Blackstone Inc (BX) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen.

And welcome to the Performance Food Group's second quarter 2006 earnings conference call. (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.

Good morning and welcome to our Performance Food Group's conference call and webcast to review the Company's announcement earlier today with financial results for the second quarter ended July 1, 2006.

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

Our call today is primarily intended to review financial results for the second quarter (technical difficulty).

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

I will briefly address our operating highlights for the quarter, and then Bob and Steve will provide more insight into the quarter, as well as certain expectations for the balance of '06.

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

These statements involve risks and are based upon current expectations.

Actual results may differ materially.

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

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

Our net sales in continuing operations for the quarter were approximately 1.4 billion, a decrease of approximately 1% from a year ago quarter, as a result of our previously announced exit of certain multi-unit business, and a slowing of sales in certain customer segments.

Both Bob and Steve will comment on this shortly.

A complete segment breakdown is included in our news release.

And on a consolidated basis inflation was nominal for the quarter.

Our gross profit from continuing operations increased 2% from a year ago quarter, while gross profit margins increased 34 basis points to 13.34% from 13.30% in the same quarter last year.

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

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

Operating expenses in continuing operations for the quarter were 171.7 million, or 11.86% of sales, which represents an increase of 37 basis points of sales versus the prior year quarter.

The increase in operating expense ratio during the quarter is primarily due to our investment in growing our street sales forces, and in part due to higher fuel cost, partially offset in both segments by favorable trends in workman's comp and other property casualty related insurances.

Our corporate cost increased during the quarter as a result of increased stock compensation costs.

Operating profit from continuing operations in the quarter was 21.5 million, and our operating profit margin was 1.49%, reflecting a decrease of 2 basis points versus the prior year quarter.

Interest expense and the loss on sale of accounts receivable was 2.2 million for the quarter compared to 2.8 million in the prior year quarter.

Lower interest due to reduced borrowings on the Company's revolving credit facility were partially offset by higher interest rates versus the prior year quarter.

Other income was 456,000 in the quarter, consisting primarily of interest income compared to 641,000 in the same period of 2005.

Our effective income tax rate was 38.4 (technical difficulty).

And we currently expect our tax rate to be approximately 38.5% for continuing operations in 2006.

Net earnings from continuing operations in the quarter were approximately 12.2 million or $0.35 per share diluted compared to approximately 12.2 million or $0.26 per share diluted in the prior year quarter.

Our diluted weighted average shares outstanding amounted to approximately 34.8 million compared to 47.6 million in the same period in '05, reflecting (technical difficulty) repurchase programs we executed in late 2005 and early 2006.

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

Our debt to capital ratio was less than 1%; however, this concludes the 130 million of interest and accounts receivable sold under our receivables purchase facility.

We continue to make progress in our management of working capital.

Days sales outstanding in receivables were 20 days versus 21 days at the end of the prior quarter, and 20 days at the end of -- or in of prior quarter, 21 days at the end of the first quarter.

Inventory turns amounted to 18 times versus 17 times during the first quarter and 18 times in the prior year quarter.

And accounts payable float was 123% compared to 124% at the end of the first quarter and 122% in the prior year quarter.

For continuing operations depreciation amounted to 6.3 million and amortization to 845,000 for the quarter.

Stock compensation expense was 1.5 million versus (technical difficulty) in the prior year quarter.

And capital expenditures were 13.5 million versus 19.8 million in the prior year period, resulting in a free cash flow of 7.4 million for the quarter.

This represents an improvement of approximately 7.9 million versus the prior year, due in large part to lower capital expenditures in our Customize segment.

Based on current business trends we expect the following for the balance of '06.

We expect internal sales growth on a consolidated basis to be in the low single digits for the year. (technical difficulty) certain multi-unit business -- we exited certain multi-unit business.

We expect depreciation to be approximately 25 to 29 million, and amortization to be between 3 and 4 million, and capital expenditures to be between 60 and 70 million.

We continue to expect our capital expenditures to ramp up during the balance of the year, due primarily to two replacement (technical difficulty) segment, one which we expect to complete in the third quarter, and another we expect to begin during the second half of the year.

We continue to expect to incur pretax stock compensation cost of approximately 5 to 5.5 million for the full year.

As a result of these expectations and current market conditions, we expect net earnings per share in the third quarter to be in the $0.32 to $0.36 per share range.

And for the full year we expect net earnings per share, including stock compensation cost, (technical difficulty) $1.22 to $1.30 or equivalently $1.31 (technical difficulty) excluding stock compensation cost.

With that I will turn the call over to Bob Sledd.

Welcome and thanks for joining us this morning.

I will add to some of John's comments regarding our second quarter results (technical difficulty) and highlights in our Customize segment.

Steve Spinner will then review our results on the Broadline segment.

We are pleased with our progress.

