Blackstone Inc (BX) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and thank you for holding.

Welcome to the Performance Food Group first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] It is 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.

Good morning and welcome to the Performance Food Group conference call to review an announcement of our financial results for the first quarter, ended April 1st, 2006.

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

Our call today is primarily intended to review our financial results for the first quarter and our first quarter earnings release was issued this morning and is available on our website at www.pfgc.com.

I will briefly address our operating highlights for the quarter and then Bob and Steve will provide more insight into the quarter as well as expectations for the balance of 2006.

Let's start with our forward-looking statements.

Statements we make on this call may be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks and are based upon current expectations.

Actual results differ materially.

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

In addition, we will make certain references or remarks relating non-GAAP financial measures as defined by Regulation G of the SEC and a presentation of those most directly comparable GAAP financial measures and a reconciliation of those non-GAAP measures to the GAAP measures are both available on our website as well as our press release.

Looking at the financial highlights, net sales and continuing operations for the quarter were approximately 1.5 billion, an increase of 3.3% from the year-ago quarter.

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

Both of our continuing business segments contributed to improvements in net sales and a complete segment breakdown is available in the news release.

On a consolidated basis, inflation was nominal for the quarter.

Our gross profit from continuing operations increased 4.1% from the year-ago quarter, while gross profit margins increased nine basis points to 12.74% from 12.65% in the same quarter last year.

The increase was driven primarily by improvements related to our procurement initiatives and by a more favorable mix of growth in our higher-margin street sales.

Gross profit margins were also positively impacted by positive fuel surcharges, which were offset by incrementally higher fuel costs.

Operating expenses in the quarter were 176.5 million, or 12.01% of sales, which represents a increase of three basis points versus the prior-year quarter.

The increase in the operating expense ratio in the quarter is primarily due to our investment in sales personnel and incremental IT costs, primarily in the broadline segment as well as costs associated with the planned exit with certain multiunit business in the broadline segment.

Operating expenses were impacted by higher fuel costs in both of our segments.

Our corporate cost decreased in the quarter, primarily a result increased stock compensation of cost in the quarter offset by the lapping in the year-ago quarter of incremental costs related to our accounting investigation.

Operating profit for continuing operations in the quarter was 12.7 million and our operating profit margin was 0.73%, reflecting an increase of seven points versus the prior-year quarter.

Interest expense and loss of sales of accounts receivable was $2 million for the quarter which was flat compared to the prior year quarter.

Higher interest rates versus the prior-year period were offset by a lower overall interest due to reduced borrowings on the company's revolving credit facility versus last year.

Other income was 559,000 in the quarter, consisting primarily of interest income versus 164,000 in the same period of 2005.

The increase in interest income relates to earnings on the remaining cash proceeds from our gain on the sale of our fresh cut segment.

Most of these proceeds were used to complete the balance of our $100 million authorized stock repurchase program, which was completed in the first quarter.

Our effective income tax rate was 38.9% for the quarter.

We continue to expect our tax rate to be approximately 39% for continuing operations for the balance of '06.

Net earnings from continuing operations in the quarter were 5.7 million or $0.16 cents per share diluted compared to 4.7 million, or $0.10 cents per share diluted, in the prior year quarter.

Diluted weighted average shares outstanding amounted to 34.9 million, reflecting the completion of our stock repurchase program.

At the end of the quarter, our balance sheet remains strong.

Our debt to capital ratio was less than 1%.

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

We continue to improve our management of our working capital.

Day sales in receivables were 21 days, which is consistent with the fourth quarter and a one day improvement versus the prior-year quarter.

Inventory turns amounted to 17 times, versus 16 times at the end of the fourth quarter, and 17 times versus the prior-year quarter.

Lastly, accounts payable float was 124%, compared to 118% in the fourth quarter and 119% in the prior-year quarter.

For continuing operation, depreciation amounted to 6 million and amortization to 861,000 for the quarter.

Capital expenditures were 12 million versus 18.5 million in the year-earlier period.

Free cash flow was 1.4 million for the quarter, which represents an $8.7 million improvement versus the prior year, due in large part to reduced capital expenditures in our customized segment.

Based upon current business trends, we continue to expect the following from continuing operations for 2006.

We expect internal sales growth on a consolidated basis to be in the lower single digits until the latter part of the year as we lap the exit of certain multiunit businesses.

We anticipate depreciation to be between 25 million and 29 million.

Amortization to be between 3 and 4 million and capital expenditures to be in the 60 to $70 million range.

