Spinner to provide us an update on our current initiatives in the broadline segment.

Steve?

Good morning. 2005 was a very rewarding year for us in the broadline segment.

We've made great strides in driving structural change in broadline, moving from what has historically been a decentralized platform to one of standardized business processes and systems.

We've begun to align these processes with benchmark metrics leveraging the benefits of scale in having achieved efficiency improvements through the implementation of new technologies.

These efficiencies have proven themselves in reduced warehousing operating costs and increased customer satisfaction.

Specifically, operating margin in the fourth quarter was 27 basis points ahead of the prior year, and operating profit increased 17%.

This was driven by controlling costs, continuing to grow our sales to independent restaurants, and beginning to reap the benefits from our standardization initiatives.

As we've discussed in the past, our three primarily initiatives in broadline continue to be, number one, growing our sales to higher-margin independent restaurants; number two, effectively implementing new processes, systems, and programs in our national and local category management; and, number three, establishing measuring and delivering against rigorous operational excellence standards.

Let's review what we've accomplished over the past year and what we expect to take place during 2006.

During the fourth quarter, we continue to focus on expanding our sales rep headcount and successfully completed the addition of 10% more outside sales reps calling on independent restaurants.

Sales to independent restaurants during the quarter grew 8%.

In addition, our continued focus on account penetration drove our average sales per delivery up 8% for the year.

During 2006, we will continue to maintain our headcount expansion objectives while remaining vigilant in our hiring, training, and retention practices using our proprietary Web-based sales tracking system.

Growing a sales force that will ultimately drive an increase in sales to independent restaurants requires more than headcount expansion.

It requires a very disciplined approach to hiring, training, compensation, and retention.

During 2005, we implemented a common assessment tool to evaluate prospective sales candidates, a PFG corporate training curriculum staffed by regional sales associates and PFG training managers in each location.

Our approach requires an up-front investment that will take some time to bear fruit, however, I am optimistic about our near-term trends and ramp-up of our sales to independent restaurants throughout the next several years.

We will also continue to be opportunistic in our evaluation of multi-unit account business, reviewing profitability models, and required service levels will remain front and center as we pursue this business at some of our locations.

In an effort to enhance our category management, I am excited about the progress we've made in this key area.

We are effectively on a common item platform and have begun utilizing our data warehouse to analyze item and vendor movement.

This has enabled us to more effectively negotiate and track national programs with our suppliers.

In addition, we have completed our analysis and rollout of core items designed to ensure that our independent restaurants have access to the right items at the right price all the time.

And we are now gearing up to expand our PFG-branded product offerings by introducing a complete lineup of PFG-procured and branded fresh produce and will continue to enhance our branded product offering based on customer preference and data analysis using our data warehouse.

During 2006, we will continue to ramp up our supplier negotiations, and we'll be implementing a region procurement strategy.

We made significant advances in our operational excellence initiatives as well.

Our warehouse productivity, management, and compensation systems have been standardized.

During 2006, we will continue to focus on operational excellence in our transportation departments through the implementation of our previously announced onboard computer systems.

In addition, our commitment to safety throughout our operating companies will allow us to more effectively manage our insurance and related costs.

Standard productivity systems and measurement tools allowed us to improve our selection rates and accuracy while reducing our overall warehouse costs as a percentage of sales during the last two years.

Our combined initiatives within these three core strategies are designed to drive long-term improvements in our broadline operating margins.

We'll continue to drive further standardization and consolidation of functions within this segment.

We've made a lot of progress in a very short period of time.

Our team understands our vision, and we are well positioned today to achieve both short and long-term growth.

At this point, we'll take some questions.

[OPERATOR INSTRUCTIONS]

Simeon Gutman of Goldman Sachs.

The 4Q seemed to be somewhat of an inflection point with respect to broadline EBIT margin.

What, if anything, changed from the 4Q versus the 3Q?

Is there anything one-time in there?

Obviously, the hurricane was certainly -- caused a lot of noise in the third quarter.

Plus, the other thing was, Simeon, as it relates to margin, was we lacked the addition of a couple of major multi-unit operators, and as we had indicated actually earlier in the year, that would slow down sales growth but we were focused on, as Steve said, we achieved 8% growth in our higher-margin street business.

So the result of that, plus the initiatives and so forth -- that was really what caused the increase in operating margin.

And the timing of the exit of some of the multi-unit business -- how did that play out?