And while there is some slowdown in certain industry segments, we are on track with most of our objectives, and aggressively attacking the market where there are ample opportunities for (technical difficulty).

All of our initiatives are gaining traction and we are optimistic that 2006 will be a year of solid earnings growth with sales showing some improvement as the year progresses.

At the same time we are positioning ourselves for solid growth in sales and earnings in 2007, as we work to accelerate our street sales (technical difficulty) some attractive chain opportunities.

During the quarter we continued to achieve steady growth in our higher margin (technical difficulty).

Our overall (technical difficulty) in the second quarter is a result of our exit of a certain lower margin business during the first quarter, which we shared with you earlier, much of which was intentional as it represented business that did not need our profit criteria.

Our sales in the quarter also slowed as a result of slower trends in certain Customize segments (technical difficulty).

We continue to make good progress in the execution of our core strategies to drive our long-term earnings performance.

We're aggressively working to grow our street sales business and continue to gain traction in that effort.

At the same time we're aggressively pursuing attractive chain restaurant customers, and believe there're some good opportunities in the industry.

We do expect sales growth to be in the low single digits for the balance of the year, with the fourth quarter at a slightly better rate than the third quarter.

As to the balance of the year, our third quarter historically reflects flat or slower -- excuse me, or slightly lower earnings than our second quarter.

We are seeing steady progress in our initiatives and are comfortable with the fully diluted net EPS range provided on our earnings release, which is a significant improvement over last year's fully diluted net EPS (technical difficulty) operations.

The fourth quarter is historically our best quarter, and we expect to see greater benefits from our investments.

As a result, we do expect the fourth quarter to be our best quarter of the year.

We are continuing to monitor the overall trends in the market, and will remain (technical difficulty) on our core strategies.

Now we will review our second quarter results in each segment, beginning with our Customize business.

Our Customize segment generated sales of 585 million, an increase of approximately 4% over the prior year quarter.

Internal real sales growth was approximately 6%, adjusted for deflation of approximately 2%.

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

Operating margins increased 26 basis points compared to the prior year quarter.

Operating margins were positively impacted in part by favorable trends in our risk insurance cost as a result of our safety and risk management programs, and by the impact of deflation in the quarter.

Our Customize segment continues to leverage its new capacity by more efficiently servicing our customers.

In addition, we remain well-positioned for growth with potential new customers.

Now we will ask Steve Spinner to review our results in the Broadline segment and provide an update on our current initiatives.

Good morning and thanks again for joining us.

Our Broadline segment generated sales of approximately 864 million, a decrease of approximately 4% versus the prior year quarter.

Inflation was approximately 1% during the quarter with a decline in real sales of 5%.

Second quarter sales in Broadline reflect our previously announced exit of certain lower margin business during the first quarter of this year, and a general industry slowdown in certain Customize segments.

Our higher margin street sales continued to grow at a rate of approximately 6% for the quarter and the year, reflecting our commitment to this initiative.

Operating margins declined 3 basis points in the second quarter compared to the prior year quarter, primarily as the result of our investment in our sales force, what has been an important part of our strategy to increase our percentage of higher margin business in Broadline.

Year-over-year operating margins during the second quarter reflect a sequential improvement over the first quarter of the year.

Gross margins improved by 70 basis points in the quarter as we began to leverage the early stages of our new procurement initiatives, and as a result of our increased mix of higher margin street sales.

Our higher margin street sales represented 51% of our total sales in the second quarter that 2006 versus 46% of our total sales in the second quarter of 2005.

During the quarter we experienced favorable trends in our insurance cost, which were a direct result of our efforts to improve safety and risk management.

We are pleased with the continued progress and the growth of our higher margin sales throughout the first half of this year, and we expect to continue to leverage our investment in sales staff towards greater earnings contribution in the second half of the year.

As we discussed previously, we're also aggressively pursuing profitable multi-unit business in Broadline.

We continue to make good progress in the execution of our core strategies and in the further standardization of our operations.

In an effort to drive our long-term operating improvement, we continue to focus on three core strategies in the Broadline segment.

Number one, growth of our higher margin street sales to independent restaurants.

Number two, improvement of our negotiated vendor program returns through the implementation of new procurement programs.

And number three, enhancement in the accuracy and efficiency of our operations by leveraging new technologies and standardized best practices that drive (technical difficulty) operational excellence.

The investment in our street sales force is an important part of our long-term strategy to increase our higher margin sales to independent restaurants.

Along with our 6% street sales growth during the second quarter, we also improved our account penetration by increasing the number of line items sold for delivery by 8% to our street customers.

As the year progresses, we will continue to invest in the expansion of our sales force and increase our headcount by 10% for the year.

The costs associated with our sales force expansion continue to affect our operating margin in the second quarter.