While our current period capital expenditures were 12 million, we do expect our CapEx to ramp up during the year as we replace a broadline facility, which we expect to complete in the third quarter, and begin another replacement facility in the second half of the year.

We expect to incur pretax stock compensation expense of approximately 5 to 5.5 million for the year and, as a result, we expect net earnings per share for the second quarter to be in the range of $0.32 to $0.36 per share diluted.

And for the full year, we expect net earnings per share, including stock compensation expense, to be in the range of $1.22 to $1.30, or approximately $1.31 to $1.40, excluding that stock compensation expense

And with that I will turn the call over to Bob Sledd, our Chairman and CEO.

Good morning.

I will add to some of John's comments regarding our first quarter results, discuss the operational highlights in the customized segment and then ask Steve Spinner to review our results and initiatives in the broadline segment.

We achieved steady growth and solid earnings improvement as we planned in the first quarter.

We are executing our strategy to increase our higher mix of higher-margin business as we continue to gain traction in driving improvements on our operational efficiencies in each of our segments.

Now I will review the first quarter in each segment, beginning with customized.

Our customized segment generated sales of $601 million, an increase of approximately 7% for the quarter.

Internal real sales growth was approximately 9% adjusted for the inflation of approximately 2% in the quarter.

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

Operating margins increased by 29 basis points compared to the prior-year quarter.

A significant part of this margin improvement was a result of improved operational efficiencies as we lapped the cost associating with the opening of the Indiana distribution center in the previous year.

In addition, we are expected to be leveraging our new capacity in customized by more efficiently servicing our customers in their locations.

Our new capacity also positions us favorably for growth with potential new customers, which we will continue to pursue throughout the year.

Now I'll ask Steve Spinner to review our results in the broadline segment and provide us an update on current initiatives.

Thanks, Bob.

Good morning, and thanks for joining us.

The broadline segment generated sales of approximately 869 million, an increase of 1% in the quarter.

Inflation was approximately 2% during the quarter with a decline in real sales of 1%.

As we anticipated, sales in broadline reflect the completion of our the planned exit of certain lower-margin multiunit business during the quarter, as well the seasonality of the food-service industry, which historically reflects lower sales and earnings during the first quarter.

As a result of our focus to increase sales to independent restaurants, our higher-margin street sales grew at a rate of 6% during the quarter.

Operating margins declined 19 basis points in the first quarter, versus the prior-year quarter, primarily as a result of our investment in the expansion of our sales force, which we initiated during the later part of 2005 and as a result of costs associated with our planned exit of multiunit businesses during the quarter.

We remain confident that as we begin to leverage our additional sales associates, our focus on growing higher-margin street sales will provide greater levels of earnings contribution in the later part of the year.

We will also continue to be selective in pursuing profitable multiunit business in broadline.

We continue to make good progress during the first quarter in executing our core strategies and driving standardization throughout our broadline operations.

As we have discussed in the past, our three core strategies in broadline are, number one, growing our higher-margin street sales to independent restaurants.

Number two, implementing new systems, processes and programs in our national and local category management.

And number three, measuring and delivering against rigorous operational excellence standards supported by a common technology in business standards.

Our recent investment in the expansion of our street sales force will help drive our long-term strategy of increasing our mix of higher margin street sales to independent restaurants.

During the first quarter, street sales grew at a rate of 6%, while our focus on account penetration helped increase our average sales per delivery by 7%.

We also increased the variety of products sold to customers by increasing our street line items per delivery by 8%.

And this was achieved in light of the number of new sales reps, who typically have lower lines in sales per delivery as they work to build their territories.

Throughout the year, we will continue to maintain a disciplined approach to hiring, training, compensation and retention, as we continue to increase our sales headcount by 10%, driving long-term growth of higher-margins of street sales.

The cost of our headcount expansion did affect our operating margin in the first quarter and will continue to have a modest impact as those reps become more productive during the second half of the year.

In broadline operations, we continue to gain traction in driving warehouse and transportation efficiencies through the implementation of new fleet technologies, warehouse productivity systems, and activity-based compensation programs.

These programs were partially offset in the quarter by higher fuel costs.

During the first quarter, we increased our warehouse pieces per shift per hour by 13%.

In the area of procurement, we are in the early stages of leveraging our new category management and procurement initiatives, as we utilize our common item platform and data warehouse to analyze vendor movement and SKU profitability to improve our negotiated programs with suppliers.

During the first quarter, we began an expansion of our PFG-branded product offerings with the introduction of a complete line of PFG-procured and branded fresh produce products.

