Blackstone Inc (BX) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Performance Food Group third quarter 2006 earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

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

Thank you, Mr. Austin.

You may begin.

Thank you, Tina.

Good morning and welcome to Performance Food Group's conference call and webcast this morning to review the Company's announcement earlier today of its financial results for the third quarter ended September 30, 2006.

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

Our call today is primarily intended to review financial results for the third quarter of 2006.

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

I'll briefly address our operating highlights for the quarter and then Steve will provide more insight into the quarter as well as certain expectations for the remainder of 2006.

As is customary before we start, let me say, certain of these 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, these remarks may include certain non-GAAP financial measures as defined by Regulation G. A presentation of the most directly comparable GAAP financial measure and a reconciliation of those non-GAAP measures to the comparable GAAP measure is also available on our website.

Net sales and continuing operations for the quarter were approximately $1.43 billion, an increase of 2% from the year ago quarter.

Sales trends in the quarter reflect the result of a previously announced exit of certain multi-unit business and more moderate industry growth.

A complete segment breakdown is included in our news release.

On a consolidated basis, inflation amounted to approximately 1.5% for the quarter.

Sales in the prior year quarter were negatively impacted by Hurricane Katrina by about 12 to $13 million.

Our gross profit from continuing operations increased 4.6% to 194.4 million compared to the year ago quarter, while gross margins, profit margins increased 33 basis points to 13.59% from 13.26% in the prior year quarter.

The increase in margin was driven primarily as a result in increase mix of street sales and by improvements related to our procurement initiatives.

Gross profit margins were also positively impacted by fuel surcharges which were ultimately offset by higher incremental fuel costs.

Operating expenses and continuing operations for the quarter were $174.2 million or 12.19% of sales, an increase of 19 basis points versus the prior year quarter.

The increase in operating expense ratio during the quarter is due primarily to our continued investment in our sales force, continued investments in information technology, to higher fuel costs which were partially offset by favorable trends in insurance costs.

Our corporate costs decrease in the quarter primarily as a result of lower associate-related compensation costs partially offset by increased stock compensation costs.

Operating profit from continuing operations in the quarter was $20.1 million and our operating profit margin was 1.41%, reflecting an increase of 15 basis points versus the prior year quarter.

Operating profit in the prior quarter was negatively impacted by approximately $2.4 million related to the Hurricane Katrina.

Interest expense and the loss on sales of accounts receivable was $2.3 million for the quarter compared to $1.7 million for the prior year quarter as a result of higher interest rates on the Company's receivables facility.

Other income was $939,000 for the quarter consisting primarily of interest income compared to 3.2 million in the same quarter of 2005.

The prior year quarter was positively impacted by interest earnings on the net cash proceeds from the sale of our fresh-cut segment.

Our effective income tax rate was 35.1% for the quarter.

Our tax rate declined in the quarter primarily due to the reduction of accruals for tax contingencies as the statute of limitations for those periods under audit expired during the third quarter.

We currently expect our tax rate to be approximately 38% for continuing operations for the full year 2006.

Net earnings from continuing operations in the quarter were approximately $12.2 million or $0.35 per share diluted compared to approximately $11.9 million or $0.28 per share diluted in the prior year quarter.

Diluted weighted average shares outstanding amounted to 34.6 million compared to 42.9 million in the same period of 2005 reflecting the completion of our stock repurchase programs in late 2005 and early 2006.

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

Our debt to capital ratio was less than 2% and this, again, excludes 130 million of interest under our accounts receivable facilities which are off-balance sheet liabilities.

Regarding working capital, our day sales outstanding and receivables increased one day versus the second quarter and was flat compared with the prior year quarter.

Inventory turns decreased by one turn versus the second quarter and again were flat compared to the prior year quarter.

An accounts payable float decreased 9% compared to the second quarter and was flat versus the prior year quarter.

Again, we continue to remain focused on effective management of our working capital.

For continuing operations, depreciation amounted to $6.5 million and amortization was $817,000 for the quarter.