And as we have discussed previously, it will continue to have a modest impact as we gain greater productivity from the new sales team throughout the latter part of this year.

I'm pleased with the improvements we have continued to generate in our Broadline operations as we drive greater standardization, implement new technologies, and fine-tune our engineered labor standards to improve warehouses and transportation efficiencies.

As a result of these programs, our warehouse pieces shipped per hour increased by 9% in the second quarter.

Higher fuel costs partially offset these improvements during the quarter.

In the procurement side of our business we're beginning to gain traction in the early stages of our new procurement programs as we leverage our (technical difficulty) data platform to focus on SKU profitability and improvements in our negotiated vendor programs.

In closing, we're making progress in the right areas, rationalizing nonprofitable multi-unit business while aggressively pursuing new customer opportunities and sales to independent restaurants.

Our three core strategies remain our primary drivers in Broadline as we move forward in our standardization initiative and operations and focus on improved returns for higher margin sales and enhanced procurement programs.

We're now ready to take questions.

(OPERATOR INSTRUCTIONS).

Simeon Gutman with Goldman Sachs.

With respect to the sequential topline weakness, can you speak to where it came from?

Was it a few identifiable customers or was it broad-based?

Then just as a follow on to that, because the street sales didn't seem to decelerate, is that a reflection of some of a new hires and their productivity getting better?

A let me talk first about the sequential chain business.

Obviously, we discussed a lot of the large, multi-unit accounts that we exited.

I think the other piece of that is just general market conditions, and we were seeing some softness in certain categories.

And then we exited some (technical difficulty) multi-unit business.

I think to your point, the Broadline business and street (technical difficulty) was definitely aided by the addition of new reps.

And Steve, I don't know if you want to talk any further about that?

Yes.

We start to see some traction -- and we started to see some traction in some of the new reps we hired.

If you recall, we had a significant headcount expansion beginning towards the end of the third quarter of last year, and really completed in the fourth quarter of last year.

So we are starting to see some improvement from those reps, but keep in mind that it does take a year for us to really see a live the benefit.

The reps really come into their own somewhere between 18 and 36 months.

But we have started to see some improvement as a result of those reps that we took on in the latter part of 2005.

What about -- John, can you quantify the dollar amount of the business that you exited?

We have talked about the previous -- the 150 million -- that is all (technical difficulty) accounts.

There were a number of smaller accounts that we ended up exiting.

If you add back those larger ones that we previously disclosed, you ended up with roughly 1.5 to 2% increase in Broadline consolidated sales.

Changing gears, how are you guys managing the macro topline slowdown from a cost standpoint?

Have you guys made any adjustments in terms of labor or other expenses?

And could it possibly push some of the margin recovery back if it continues?

On the variable cost side of our business that tends to change relatively quickly.

As we adjust for a seasonality, upturns, down terms, and certain aspects of our business throughout the country.

And we do that all the time.

Yes, I think that we do adjust from a cost perspective in terms of the number of (technical difficulty) maybe the number of drivers, the number of warehouse people, but I wouldn't say it is attributable to specifically to the industry as much as it is attributable to each operating companies' warehouse expense ratios.

There is some just fixed cost on these, so as sales slow you've got -- you don't have more sales to offset the fixed costs.

We still have the costs of the sales reps that we have ramped up continuing all the way aggressively through the first quarter, and similar higher fuel costs that we have absorbed sorbed somewhat more of that as well.

Then lastly, given the macro backdrop that you're dealing with right now, what makes you confidence that a reduction in your guidance wasn't necessary?

And obviously things haven't bottomed yet.

It doesn't appear to.

And with the way that you're guiding the topline it seems like it is going to be more predicated on margin.

What gives you confidence that that can still be achieved in this environment?

That's a good question.

We have debated whether to lower the guidance or leave it open.

We looked at our (technical difficulty).

We're leaving it open at this time simply because we don't know how the industry sales are going to trend.

Historically the industry gradually adjusts to higher fuel prices and sales trends go back up.

So we're just not sure where the industry is going.

We thought it would be premature to reduce the range.

At the same time we have several new customer opportunities that we are pursuing.

But the reality is we don't see the benefit of those until 2007, if we bring those onboard.

And I bring them on -- at least a couple of those.

But basically, (technical difficulty) primarily just the answer is we don't know exactly when these will trend so we just thought we would leave it open at this point in time rather than prematurely lower the range.

With topline trends at the end of the second quarter, or even currently if you can speak to them, more encouraging than when you left off, or they are were about the same?

Topline trends with certain chain customers, as you saw (technical difficulty) towards the end of the quarter were little softer then at the beginning of the quarter.

Street business was a little stronger at the end of the quarter than it was at the beginning of the quarter.

We think maybe because of the progress we're making with our newer sales reps.

Bill Chappell with SunTrust Robinson Humphrey.