We plan to continue to enhance our branded product offerings based on our new data analysis and customer preferences in the market.

Beginning in 2006, we restructure our corporate cost centers whereby allocating a greater share of our investment in IT cost to broadline.

We also reclassified the prior year information to conform to this management structure.

And also in the quarter, we completed the expansion of our PFG-AFI facility in Elizabeth, New Jersey, which provides us with approximately 60% of new capacity in that facility.

In closing, we will continue to execute our three core strategies in broadline.

As we implement new standardization programs and rigorous standards by which to measure our progress.

We will maintain our focus throughout the year to drive long-term operating margin improvement throughout our broadline business.

We are now ready to take your questions.

[OPERATOR INSTRUCTIONS]

Our first question this morning will be coming from Simeon Gutman of Goldman Sachs.

Please proceed with your question.

Hey guys.

Steve, in particular to broadline EBIT margin, the past couple of quarters you've actually shown some nice improvement I think in the third quarter, ex Katrina, it was up slightly an in the fourth quarter you are up over 20 bps and now in the first quarter we're clearly off that trajectory, I think down 19 basis points.

Are you able to quantify those buckets of costs that you mentioned, transition costs, technology, sales force expansion?

Can you quantify those and try to give us a sense of what the underlying improvement in broadline is without those?

Sure, Simeon.

That's a good question.

We had a couple of things, as you know, the exit of some of the multiunit business added estimated costs in the first quarter of 1.2 million, roughly.

In addition, the ramp up on the headcount expansion cost us approximately $2 million in the quarter.

So the two things combined, it's about $3 million in total.

Got it.

Okay.

And then if I can ask one more, with respect to customized, with these capacity initiatives that you guys have been doing, we thought it would hurt your profit this year.

That clearly wasn't the case.

I know you talked about the drivers that's enabling that performance.

Can you expand on that a bit and then separately give us an update on any visibility you have with potential new business?

First off, new business, we continue to work on that and we are talking to customers.

As relates to performance, they've done a good job.

The sales growth has been there, some customers have been promoting, which has been helpful.

We are continuing to add a few different lines and penetrate customers to a slight degree and then a lot of our customers have had good performance in the first quarter.

So sales growth was good and we expect sales growth to continue.

It's hard to say it's going to be at that same clip, but we expect solid continued sales growth in that segment.

As it relates to profitability - we did lap Indiana, which was a big cost last year as we opened that facility.

We had the cost associated with adding people and not a lot of sales going through there.

So we have actually done maybe a slightly better job than we had even anticipated in terms of getting enough volume moved up there to be able profitize that so we have moved - volume out of other facilities into that facility and that's helped profitize that at a pretty good rate.

So that was a really significant driver of the improvement in margin in the first quarter.

And then lastly, and sorry to jump back to broadline, that 3 million that you referenced, Steve, would that, at least 1.2 of that from the exit cost, would that just disappear as we go forward and then how does that 2 million of sales force-related expansion go in the second quarter?

Simeon, most of the cost will be in the second quarter.

There will be some additional cost as we gear down from businesses that's exiting.

So we'll still see some of it in the second quarter.

And the sales ramp up, we are going to see that see that through this year.

However, if you'll recall that we did a fairly significant expansion in the latter half of last year, so we're hoping to see some of that return to us in the form of some increased sales in the third and fourth quarter.

Okay, thanks.

Thank you.

Our next question is coming from Meredith Adler of Lehman Brothers.

Please proceed with your question.

Hi, this is Ivy for Meredith.

I have a couple of quick questions for you guys.

Going back to your expectations for broadline and customized, is it still safe to assume that we expect roughly a 25 basis point improvement in the broadline margin?

Is that guidance still relevant?

And flattish operating margins for the customized business then?

Yes, on the broadline side, I would say that the guidance is still good guidance over the course several years.

That's where we expect it's going to end up.

And it will certainly ramp up later in the year.

And in this year, it ramps up much more heavily in the latter part of the year.

Right, and as in relates to customized, we said it was going to be relatively flat because of the opening of all those other facilities.

It may do better than that as a result of us being able to profitize Indiana a little more than we anticipated.

We don't expect a big increase over the course of the year.

Maybe something in line with what we had given as our restored guidance.

Or, excuse me, our longer-term guidance.

Okay.

Could you also provide some more color around how fuel is impacting the business, and especially the sharp rise in fuel?

I know for some of your street customers you have implemented surcharges.