Was it some in the fourth, the rest in the first?

A little bit in the fourth.

The majority of that is actually in the first quarter, throughout the first quarter.

The progress that we've seen, then, sort of makes this first quarter -- your first quarter guidance seem a bit conservative.

Are we missing anything there?

No, I think the first quarter is historically the lightest quarter, if you remember the seasonality of our business.

Secondly, we'll be transitioning out of a lot of that multi-unit business, so there will be some transition costs associated with that.

And we continue to do some investment spending in this area of sales development -- street sales development, in particular.

So we just think it's wise to continue to have the range that we have given.

We do not expect to update that at this point in time.

Okay, and then with respect to customized -- really, throughout the year and as well as in the fourth quarter, your profits really didn't seem to get hurt much by your capacity additions.

Is the impact from those -- has it been less or is the underlying strength of the business stronger than you thought?

There was some pretty good strength of the business.

Our folks did a great job in that area.

As we said, part of the cost of the new facilities was shifted to -- as we shifted the customers around, we saved a little bit of money relating to the miles that were driven.

We saved over 2 million miles they've driven.

But, by the same token, those facilities didn't all open until the end of the year.

So some of them opened a little later than we anticipated, so I think the first couple of quarters, in particular, I think you'll see a higher cost related to capacity than we had even at the end of the year, again, because some of those didn't get capitalized, they didn't get on the books until the end of the year, a couple of major new facilities.

And what about visibility as it relates to new customers?

I think in early January on the guidance call, you said you didn't have anything yet to report, I mean, other things kind of getting closer now?

We do not anticipate anything imminent, and we're going to continue to have conversations with folks, and there is some interest out there, and we're committed to work, and we're hopeful that -- I suppose by the end of the year we'll have something to announce, but we just don't have anything at this point in time to talk about.

All right, and given all this progress you're making, has your comfort with acquisitions moved up in terms of a timetable?

Acquisitions of additional broadline distributors, do you mean?

Sure, yes.

Well, we are having numerous conversations, and, again, with acquisitions there are so many things related to acquisitions.

They need to meet our criteria, be a good, solid company with strong management teams and good geographies and looking to sell at a reasonable price.

And so we are talking to some folks, and we'll see what happens.

All right, and, Steve, lastly, you mentioned the brand fresh produce.

I just took a gulp there for a second -- you're not referring to fresh cut lettuce are you?

[laughter]

No, no, no, this is primarily a commodity product that happens to be packed under a Westcreek brand, which is a PFG proprietary brand.

Meredith Adler of Lehman Brothers.

I have a question about corporate expense, which was up quite a bit in the fourth quarter last year, and we thought that it might normalize a little bit.

Could you talk a little bit about what you think the prospects are for corporate expense and maybe what are the items that show up in that line?

Obviously, the corporate office, but what else?

Meredith, I can answer that first.

The primary things this year that we have in corporate costs, and then I'll speak to '06 in just a minute, are all of our IT -- corporate IT functions.

We do allocate some into the divisions, but there's a lot of corporate infrastructure we have associated with IT.

We have some centralized HR functions and initiatives, all the finance initiatives, all the public reporting, treasury, tax, those sorts of things, and then some -- just -- basic corporate management are really the primary areas.

Obviously, stock compensation costs are in there as well.

HR, human resources.

HR, human resources, right.

Now, the one thing that will change next year, just to remind you when we gave our '06 guidance, we've kind of relooked at where IT fits, what it supports, and those kind of things.

So as we start to report our segment reporting for '06, a lot of those IT costs are going to be lumped into the broadline segment.

So '05 will be restated for that change, and I think that was roughly 4.5 million to 5 million, I think, of incremental costs that will get allocated to broadline in 2006 from '05.

We never indicated that our corporate costs were going to come down.

In fact, because of things like 404 Sarbanes-Oxley, we've worked hard to keep them pretty steady, and, in fact, when we say corporate costs, we're talking about IT investments and all these different initiatives that you're seeing out in the field.

We've actually -- as I think we mentioned to you all in our forecast meeting, particularly in our broadline segment, of ramping up our IT expenditures.

But that will be reflected in the broadline segment.

And then just from a trend perspective, looking at the second quarter with 7.6 million, 7.3 million in the third quarter, 7.4 million -- so it's been relatively stable for most of 2005.

Okay.