Just could you day talk a little bit about the competitive landscape as the environment has gotten a little bit tougher what you're seeing out there? are you saying seeing aggressive discounting or is everybody holding the line?

It is always competitive.

It varies geography by geography.

I would say that the competitive landscape today isn't significantly different than the competitive landscape in any other quarter we have had for the last couple of years.

Have you seen any strengthening from US Foodservice or anyone else out there?

In terms of their pricing?

Right.

U.S. has always had a reputation for being pretty aggressive.

We haven't seen that change.

What is your outlook for inflation for the back half of the year?

That is a good question.

We would like to see a little inflation, but it is just too early to tell.

Do you think we'll see deflation for the remainder of the year?

Go ahead.

I was just going to add that in our Broadline business we saw moderate inflation, roughly 1%.

Customize, we saw a little bit of deflation.

That tends to be more driven by when those customers contract with their suppliers.

I think your Broadline number as far as just the general pricing of food products, is maybe a little bit more indicative of current market.

But it is very difficult to project that out and say where is it going.

We wish we can answer that, but we're just not certain at this point.

I understand.

Just last -- when I look at the back half, can you just remind us what the benefit, or as you cycle through kind of the hurricane-related costs in third and fourth quarter, assuming there are no hurricanes or impact -- a similar impact -- what benefit you would see?

I think we quantified last year the impact in the third quarter we estimated to be about 2.3 or $2.4 million in the third quarter.

So obviously (technical difficulty).

Who knows what the impact would be from any storms this year.

That is awfully obviously difficult to --.

I remember there was a fair amount of sales slowdown just as well just as some of the --.

Yes, there was 12 to $14 million --.

Just to let you know that up historically the third quarter is a little light than the second quarter.

So that is another reason why even with that plugged back in we did not project really a stronger third quarter than we did second.

If you look at the third quarter last year, the range we give you is a pretty significant improvement over the prior year.

Bill Leach with Neuberger Berman.

I have got two questions.

John, what is the option expensing?

Is it in additional earnings or in the corporate number?

It is all in our corporate cost number.

I was just wondering if you could comment on the underutilization of your balance sheet.

Even though you bought back so much of your stock, you're still very underevered.

How do you see using your free cash or your borrowing ability over the next year?

As we look out over the next year, hopefully, the M&A market will continue to improve a little bit.

At this point, obviously, we haven't announced anything and there's nothing imminent there.

But our balance sheet is fairly under capital, or underleveraged I should say.

We will continue to evaluate that and what makes the most sense given our growth plans and what acquisition opportunities do come up.

And that is probably as much clarity as I can give you.

Do you have any authorization to buy back stock, or is that all finished?

We would have announced anything that has been approved.

Yes, everything that we did announce has been completed.

So right now you have no authorizations?

Right.

Meredith Adler with Lehman Brothers.

I am still a little confused about the sales slowdown.

How widespread is it?

When you look at street customers that you have had for a while that aren't new, are you seeing a slowdown in their business, or does this slowdown seem to be hitting chain more?

We have actually -- are very best customers, what we would call our A customers, they seem to be holding their own.

Not so true for the restaurant customers on the opposite end of the spectrum.

But, again, don't know whether that is being driven by a more competitive landscape or their ability to grow their business (technical difficulty).

Then another question I have, I think you have comment on the fact that deflation might helped your margin.

Is that right?

Did I understand that correctly?

I think in our Customize segment deflation generally will help margins.

It doesn't change gross profit dollars.

But if you remember that business is primarily priced on a fee per case.

So as the sales line deflates a little bit, your gross profit dollars stay the same.

That generally helps in our Customize business.

Inflation, slight inflation, generally helps our street business because that is less contractually driven. (multiple speakers).

When we say it helps us, it really doesn't help us, it just doesn't make any difference.

In other words, it makes the operating margin look a little bit better, but it doesn't add or -- from our actual operating profit dollars.

Right.

It is an optical mathematical saying it is not.

Exactly.

I understand what you're saying now.

And then I guess just trying to understand whether -- how much lag is there on talks about slowdown?

Will you feel that pretty much immediately?

I guess you would, right?

Yes (multiple speakers).

Because they would be purchasing less.

When the gas prices spiked, I think -- well, we did mention in the call in May, for example, that we had seen an impact in April.

The first quarter had been rocking along pretty good.

Just kind of right in tune with the gas prices spiking we saw just an immediate slowdown, which is why we went ahead in May and mentioned that to the market that we have seen that, because it was just almost overnight.

I think there's a lag (technical difficulty) in the time the consumer changes his spending habits.

But there is no lag between the time that a restaurant feels the pain to the time that we feel the pain.

Right.

Then my final question this just about on the operating margin in the Broadline business, which you had been projecting was up, and it is going to be up very strongly this year.

To get that to happen you have to have a substantial improvement in the second half.