Are you looking to do this across all of your street customers or how do you plan to approach this going forward?

Fuel surcharge for independent restaurants is a tough one.

We have each one of our distribution centers handles our fuel surcharge to street customers a little bit differently.

We do provide them with that flexibility.

Some of them do actually use a fuel surcharge on the invoice.

Some use a minimum delivery.

So there is a variety of tools that the operating companies use in order to pass those fuel costs along.

On the chain side, our are larger chains do have some contractual obligation for chains to pay fuel surcharge.

Certainly, as the price of fuel goes up, the fuel surcharge goes up as well.

The bigger question is maybe how the fuel surcharge affects sales and there have been some industry - its little early in the quarter, but last time that happened in the fall, there was a sudden jump in fuel prices and there was some softness in the market for about six weeks until people adjusted to kind of the shock of the fuel increase.

And then we saw sales ramp back up again to more normalized levels.

If you look at different industry kind of prognosticators, there is some expectation that the same sort of thing may happen again, where maybe industry sales may slow a couple of points and then, hopefully, we will see it kind of work through that.

All right, thanks, I appreciate it.

Sure.

Our next question is coming from Bill Chappell of SunTrust Robinson Humphrey.

Please proceed with your question.

Good morning.

Just looking at the balance sheet and the remaining cash sitting there, are there other options in terms of share repurchases, other things to do with that cash or are you comfortable with that level just remaining on the balance sheet on for the next few quarters, excluding acquisitions?

Yes, I think, Bill, we'll continually look at what the right capital structure is.

As the M&A market continues to evolve we want to make sure we have a lot of flexibility in relation to that.

Obviously, we do consider while the on-balance sheet leverage is very, very low, we do consider that receivables facility in our leverage structure.

So when you really look at that, you're really looking at a debt to capital of like 15%.

That's still little lower than what we would like from a long-term capital structure.

But right now we are just kind of evaluating our options and seeing how the M&A market develops.

Okay, and then secondly, just kind of maybe give us an update on the competitive landscape and how your competitors have changed with the changing gas prices, or if there has been any, and if you have seen any kind of resurgence from U.S. food service out in the marketplace?

That's a tough one.

We have always had a case where in certain markets, the U.S. is very aggressive, in other markets, they are more rational.

That continues to be the case.

And Sysco is Sysco.

They have always been a good competitor.

And we expect and hope that that will continue.

So we haven't seen any significant changes in the marketplace from that respect.

I guess maybe a different way to look at it is where are you finding some of the new salespeople that you're hiring?

I would say that the salespeople are coming from two sources, primarily.

They're either coming from the competition - they're dissatisfied with what's happening in that particular company, or the majority of our very successful, most successful, salespeople come out of the food and beverage industry.

They just happen to have been chefs or have worked in a restaurant and get tired of the long hours and our selling positions - they understand the products, so it's pretty easy for them to make the conversion.

Got it.

Okay, thanks.

Okay, thank you, Bill.

Our next question is from Bob Husson of HSBC.

Please proceed with your question.

Mr. Husson, your line is live.

Our next question is coming from Ajay Jain of UBS.

Please proceed with your question.

Hi, good morning.

Good morning, Ajay.

I just had a question in terms of the current ramp-up for your sales force, and I guess this is specifically in relation to the incremental headcount for '06.

Steve, do you think that hiring and training process is completed now, or are those activities kind of still ongoing and spilling into the current quarter?

Yes, Ajay, that's a good question.

The biggest difference is last year we had a forced headcount so we did it in a very narrow period of time.

This year, we're going to do it again, but it's going to be spread out more ratably throughout the year.

So we ended '05 with a 10% increase.

We'll end '06 with another 10% increase.

It just won't be as drastic.

It will happen throughout the year.

Okay, and since you mentioned the incremental headcount from last year, I know it's probably premature to ask this question, but can you comment on the productivity of those new salespeople from last year that you hired.

Are you getting any sales lift from them, or is it still too early in the process?

It's still really too early in the process.

Our retention with those salespeople is good.

They're in the process, so they're midway through their training program.

So we really wouldn't expect to see a whole lot from them until the third and fourth quarter of this year.

One of the challenges that we have of actually measuring specific productivity is we've split territories, we give them some new business, and then you look at their business.

So it's a little difficult to tell exactly how much of that is new business and how much of that is business that we've given them.

They've got it in the op cos.

We just have not asked them at this point in time to roll to corporate so that we can kind of figure that out.

But that is something that we probably will be working towards.