Another question I have is to talk about -- this is what I think Steve listed as his second major initiative, going forward, is category management.

And I just want to confirm that you guys are still at a fairly early stage in terms of the discussions with vendors.

You have a common item database now, but would you say you're in the first or second ending or do you think you're further along?

Meredith, I think that we really are still in the beginning stages of utilizing the common item in the data warehouse to actually begin the process of calculating return on vendor investment.

We have -- did start in late 2005 and certainly will be very busy in the first quarter of 2006 and throughout the year in putting out RFPs for a lot of our major product categories using this new aggregated data.

So we're pretty early along in the process.

Mark Husson of HSBC.

Good morning, it's sort of a long look-back question.

If you look at the development of PFGC, over time, you've been able to grow as a relatively decentralized business for a long period of time without really having significant issues.

Then you add the last couple of years of real kind of volatility, and I'm wondering now, looking at the toolkit that you've got in front of you, or your dashboard, if you like, and how you run the business, do you think what you've got now -- or, first of all, is that what got you out of some of the trouble you got into in the last couple of years?

And then, looking forward, how scalable is that to being a bigger operation?

Mark, that's a good observation -- this is Bob.

If you look back historically, the philosophy that we had was more of a decentralized philosophy, and the reality was that our operating companies didn't have the time or the resources to really take the companies the next level.

We started kind of hitting a wall.

We made good progress for a while, but the reality was we started hitting a wall and just did not have the time or resources within the opcos [ph] to share -- develop and share best practices.

We were reinventing the wheel with our IT resources, and there were just a lot of areas that we were just not making good progress in.

So we took a step back, built a stronger infrastructure, brought in a number of extremely strong people in operations and IT and different areas of the business -- human resources -- and really standardizing -- we don't like the word "centralizing," but standardizing best practices, and our operating companies really appreciated this.

They are embracing it and seeing the benefits of it.

And so we've seen, as Steve has mentioned to you, some of the numbers, and we've significant improvements in our operating companies in those areas, and we expect that to continue.

This area of category management and actually being able to leverage our purchasing power in that area for the first time is an exciting opportunity.

There are just a number of different initiatives that we're still in the early stages of that we think bode well for the future, and we've got a great team of committed folks to make that happen.

And how scalable is it?

Actually, it's very scalable.

We've built the infrastructure, a team here, that can add to it, and we've got regional presidents out in the field working with the opcos.

I mean, this is really the platform we need to grow aggressively, and we've got a platform now that we can bring new companies in and bring them into the family and make those work, we think, well.

The biggest, I think, challenge, too, is development of people, and when I say "challenge" I mean that's really a key to any successful business, and so we're also implementing a leadership development program to raise the level of leadership of our existing people but also to develop a whole new team of leaders in the company and also go out and solicit folks to bring into the company, long term, and help us grow.

So we want to -- well, let me just say that that's an important part of our future as well.

And a final question, you're talking about obviously hiring a lot of salespeople here, and your major competitor is doing something similar as well as having aggressive account reviews and looking to try and poach other people's platinum accounts.

Aren't you afraid that these salespeople are just going to be bumping into each other out on the street these days; that there are just too many of them?

In our situation, we still have so much room for growth in every one of the territories in which we trade, that's just not going to happen.

The geographies are so big, and we're just not that penetrated in any one of the markets.

We really don't have any of the geographies in which we trade where we have a share greater than 10% -- in the geography that that particular operating company covers.

So I don't see that as an issue at all.

Jeff Omohundro of Wachovia Securities.

At your analyst meeting, you highlighted some of the technology initiatives, and it looks like you're making some real progress getting some traction on them.

I wonder if you could maybe highlight with us the top two or three major IT initiatives for '06, when they might be completed, and what benefits you expect to see.

Well, let me take a step back for a second.

What we completed in '05 was the standardization of our warehouse and transportation system so that we rolled out standardized warehouse productivity system as well as some fleet management including onboard computers, and that's going to continue rolling out until about 2006.

And that's on a very scalable platform, which gives us the ability to go in and take a look at selection productivity, the accuracy down to a selector detail in any operating company.

At the same time, we're building the corporate infrastructure here as it relates to standardizing our financial reporting systems, our HR management systems, in addition to continuing to enhance our proprietary sales tracking system, which gives us the ability to take a look at customer potential in any market, look at business that we've lost, look at business that we've gained, and that access goes all the way down to the sales rep level and can be aggregated into district management, regional management.