And I think you talked about the fourth quarter being a very good quarter.

Are you still anticipating substantial improvement, and is the fourth quarter the right time?

I think there're two things.

One is you'll have the lapping of the hurricanes as well.

So the comps in the third quarter should help a little bit.

At this point we have not revised our operating margin guidance for the full year.

Although, depending on where we are in the range and where we see sales trends for the third and the fourth quarter, obviously might determine whether we're in the higher end of that range or the low end of that range.

We're not sitting here being victims of a slower industry.

Then a point we want to make really clear.

We're not sitting here just whining to you (technical difficulty).

We're being very aggressive in the way we're addressing the market, pursuing the street business, which we're making good progress in, despite a slower market.

And (technical difficulty) going after some attractive chain customers.

And we're into pretty deep conversations with a few chains.

And we're hopeful that we will bring a chain on, or a few chains on, by the end of the year, which probably wouldn't help the fourth quarter, but the fourth quarter is just historically a better time of year.

And usually gas prices drop off -- drop down a little bit after the summer season.

Again, that is why we think it is a little bit premature to change our guidance.

If that happens this year, then we think sales could bounce back from the latter part of year some, and we may -- we have got an opportunity to have a very strong year, or regardless of that, we think a solid year.

Just to confirm those good chain customers you're talking to, that would benefit the Broadline business, not Customize business.

Both.

We were pursuing it in both areas.

Eric Larson with Piper Jaffray.

The one area where we probably have a reasonably good sales visibility is in Broadline with addition of your sales force.

Can you give us an update on let's say your retention rate, etc.?

If you are having turnover in those new sales people that you bring on come, is the first six to nine months are critical where we're kind of at nine month period.

How does it feel (indiscernible) the retention rates?

How do you feel about the quality of the 10% increase in sales reps?

That's a great question.

I feel very good about the quality of the reps.

We're turning them over as planned.

Our retention has been good, but not too strong.

So like I said earlier, we are starting to see some traction from some of the reps that we brought on in the (technical difficulty) this year, and pretty optimistic that as we get through the rest of this year and into the beginning parts of 2007 that we will see the street sales number continue to ramp up.

Steve, on the sales people -- on the numbers, you obviously made a strategic decision to increase your sales reps by about 10%.

Do you have a normal annual increase in sales reps as well?

You have it built into your budgeting every year, maybe 1% -- 1.5?

How do you look about sales force ex a onetime 10% increase?

We expanded it towards the end of 2005 by 10%.

We will expand it again by the end of '06 by 10%.

That is not a number that we're going to project every year for the next many years.

But with a 20% increase in the number of our sales folks out on the road, we think that gets us to a critical mass in each one of the markets where, to be quite frank, we needed to be.

What the guidance -- we haven't given guidance for our sales (technical difficulty) expansion through 2007, 2008.

We have given some guidance around our continued street sales growth in those years.

You could somewhat back into what the headcount requirement will be to get there.

I might add to that is we did continue to invest in new sales reps even throughout the first and the second quarter.

So our incremental cost of those new reps is continuing to grow in [Seattle].

It is 2.5 million in the second quarter, where I think it was around 2 million in the first quarter.

We have continued to make those investments as we have focused on that area.

Keep in mind that it does take about 12 months for the sales rep to begin paying for himself.

And we start to see the real traction developing around 18 months.

We are seeing that today.

Good.

Really, if you look at the sales figure you put on toward the end of last year, you should really start seeing performance in the first quarter, early part second quarter of '07 would be about the right time frame for that?

Yes.

Good.

One final question.

John, I think we've got about half of the stock option expense in your first half.

You have been running at about 7.5 million of corporate overhead per quarter.

Is that a runrate that is reasonable for the third and fourth quarters?

I think that is directionally correct.

Yes.

Ajay Jain with UBS.

First, on the growth that you're seeing right now in Customize, I guess based on the slower casual dining traffic that we all have been reading about, can you comment about the growth drivers in Customize, specifically?

I think in the earnings release you cited that a lot of the growth is coming from existing customers.

And I am just trying to reconcile the recent trends for OSI and Cracker Barrel, for example, and their reported topline growth.

Even though as you have seen a number of our customers are not having topline growth, they are still adding restaurants.

We're getting our growth from new restaurants -- new restaurant openings, as well as additional line penetrations.

The combination of those things is helping our growth.

And we think we will continue to have positive growth over the balance of the year.

Within Customize is that growth broad-based or isn't skewed towards any specific customers or customers segments?

And were there any kind of forward buy-in that underpinned that growth?

We wouldn't comment on any specific restaurant concept as far as their growth, but Customize in total I think we would be okay commenting on.

No, there is no buy-ins.

Our restaurants don't typically do that.