It's a good question and we need to be able to answer it here.

Okay, and just lastly, in terms of the progress on the street sales that Steve talked about, I think last quarter your street sales were up by 10%.

Is there anything we should read into as far as the slow growth rate in the March quarter?

I think it's premature to do that.

I think we're really taking a wait-and-see kind of view on what's happening in the industry, what the impact of higher fuel is to the consumer.

So I would say we're cautiously optimistic.

We're kind of playing wait and see at this point.

Okay, great, thank you very much.

Okay, thank you.

Our next question is coming from Jeff Omohundro of Wachovia Securities.

Please proceed with your question.

Well, let me just start by, I guess, a follow-up to that last question, because we are seeing in the restaurant section a bit of a slowdown, particularly in casual dining, recently.

When you are saying you're optimistic, are you not seeing that?

Well, as we said, the industry, we have read reports about it, and we are seeing a little bit of a slowdown ourselves.

And when we say we're optimistic, what happened last time is we saw this initial shock to people, which occurred, and even though the price stayed up in the fall for a significant period of time, we started to see people kind of adjust to it and say, well, I've adjusted things, I still want to get out.

So we saw it bounce back, and so I guess when we say we're optimistic, we're optimistic if it doesn't continue to rise dramatically that sales will bounce back.

The industry, we are hearing reports that it's affected the industry by a couple of basis points - or excuse me, a couple of percentage points in terms of industry growth.

So, obviously, we'll see what happens.

Yes, I'm also optimistic just because of the ramp-up in the headcount.

Oh, got it.

So, as Steve said, we're optimistic that that will impact us favorably the second half of the year, as those people get more and more traction on the street.

I might have missed it, but what is the prognosis on customized for new customer additions, perhaps later in the year?

Yes, that's a good question.

We are talking to customers.

You never know until we sign a deal whether it works or not.

So there are prospects out there that we're having conversations with.

We're obviously hopeful that we'll have a new customer by the end of the year, but just, Jeff, it would be impossible to say that we would or not.

Fair enough.

Thank you so much.

Thank you.

Our next question is coming from Steve Chick of JPMorgan.

Please proceed with your question.

Thanks.

Hey, Stephen.

Just to clarify, if I may, Bob or Steve, your commentary, are you saying that I guess it kind of sounds like the way that the second quarter started in terms of broadline sales, did it start below the 1% that you've reported?

Am I understanding that correctly?

We started the second quarter, we're relatively flat.

Flat as in 0% or ...

Right.

Correct.

The result of exiting that multiunit business.

If we had not exited the multiunit business, for example, in the first quarter, our sales would have been up 6%.

So we're actually having good growth with our existing customers, we're gaining traction with the street sales, but because of the exit of that business our sales are relatively flat in broadline.

And just one comment, on some of the business that we exited, the majority of that business is business that we acquired as a result of companies that we had purchased a couple of years ago.

Okay.

All right, right.

I guess some of the exits happened as the quarter went on, so it has a bigger effect at the end of the quarter, end of Q2.

Okay, I understand that now.

I guess the second thing I was trying to reconcile was the street growth - well, let me ask you this.

Did you have other multiunit wins that added to growth, and is the annual sales number of the multiunit accounts exited, is it still roughly 150 million?

There was no additional business that came on in the first quarter, only what we disclosed during 2005.

I'm sorry, what was the second part of the question, Steve?

Well, I was trying to do, and maybe we can speak to it offline a little bit, but I was trying to do the math of where the 6% rate of street growth and assuming the attrition of 150 million of annualized volume in multiunit and I was coming up short with the sales you reported, so I was wondering if there were other accounts or other multiunit wins in there or something.

They're the customers that we're talking to, but there was nothing at this point in time.

Steve, it all depends, because we did phase out of that multiunit business during the quarter, so it's hard to just take the 150 million annualized, divided by four, but I think you're getting in the right directional ballpark.

Okay, that's fair enough.

And your guidance still for the year is broadline internal sales growth of low single digits.

Is that right?

Yes.

All right, and then second question.

Just can you speak a little bit to cost inflation and the 2% that you saw in broadline and the components of that and your ability to pass that through?

I apologize, I missed if you said that earlier.

There were a couple of categories that had some significant inflation.

They were primarily produce, disposables, which is a petroleum derivative.

Dry grocery had some significant inflation.

And, interestingly, we saw the largest inflation in our seafood category.

And in addition we also had some significant deflation, primarily in poultry.