So we'll continue on those sales and operations initiatives that we talked about prior as well as invest a great deal of time and effort in standardizing our basic legacy system infrastructure, our ERP system, to get all of our companies on the same platform.

Jeff, let me add just one point to Steve's comment -- as we look at standardizing this ERP system and making sure we integrate that with a scalable ledger system, which would enable us to look at centralizing certain functions.

Right now, we're very distributed, still, on our financial reporting systems.

We've done a lot of work on standardizing those systems, but we're just looking at what the right platform and architecture is for the long term in helping to drive cost and efficiency in the business.

And is that something that is an '06 event?

We'll continue to work on that in '06.

I don't think that we will have any major wholesale change in our structure in '06, but we are certainly setting the stage for that by the end of '06.

Okay, and then one other, I guess, housekeeping type of item -- in your labor side, are there any contracts coming up?

Yes, we have one collective bargaining agreement that expires in '06.

Janet King of J.P. Morgan.

Hi, I'm filling in for Steve Chick.

Just a couple of questions -- the first one, if you could talk a little bit about Progressive Group Alliance, I think, is your old Pocahontas Division, and a little bit about what that is as a percentage of sales and profits and how that relates to the rest of your business in terms of margins.

Progressive Group Alliance falls within the broadline segment.

We don't disclose the actual results of any individual operating company.

Progressive Group Alliance provides a lot of marketing and procurement services to independents as well as PFG-owned operating companies across the country.

But is it fair to say that there is a pretty high -- a large amount of proprietary brands that you sell through the Progressive Group Alliance?

Well, Progressive Group Alliance has quite a few of their own proprietary brands that PFG operating companies sell.

The independents who belong to Progressive Group Alliance utilize those brands as well as some additional brands that happen to fall under the Pro Group umbrella.

And then PFG also has its own proprietary brands that are not sold to the independents.

And Pro Group is actually several companies -- Progressive Group Alliance happens to be the umbrella that they fall under.

Okay, so are they higher margin than the average broadline margin?

It's a totally different comparison because our operating companies are actually delivering freight to a customer, whereas our Pro Group companies do not have a warehouse.

They are providing marketing and merchandising services that they earn a fee from.

And it's not a big revenue driver.

Like Steve said, we don't disclose profitability of any particular company, but it's not a big revenue driver.

Okay, thanks.

And then a second question is -- I'm not sure if I heard you correctly, but your headcount went up 10% in the quarter, and your sales independent customers went up 8%, is that correct?

Our sales to independent restaurants grew 8% in the quarter, and our headcount grew 10% in the second half of 2005, most of it coming on in the fourth quarter.

And there's a ramp-up time.

Janet, as we've explained before, usually it takes at least six months to a year for sales reps to really pay for themselves.

So we've done a pretty good job here, the second half of the year, of investment spending, and we expect that to pay off, more than likely, in the second half of this year.

Dana Walker of Kalmar Investments.

Good morning, well done.

What is in discontinued operations in Q4?

There were a couple of things, Dana.

It's primarily related to truing up our tax.

We had a couple of projects underway to look at how we allocate tax basis between some of our legacy companies, and so we ended up benefiting in the quarter from additional tax basis that was allocated to the fresh entities.

I don't know if this is a philosophical question -- I presume you don't take on poor multi-unit business knowingly, but I'm curious -- what is the difference between quality multi-unit business -- and we're talking about broadline here versus business that doesn't turn out to be as good.

Were the assumptions wrong in the long run, or is it something more fundamental?

Well, first off, I'd like to say that we inherited some of that business through one of the companies we brought in as an acquisition and tried to profitize it and just were not able to profitize it.

So, Steve, do you want to take it from there?

Yes, I think there are a lot of factors that go into evaluating what's profitable and what's not -- geography, the size of the drop, how fast they pay, how many proprietary line items we have to carry in order to service the location, how often we have to deliver to the location, what the hours are that they'll allow us to deliver.

So there's a lot of factors, unfortunately, there is no one rigid rule that you look to to say, "This is going to work and this isn't."

And it's also going to be different by operating company, depending upon their own capacity limits, their current mix of business.

But the last thing we want to do is put ourselves in a situation where taking on chain account business is going to slow our ability to grow the sales to independent restaurants.

So there's no black-and-white answer.