(technical difficulty) For my next question, John, you might have already mentioned you don't comment on specific customers, but as it relates to Outback Steak House and Cracker Barrel specifically, as you know both companies have made some pretty big management changes recently.

Are there any implications for the PFGC based on the governance issues with these customers that you can speak about?

Not that I am aware of.

I don't know, Bob, if you have any additional thoughts on that?

No.

I guess just one last question.

I was wondering, Steve, in terms of the investment in the sales force for Broadline that you're making this year, I know that is supposed to be staggered, but can you quantify how much of the cost associated for hiring and training for the newer sales people -- how much have you already the absorbed in the first half?

2.5 million is our net impact in the second.

It was 2 million for the first quarter.

Right.

And that is their -- the contribution margin from the sales they generated versus primarily compensation costs.

We had a little bit of training costs and things like that in there, but I think that is fully loaded as far as what we can capture as far as the cost of those new routes.

One reason for that was we continued to be aggressive in the first quarter in the hiring of sales reps.

We added quite a few in the first quarter as well, more than we normally would have at the beginning of the year.

Relative to the cost that you expecting for the full year, how much does that 4 -- 4.5 million represent?

I'm not sure we have given any guidance on what that longer-term impact is.

Obviously a lot of it depends on how productive they become, and when they start to generate enough sales and gross margin to pay for themselves.

It is kind of a quarter by quarter thing, I guess.

But directionally the numbers for the first half of the year will be somewhat similar in the second half.

I think I would say not only do they come back up, I do think the reps that we brought on late in '05 incrementally will continue to contribute more, and hopefully start to pay for themselves by late in '06.

Obviously, the reps that we just hired in the first or second quarter will probably be a little bit later.

We would expect to see some incremental improvement in that as they start to pay for themselves, but it will be more late in the year than early '07.

As Steve had talked about, it takes about 12 months for a rep to pay for themselves, but really probably more along the lines of 18 months until they are really starting to hit their stride and contribute meaningfully to profitability.

I hope that gives you the kind of qualitative -- it should start to decline the later we get through '06, the impact of those reps, and then hopefully lesser and less in 2007.

That was very helpful.

Thank you.

Jeff Omohundro with Wachovia.

My first one is a bit of a follow-on to the prior question regarding development.

When you look at your multi-unit customer base, I was just wondering if there is any sense of any shifts in the momentum of the development pipeline, again, when you look across the chain customer base?

Are you talking about opportunities with new customers, (multiple speakers)?

I'm talking about the unit development plans, timing of new units, or the actual number of new units in the pipeline for your customer base.

We really can't talk about our customers and how they're rolling out their units.

That is really a question for the customers.

They don't really like us to comment on those.

You're not going to respond across your entire customer base?

You're talking about -- in general all of our chains?

Yes

It really depends on the chain.

As you probably been told, some are aggressive and what on track.

Some of them slowed down a little bit -- is looking for sites.

It just really depends on the chain.

I don't see a significant difference this year from previous years.

On the comments regarding seeing some sales slowdown in certain segments, I just wonder if there's any granularity around that?

What segments specifically are you referring to, and how large a proportion of your customer base might they be?

I think where we have seen it probably the most is in kind of that mid tier, kind of family dining and that mid casual.

It seems like some of the higher end like tablecloth restaurants have been doing relatively well.

Still seeing a slowdown, but relatively well, And maybe some of the lower end may be benefiting from trade downs and things like that.

But I think it is probably that mid tier that we've seen more of an impact.

Unfortunately right now, that is probably not the best, because that is our bread and butter account.

But as Bob had mentioned, we are aggressively looking at new account opportunities and investing in sales reps to continue to grow Broadline, and are not sitting in our heels waiting for that.

That is probably what we have seen more of in that tier.

On the sales to independent restaurants, we've got so much room for market share expansion that we could be in a situation where the industry basically wasn't growing, and it really wouldn't affect our ability to grow our sales to independent restaurants for quite some time.

Tied again to the sales rep expansion, (indiscernible).

Obviously it does help when the customers themselves are growing.

Ann Gurkin with Davenport.

I just want to make sure I understand the guidance for the year does not include any new business.

It does not include any significant new chain business, right.

It always includes just miscellaneous business that we bring on.

But any major new chain accounts is not included in it.

One of the reasons for that is if we were to bring one on it would take probably a quarter to really profitize it anyway.

Even if we brought one on sometime during the second half of this year, it probably would be '07 before we would realize any profits under that (indiscernible).

Then secondly, I guess it was my understanding in the fall when we had a spike and fuel prices it took customers a period of maybe six weeks to adjust.

Is that a similar adjustment period in April/May this year when we have a spike in fuel prices?

We really haven't -- as we said, the industry still seeing a slowdown, which I guess is a little suppressing to us that this consumer hadn't seem to adjust.

Maybe that is because -- for one reason the prices stayed up.