Seafood probably in one particular case was the hardest one to pass on, so we had a contract on some lobster that we had some loss associated with that.

And I would tell you that when we have gradual inflation or deflation, we tend to pass them along quite successfully.

It's whenever you have a drastic change in a market, which we really did not experience during the quarter.

That's generally when a distributor has difficulty passing it along fast enough.

And that was about the only case where we feel like we probably were not able to pass all those costs along.

Okay, so broadly it sounds like the margins weren't too affected by - it sounds like you were able to pass through okay and the margins weren't too affected by the inflation you saw in the quarter.

Okay, great, thanks, I appreciate it.

Our next question is coming from Eric Larson of Piper Jaffray.

Please proceed with your question.

Yes, good morning, everyone.

Just another real quick question on the deflation in customized.

I would assume that that was mainly protein.

Would that be the main reason why it was so low in customized?

Well, what happens is that we have customers that have - they have contracts and so if they do their own purchasing, they take long-term positions and that was really what caused the deflation.

Okay, got you.

And then a quick follow-up on the M&A environment.

You haven't made an acquisition, I don't believe, in about three years or thereabouts.

And the ones that we're seeing in the industry, Sysco, it's really mainly specialized produce companies, meat specialized - specialized meat distributors, et cetera.

And we know that once you get kind of past the top 50 distributors, to get a meaningfully sized broadline distributor, there's just not that many out there.

Can you comment a little more, are there good acquisitions available, Bob, yet, and are you guys looking at any?

Yes, there are, and we are having some discussions with some and we'll probably ramp that effort up some, quite frankly.

So past that, it's really hard to make comments, because we're looking for certain criteria, customers that are focused on those areas that we like them to be focused on.

I mean, there's a lot of the distributors out there that are focused in certain areas that we don't have a great interest in.

We are having conversations and we'll see how those go, but there is nothing imminent in terms of an acquisition.

Okay, good.

And then just one final comment.

It's been quite a while since we've heard any sort of update on your progress in getting your margins back up at Quality Foods.

Can you give us a little bit of flavor on what's happening there?

We have progressed quite well in those facilities and our year-over-year results, '05 to '04, delivered significant, significant positive change.

Great, thank you.

Thank you.

Our next question is coming from Andrew Wolf of BB&T Capital Markets.

Please proceed with your question.

Thank you, good morning.

Some follow-ups to some of the earlier Q&A.

First, on sales, Bob, from your - sort of from the tone, it sounds like the company is probably participating a bit in the slowdown, modest slowdown, couple of ticks in the industry.

I've heard that in other areas of the consumer landscape, particularly in April.

I guess what I'm getting after is this something that occurred really sort of coincident with gas hitting $3 a gallon and sort of the sticker-shock effect that has on people, or did you see this more gradually throughout the quarter?

Is this sort of an April thing, or is this more something that ...

It was pretty sudden in April, so the only thin we could think was that it would be associated with a sticker shock with fuel.

So, again, it was - it occurred pretty quickly and there was one other thing in April that affected us.

Easter in our broadline sector is typically kind of a slow week because people tend to eat at home.

Last year, that happened in March, this year it happened in April.

So we did see that one-week event in April where for example the last week of March was a very strong week last year and the week of Easter this year in April was a pretty soft weak.

So just kind of where that hit, but that's just a once a year event.

It's not a big deal.

I'm trying to give you too much flavor.

But we did, as we said, we heard in the industry there's a couple of percent and we've seen a little bit, a couple of percent soft slowdown, and so we'll play it from there.

But, that being said, sales are still positive.

We think we are continuing to gain traction in our efforts in street sales and we will continue to do our best to continue to move those up.

And just on the cost side, John, you might have mentioned this, and if you did, I'm sorry, but on the IT costs that are now allocated to the segments, did you give any flavor for whether the broadline had more IT costs allocated this year than the past, or less?

That's a good question, Andy.

They did.

We did talk about our reclassification of IT costs, but that was about $1 million in the prior-year quarter.

But if you look t kind of the ramp up in IT, or continued ramp as we implement same of our technology initiatives, that ramp was about 1.3 million in the broadline year over year this year, on a restated basis, and then another couple hundred thousand on the corporate side.

So it totaled about 1.6 million or so, 1.7, in higher IT costs this quarter versus last quarter.

So the $1 million, that swing number, that's a net increase that was allocated into broadline?

Is that in addition to the $3 million you called out for the exit costs and adding the salespeople?

Yes, correct.

And how does the IT ramp look for the year?