It's a little bit more complicated than that.

But we've got a pretty good profit model that gives us the ability to input a lot of data and ultimately make a good educated decision.

So your point is that if and when you add multi-unit business, it's more when than if you expect to be better at gauging what you're taking on than you have traditionally?

I would say that we are not going to take on multi-unit business anywhere that we know we're not going to make a profit on it, and I think at some point we are going to add a piece of multi-unit business at one or more of the locations, but it's got to make sense with that particular location in order to do it.

And as I said before, I think there have been a few cases where we have not done something -- priced something out correctly.

In this particular case, most of that business will be inherited.

Now, that's not to say that a chain can't change their mind and try to negotiate a better deal or take something away from us.

Hopefully, that doesn't happen, but, for the most part, we have good partner relationships with customers and a good working relationship with customers, and to Steve's point, there are a lot of things that go into developing a profit model.

So, yes, we are looking at taking on a moderate amount of chain business and really focusing in on the street.

A final question is this -- you mentioned how street was up 8 in the fourth quarter.

I believe you also mentioned that your drop size was up 8%.

Steve, if you've said in the past that it's too early to expect any contribution from the new people that you're adding, what is helping your street business begin to develop a positive change in the right of change?

I think that, generally speaking, the focus that we have on growing street sales throughout our operating companies.

I talked a little bit in my comments about a core item initiative, and then something that we did about halfway through last year, which basically said from a procurement position we generally know the items that independent restaurants want to buy, and we need to make sure that we're buying those products appropriately and using our scale to get that product down into the independent restaurants.

So I think that's helping us a little bit.

I also talked a lot about this real standardized training curriculum, which we began late 2004, beginning 2005, and so our sales force that we're hiring is being assessed a little better before we hire them.

We're putting them through a terrific training curriculum that's put together by our corporate staff and then managed by all of our training managers in the opcos.

So I think it's a combination of a lot of things.

Andrew Wolf of BB&T Capital Markets.

A couple of questions for Steve -- can you tell us what the headcount is now of your salesforce?

Yes, it's about 1,000.

In fact, it's just over 1,000.

And that's what was up 10%.

Is 10% -- well, I want to confirm that -- and is 10%, is that the goal for this year, so you're looking at, roughly, 100 more folks?

Yes, by the end of 2006, I would say that's correct.

Okay, and follow-up to Dana's question and another question on the growth and the street sales -- can you break that out between net new customers versus additional business with existing customers?

No, I don't think we can break that out.

Just in Dana's question, at least the way I heard it, if the drop size is the proxy, then it sounds like it was a lot more skewed to account penetration than --

I would tell you that we did a great job penetrating the accounts that we already have.

You know, we could achieve our long-term sales numbers and short-term sales numbers without ever having to add another customer.

Realistically, it doesn't quite work out that way -- you've got to do both.

Sure.

And, lastly, more for John -- on the IT spend in '05 and what you expect for '06, can you break out that number out of the total capex?

Just give us the IT capex?

I can give you a good directional indication -- it's between 10 million and 15 million in IT spend in our total capex.

So it's actually probably closer to 15 million on a consolidated basis.

Is what you spent in '05 or what you expect to -- I want, if you would --

Yes, that's '06.

It's up around 15 million, and in 2005 it was closer to 10.

Yes, incremental spend this year of about 4.5 million to 5 million.

Bill Chappell of SunTrust Robinson Humphrey.

I'm just trying to -- looking back on '05, any way to quantify the one-time hurricane-related or startup expense costs that we wouldn't see in '06?

We estimated, Bill, I think we disclosed in the third quarter that the operating profit impact was approximately 2.4 million for the full year.

There was a little bit of carryover, as we indicated back then, into the fourth quarter, but that was relatively small.

We think the total impact was about 2.6 million.

Okay, and then, looking forward, any kind of outlook that you have on diesel costs or other costs.

You hear some companies say that it looks like, as we get to the summertime, things might ease, but I'm not sure if that's true for diesel.

What are you seeing on the horizon there?

That's a tough question to answer.

We do hedge some fuel.

We did in '05, and we did hedge some fuel in '06.

But right now we're kind of taking a wait-and-see view.

Okay, and then, finally, just going back to the street sales.

Certainly, they were improved in this quarter versus the third quarter.

Was there any net change in the trends, or was it easier comps?

What's going on there and what do you see, moving forward?