I think in the fall prices when up, but they came back down a little bit.

This time they have stayed up, and we are still right around that same range.

The consumer hasn't adjusted yet.

Whether they will or not, we don't know.

Whether the price will drop some on fuel in the fall or not, we can't answer at this point in time.

But you in the back half you are looking for sales to continue to decline?

I think how the market responds might depend on where we are in that range.

But what we are looking for is maybe a slight increase in (technical difficulty) quarter, and we think a little bit better low double-digit -- excuse me, low single digits in the fourth quarter.

We're not looking for -- really looking for sales declines in the second half of the year.

Then you all have been implementing fuel surcharges.

Can I get an update on that?

We have continued to have some offsets (technical difficulty) to fuel costs, where we are contractually allowed to do that with our certain customers.

With our chain customers -- we've got contracts with just about all of our chain customers.

And then -- which offsets the cost of fuel, which we need to have because of the margins we are working on.

With the street we have got fuel surcharges with the vast majority of our street customers, just to offset some part of the fuel costs.

Is there a cap on when you have to go back and renew those or --?

Are you talking about the chains?

Yes.

That is really --.

It depends on when the contract (multiple speakers).

It depends on when the contracts come up.

But in the negotiations that we've had, we've always had that as an absolute necessity, just because we don't control the cost of fuel, and it is a significant cost.

Mark Husson with HSBC.

I just want to go into the street business and try and back into the most important metric, which is gross profit dollars per drop.

I think you said that street sales were up about 6%, and you said lines per drop were up about 8%, which makes it sound like the average line that you're adding has less dollars than the core lines.

But also the gross margin was in decent shape.

It sounds like you have a good shot here at improving gross profit dollars per drop.

Can you just talk about that metric, and how are the new salespeople affecting that metric in the mix?

Historically, as you might imagine, when you add a new sales (technical difficulty) they will tend to hurt your average.

However, we've got a pretty good standardized training program.

We have training managers in all of our locations.

We have got a standardized curriculum that we're using to train a lot of these folks.

So we're doing a pretty good job in educating the newer reps in how to sell a program as opposed to how to become one of many.

We are seeing a pretty good return in the average drop in the salespeople with less (technical difficulty).

But we're also doing a good job in increasing our account penetration, using a couple of tools that we have internally in our more seasoned reps.

To get a larger (technical difficulty) customer share, currently in the center of the plate category.

That is being driven in great degree by our concentrated effort in center of the plate through not only our six USDA meat plans, but to our corporate center of the plate programs as well.

(indiscernible) specific number.

I guess to give you a little clarity, the street sales per delivery is up about 6.6%, which is slightly more than the street sales were up.

But not as up -- to your point lines per delivery are up 8%.

So (technical difficulty) I'm sorry for delivery.

So to your point, the new lines may be less slightly less profitable lines and that is probably the level of granularity -- I don't quite get that.

The first thing is it sounds like you got a big book there with all the answers in it.

And my second question is a more general one.

To what extent did this industry slow down (technical difficulty) bit of control panel that you have to (technical difficulty) help you sort of match costs with demand, and all that kind of stuff that you couldn't have done before?

I think what it really comes down to is a method of training and evaluating (technical difficulty) existing reps that you have, but with the new reps that you bring on and having a very disciplined approach to managing them.

We have a web-based tool that all of our sales (technical difficulty) people, district managers, VPs of Sales, and so on and so forth, use to show them account penetration, penetration in specific lines, penetration in specific categories, any business (technical difficulty) have lost or are selling less than we have in the prior thirteen week period.

It is a very scalable, powerful tool that gives us a great deal of granular insight into how well we're managing against specific objectives.

I guess (technical difficulty) I scribbled it down earlier on the call, but I will ask it anyway.

It was given what we know about the slowdown now would you have hired as many salespeople as you did?

You went on to say you're going to higher a bunch more so perhaps that answers it. (multiple speakers).

Absolutely.

Glad we did.

Andrew Wolf with BB&T Capital Markets.

A couple of (technical difficulty) follow ups.

But first you mentioned two replacement distribution centers I think in Broadline.

Can you just kind of discuss (technical difficulty) capacity, which I assume at least some of it is, or is it also contained -- you know, if you're going to build state-of-the-art PCs and maybe locate them more optimally, is there also a margin play on the (technical difficulty) backing them up?

These expansions that John talked about were capacity issues.

And growth markets for us -- they needed the capacity, and that is why we built them.

Last quarter -- and thank you for the (technical difficulty) sales force.

It is interesting stuff.

Last quarter you gave us the same number on information technology.

I don't know if you would be willing to share that -- the dollar amount this quarter.

But also, the same question people are asking about sales, which is basically when does that start to either go down an absolute number, or begin (technical difficulty) creating operating leverage through purchasing and what have you?

But just what the dollar flow (technical difficulty).