Can we trendline that and sort of just say, well, it's going to be up about $4 million versus last year?

Actually, I don't know if you recall, back on our guidance for the year, we said we would spend about 5 million more this year than we did last year, so we would expect full year to be about $5 million year over year increase.

Thank you, and last area for follow-up, to Steve, just on the marketing, the 2 million you spoke to, just sort of back of the envelope, it seems like it's a lot more than I would have expected if you were just paying for a draw against salary, a light salary before these folks became productive.

Are there other costs in there that pretty much cycle out like hiring costs and some training costs and that type of thing?

You might have been asked this, but I'm trying to get a little more specific.

Yes, there's a little bit of hiring, training costs that are in that number, but there's not significant.

The majority of it is salary and related benefits.

And sort of the same question on the exit costs, are those hard-dollar costs to move inventory and things like that, or is that actually sort of a deleveraging until you get more business in those distribution centers?

No, that's a hard cost as we migrate out of - we need to keep a very high service level until the time that we transfer out of that business.

So, typically, if the loss is significant enough, there's a large ramp down cost in terms of equipment, associates, as you no longer have the volume associated with that business.

So the brunt of that must have been felt this quarter, because it seems like you're at the fully realized run rate of the exited business.

Is that pretty accurate?

Yes, I would say a large portion of it was in the first quarter and we'll see a little bit in the second.

Yes.

Thank you.

One of the reasons these look so big in the first quarter is, as you remember, the first quarter is always our lightest quarter, so these costs go against a lesser sales number and a lesser gross profit number, so that's why all these things have such a big impact in the first quarter and we expect to start to see some change in that in the second quarter, and that's why we're projecting and are confident that as the year progresses we'll see a significant improvement in operating margin.

Does that answer your question, sir?

That was great.

Thank you very much.

Thank you.

Our next question is coming from Bob Cummins of Shields & Company.

Please proceed with your question.

Thanks very much, and good morning, everybody.

Just focusing on your broadline business a little further, you indicate that your street sales are up 6%.

I don't know if you've ever given a firm indication of what percentage of your broadline sales are from street sales and what percentage are multiunit.

What would those percentages have been out of that 868 million?

It's 47% - let's see, 47% street.

Okay.

That's up three points.

It was 44 in the prior year.

It's now up to 47.

Okay, is it your intention to keep your multiunit business relatively flat going forward?

In other words, are you looking basically for new customers on the street side, rather than building your multiunit business?

I think that's a tough question to answer with a yes or a no.

We're obviously putting forth a lot of effort to growing the sales to our independent restaurants.

Does that mean that we wouldn't take on profitable chain business?

We would.

If we were looking at the right concept that fit our profit model in a facility that had the capacity, we would certainly look to do that.

And, in fact, we're pursuing some of that now.

Our goal is just to grow street faster than chain and that's what we're doing.

That's what we're focused on.

Great.

And I assume that we can look for that 47% figure to increase fairly steadily in coming years, because that's where your emphasis is.

Would that be a correct assumption?

Yes, I mean, we've run different models ourselves based on growing both areas and just growing street faster than chain, and our goal would be to grow street maybe as a percentage of the total maybe 1% a year.

So maybe next year we'll be 48, maybe the next year 49, something like that.

But to have a gradual improvement, because, again, we don't want to abandon chain.

Chain's important to us.

We want to grow chain, but we just want to be more aggressive on the street.

I'm not sure if you mentioned it, but I got the inference that your broadline margin as a percent of sales would again be down from last year in the second quarter.

Is that correct, as you see it right now?

Bob, I'm sorry, could you repeat that?

The operating margin in broadline was down year over year in the first quarter and my question is will it be down year to year in the second quarter as well, as you see it right now?

Yes, Bob, yes, you're correct and it was down.

Obviously, the impact of the investment sales reps and the exit of that multiunit business had an impact on that.

The guidance we gave at the beginning of the year is we do expect broadline margins for the full year to be up year over year.

Probably not comfortable giving guidance quarter on kind of how that happens, but we do expect broadline to be improving throughout the year as a lot of these initiatives take place and we wind down from the cost of that exited multiunit.

We expect the vast majority of that improvement to be in the second half of the year.

Right, I understand.

Okay, well, that's great.

And congratulations on how well you're doing.

I'm very impressed.

Thanks, Bob.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question is coming from Mark Husson of HSBC.

Please proceed with your question.

I'm sorry, I was interrupted by an evacuation of the building, but we're all back in now.

Great.

Slightly singed.