Well, I don't know if there's any one thing that happened in the fourth quarter.

We're seeing some pretty strong results, so far, this year.

However, the weather has been very strong throughout most of the geographies in which we trade.

In January, a tough kind of period to gauge it, because January tends to be the weakest month of the year, so we'll have to see what happens as we get through the rest of the first quarter, and March, obviously, is the biggest month in the quarter.

But we're seeing some good trends so far this year.

Meredith Adler from Lehman Brothers.

A follow-up to the question that Mark Husson asked you about scalability.

Maybe another way to put that question is whether all the initiatives that you're putting in place, does it allow you to change your hurdle rate either for doing acquisitions or for bringing in new business?

Can you tolerate what may, on the surface, seem like lower-profit business because your own cost structure has gone down?

Are you thinking about it that way?

Well, I might like Steve to answer this, too, but I will tell you that if we bring on too much multi-unit business, it's a distraction to our operating companies, and so we would prefer that we just bring on an appropriate amount of multi-unit business.

We will pursue some as long as they're profitable but focus, really, more on the street and then that's really the key thing.

In terms of acquisitions, we had an infrastructure to do a few acquisitions a year, and we just are going to be very cautious to make sure that we -- our eyes aren't bigger than our stomachs.

So we're going to talk through that and make sure that we handle those right if and as we bring acquisitions on.

I think, to the scalability question, the beauty of having a more standardized platform as it relates to your ERP, your warehouse productivity systems, your truck acquisition costs, when you have all your companies on the same platform, it takes some of the risk out of making another acquisition, because you can relatively quickly get that company on to your proven standardized platform, and that's one of the big pluses in having a real scalable platform.

It, too, enables us to provide more discipline and focus [inaudible].

Still, I guess that still doesn't quite answer my question about whether you're translating all of that into a lower hurdle rate.

When you say "hurdle rate," what do you mean by that?

Well, if your risk is going down, your cost structure is going down, that business that two years ago you couldn't make money on, acquisitions you couldn't make work, should be able -- or you could pay a little more for an acquisition because you can get more out of it.

Well, one thing, Meredith, you'd implied that our cost structure is going down.

It's not necessarily going down with some of these initiatives but just allowed us to provide more accountability and discipline around what we're doing.

If you take a look at acquisitions -- I'm trying to understand your question -- if you take a look at acquisitions, let's say, two years ago versus an acquisition that we could make in '06, the difference is that two years ago we really had to buy a company making assumption that they were running that business in a way that was going to drive results to the bottom line.

Today, we would not wait.

We would go into that company, and we would put our standardized warehouse management system, our standardized compensation systems, both in terms of the warehouse and the drivers.

We would convert them to some of our more rigid financial reporting requirements right away.

So what you would gauge, you would minimize your risk, and you would give us the ability to have much greater oversight into what the company is doing across all of the business departments within that operating company.

Would it give us the ability to, say, you know, if we have a like operating company, and we run a warehouse cost at "x" percent of sales.

In theory, we should be able to run there or better at the company that we acquire, and I would say that's true.

Our last question today is coming from Ann Gurkin of Davenport & Company.

I got on the call late, so I apologize if you all have talked about this.

Cracker Barrel has been in the news looking for strategic alternatives, maybe doing some new slogans.

Can you talk about your contract with Cracker Barrel and if there's a change of control what happens to your contract?

We don't really talk about customers or speculate or anything.

We've got a very good working relationship with Cracker Barrel, and we expect that to continue.

Okay, and then, secondly, did you give a number for the projected sales from exiting lower-margin business?

I'm not sure I totally understand your -- the sales line we talked about in the last --

That we would be giving up from those?

Yes.

Well, we picked up some business, and we're exiting some.

The net was about 150 million.

We talked about that on the second quarter conference call and the third quarter earnings call.

Some of that in the fourth quarter, a majority of it in the first quarter.

Okay, in closing, I would like to thank you for your participation today, your questions, and your interest in our company.

I was pleased that we delivered on our earnings and sales forecasts of 2005.

We're projecting a good year in 2006 and, like last year, we're driving many great initiatives to assure our success in 2006 and beyond.

I'm optimistic that our strong and committed team will deliver on our forecast.

We expect strong results, and we'll continue to focus on driving solid long-term results for our shareholders.

Thanks and have a great day.

This concludes today's teleconference.

Thank you for your participation.