On the (technical difficulty) up slightly year-over-year in the second quarter where it was up a good bit more on the first quarter year-over-year.

We do still think over the full year that investment will be incrementally (technical difficulty) dollars we expect for the full year.

I don't remember off the top of my head the first quarter number.

I think it was around $1 million year-over-year.

It was somewhat less than that in the second quarter.

And then I'm sorry, your follow-up question on timing of the new sales rep investment.

I think I had answered Ann's question where we would expect as those reps become more productive and contribute more that would start to slow down late in '06 and certainly in '07.

I'm sorry I didn't communicate (technical difficulty).

I was looking for like (technical difficulty) look at the IT costs.

Simply put, do you think they will go down in '07?

I know you don't want to give guidance.

We haven't given '07 numbers yet.

Let me ask you about the insurance results you have said which were better in workers' comp.

Sometimes that is kind of a onetime accrual related thing.

And in other cases it is more long-term and sustainable based on the (technical difficulty) better best practices and getting accident rates down or better job of negotiating claims.

Could you kind of speak to which one of those two areas it would fall under?

I think we're seeing much better (technical difficulty) -- you know, if you remember -- what was it, a year or two ago we were experiencing very unfavorable kind of claims experience.

We put a lot of effort and focus on our safety programs and risk management programs.

What we are seeing right now, we see that being more a sustainable -- would that go on ad infinitum, probably not.

But at this point we are continuing to expect the lower year-over-year insurance loss rates.

Lastly, I think (technical difficulty) earlier you had spoke about getting some gross margin expansion out of purchasing and category management, and saying that is early on.

Kind of a two-part question.

My perception was you really started to gain traction (technical difficulty) maybe this was, if you want to call it a breakthrough (technical difficulty) a very positive quarter.

So does my perception match (technical difficulty) your perception?

Secondly, what inning are we in here in terms of this effort?

I think that we're still in the very early stages.

We have just gotten some of the technology on line.

And we talked about a common item.

We're getting close to converting to a common vendor.

If I had to say what inning are we in, probably second or third inning.

Keep in mind that one of the things that drives a lot of the category management initiative are continued growth in our sales of independent restaurants.

The two are very closely aligned, but we are in the early stages of the category management.

Steve Chick with JP Morgan.

You covered a lot.

I wanted to clarify, I guess, are the sales trends that you're seeing in Broadline for this month -- the first month of this current quarter -- you said that you had ended in Broadline with stronger street sales, and I think a little softer multi-unit sales.

Can we assume that the negative 4% Broadline sales decrease -- is that about where you are for the month of July?

Can you speak to that?

For the quarter we expect a slight improvement over that.

We are seeing a little better (technical difficulty).

Good.

Clearly better than before, but it sounds like maybe still in negative territory.

It still maybe consolidated -- as I said, we believe we will be up slightly over last year.

We believe that at this point based on what we are seeing.

But as it relates to Broadline, it still may be down slightly for the quarter.

Until we lap some of this chain business we gave up, number one, and until we bring on some additional chain customers, which as I said, we are in pretty deep discussions both in Broadline and in Customize at this point.

But I guess what I -- from a Broadline's perspective (technical difficulty) at least in the first month, you have seen sequentially things get a little better then this past quarter.

Not significantly, but on the street side primarily, right.

Then second thing on the insurance question, did you quantify that, how much that helped the quarter?

And I just want to confirm, it is not like you have insurance -- a credit on insurance proceeds of any kind in there.

It is definitely (multiple speakers).

There is no credit insurance, right.

How much did it help the quarter or --?

It is not something we have quantified.

We saw some very favorable trends.

And like I said to Andy, we do expect that to continue through the balance of the year.

We're starting to see a lot of really good traction, mostly in workman's comp and that kind of thing.

Health care is actually still up year-over-year a little bit.

But we have not been any specific numbers out there for that.

Meredith Adler with Lehman Brothers.

My question has been answered.

Thanks.

(OPERATOR INSTRUCTIONS).

Ladies and gentlemen, there are no further questions at this time.

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

Thank you.

We are optimistic about the year and our long-term growth.

We expect to continue gaining traction in each of our initiatives throughout the year, and drive steady improvement in our results over the prior year.

Despite some current industries softness in certain segments there are ample opportunities for growth in our industry.

Our team remains committed to driving our core strategies, which include increasing our percentage of higher margined street to sales, leveraging new technology and best practices in our operations, and the continued execution of our procurement programs.

We will also continue to proactively invest in development of long-term strategies for our Company.

We have a strong, experienced management team who share a common commitment to driving our core strategies to achieve solid long-term returns for our shareholders.

Thanks for your participation today and for your interest in our Company.

Have a great day.

Thank you.

This concludes today's conference.

Thank you for all your participation.

All parties may disconnect now.