I just want to go back on your street sales.

You had said that you had higher sales per customer and said either explicitly or implied that there were more SKUs per customer, and yet your inventory number was very good.

Is it that you were selling meat and potatoes to these customers and now you're selling ketchup, too, or are you selling black truffle oil?

I don't know where this expansion is coming from.

It's a little bit of everything.

It's just a general focus on selling the customers the products that we carry in inventory.

So you're not expanding your inventory?

You're just deepening your penetration of the customers purchased on a [inaudible].

I would say generally speaking that's true.

And there is one other initiative that we're putting emphasis on and continue to, which is just profitizing our [C] customers by working with them if we're given four deliveries a week, work with them to give them two deliveries a week.

So there's a combination of all those factors that are coming into play, quite frankly.

It's just got a more formalized kind of a [camera review] system.

Maybe it's just more formalized when they talk to us on their calls like this.

But they do thousands of these things and is there something that you can copy from their playbook here.

It sounds like you're bits and bobs of it, but is there a more consistent approach?

Yes, I can't really comment on what they're doing, but we have had a process in place for some time via a ranking system for all of our customers and there is a fair amount of incentive for a sales force or district manager to migrate customers away from the C or the lowest ranking to a B or an A, which would be the highest ranking.

And those benefits are to the customer and the salesperson, because they relate to delivery preferential windows, availability of stock price or inventory and so on.

Okay, that's helpful.

And then just a nuts and bolts question.

There was some guidance out there on one of the newswires on interest expense, but I couldn't find it anywhere.

It looked like it was 8 to $10 million.

Was that interest expense and other, or was that just interest expense?

Or what is it?

It's probably going to be mostly the combination of interest and interest income.

We had about $2 million of interest expense and loss on sale of receivables.

I think that's going to be pretty consistent throughout the year, although I would expect interest income to be declining throughout the year, but I think we had most of that $500,000 and some of interest income will go away.

But in terms of free cash, you ought to end up with even less debt, or cash, rather, at the end of the year if all things go according to plan.

I'm just wondering why the interest expense still hangs around at that level.

Because the biggest piece of that, Mark, is the fact that we still have this receivables facility, so there's still 130 million of receivables exposure out there, which we essentially pay an interest rate on.

You see it on the P&L as a loss on the sale of receivables.

I think that's been about 1.5-ish a quarter, so that exposure does continue out there.

And then most of the other interest expense is just related to an IRB or two and then there are some costs on our revolver.

You still have commitment fees and all those kind of things that are related to that commitment.

And then in prior quarters, you've talked about - you've given basis point numbers for bad debt, which have kicked up a little bit.

Is that still a concern, and also what's your fuel basis point cost now and how did it move in he quarter?

Receivables, we saw consistent trends.

We didn't see any kind of ramp up in exposure there.

As far as the basis points, I don't have that quite at my fingertips.

Fuel was 72 basis points.

Fuel was 72 versus 65 last year.

Great, that's it.

Thank you very much.

Thank you, Mark.

Operator;

The next question is a follow-up coming from Meredith Adler of Lehman Brothers.

Ms. Adler, your line is live.

Hello?

Hello.

Hi, I just had one last quick question.

When you look at the second quarter, how does it compare in terms of sales to your other quarters?

So, for example, I know Mother's Day is a big day for you, or is a big holiday for you business.

Can you give a little bit more color on any other perhaps holidays that might significantly impact the business.

Well, that's one of the only holidays where people stay at home.

The other holidays actually help our business.

Mother's Day is one of the biggest days of the year.

Valentine's Day is always a big day of the year.

That's the only holiday that kind of shifted out of one quarter and into another.

That's really kind of unusual.

So we're not going to have to worry about these holidays shifting between quarters.

That's not really an issue.

And, historically, the second quarter is one of our best sales quarters of the year, the second, third and fourth quarters are all relatively close.

So it is one of our better quarters of the year in terms of sales.

Okay, thank you.

Thank you, Meredith.

We show no further questions in the queue at this time.

I'd like to turn the floor back over to management for any further comments.

To recap, companywide, our sales great at a steady pace while earnings increased at a solid rate in the quarter.

We'll continue to execute our core strategies, which include increasing our percentage of street sales, our focus on operational excellence and the implementation of our procurement and category management initiatives to drive our short and long-term earnings performance.

In closing, I'd like to thank you for your participation today and your interest in our company.

Our team is confident in the strength of our ongoing initiatives and we expect to drive positive results in 2006 and beyond.

Thanks, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.