Stock compensation expense was 1.3 million versus 355,000 in the prior year quarter.

Capital expenditures were 9 million versus 18.3 million in the year earlier period resulting in free cash flow of $11.8 million for the quarter.

This represents an improvement of almost 11.1 million versus the prior year quarter due in large part to the lower capital expenditures in our Customized segment and a slight delay in new facility construction in our Broadline segment.

During the third quarter, we did complete the construction of a new replacement facility in Broadline and began construction for a second replacement facility.

Based on current trends in our business, we expect the following from continuing operations in 2006.

We expect internal sales growth on a consolidated basis to be in the lower single digits for the year as we lap the exit of certain multi-unit business.

We expect depreciation to be approximately 25 to 27 million, amortization to be approximately 3 to 4 million and capital expenditures to be a little bit lower in the 55 to 60 million range at this point.

We also expect our pretax stock compensation expense of approximately 5 million for the year.

As a result of these expectations and current business trends, we expect net earnings per share for the fourth quarter to be in the range of $0.32 to $0.38 per share diluted.

For the full year, we expect that earnings per share, including stock compensation expense, to be in the range $1.18 to $1.24 per share diluted, or approximately $1.27 to $1.33, excluding stock compensation expense.

With that, now I'll turn it over to Steve for further comments on the quarter.

Good morning and thanks for joining us today.

I'll add to some of John's comments regarding our third quarter results and review the operational highlights in our Broadline and Customized segments.

Over the last year, I've talked a lot about distance standards and three prime way strategic initiatives in our Broadline business, increasing sales to higher margin independent restaurants, operational excellence and category management.

If you recall, at this time last year, we began our drive towards increasing sales to independent restaurants through sales, headcount expansion and standardized training, and I also indicated that it would take one year to begin to see this benefit.

During the third quarter, our sales to higher margin independent restaurants grew 9% over the prior year quarter.

I'm real pleased with our results during the third quarter and encouraged by our positive sales momentum, especially given the more modest industry growth we've seen over the last couple quarters.

Overall sales in the quarter reflect our previously announced exit of certain lower margin business in late 2005 and early 2006 and general industry trends which showed no meaningful improvement during the quarter.

In our Customized business, we generated sales of 565 million, an increase of approximately 4% over the prior year quarter.

Internal real sales growth was approximately 7% adjusted for deflation of approximately 3% in the quarter.

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

Operating margins increased 7 basis points compared to the prior year quarter and were positively impacted in part by deflation in the quarter.

Throughout this year, our Customized segment has been leveraging its new capacity by realigning business between facilities to drive greater operational efficiencies and improve service to our existing customers.

To further leverage our available capacity, we're continuing to pursue additional growth opportunities with new customers.

Our reputation for very high service levels combined with our expertise in perishables has enabled us to grow successfully throughout the year with our existing customers and our newer restaurant concepts.

Based on current business trends, we expect Customized sales growth to be in the low to mid-single digits for the year.

For the balance of the year, Customized operating margins are expected to remain relatively stable.

Our Broadline segment generated sales of approximately 865 million, an increase of approximately 1% versus the prior year quarter.

Inflation was approximately 4.5% during the quarter as we continued to focus on growing our center of the plate categories which resulted in a decline of real sales of approximately 3.5%.

As I mentioned earlier, Broadline sales trends in the quarter reflect our previously announced exit of certain lower margin, multi-unit business and current industry trends.

Excluding the exit of multi-unit business, Broadline sales increased approximately 7% in the quarter.

Our higher margin street sales grew at a strong rate of 9% in the quarter as we continue to invest in the growth of our street sales force and implement our standardized sales training platform.

Street sales represented approximately 51% of Broadline sales compared to approximately 47% in the prior year quarter.

As a result of our focus on training and account penetration, our Broadline sales per delivery increased approximately 5% and our gross margin per delivery improved 8% in the quarter compared to the prior year quarter.

Now, our investment in the street sales force continued to drive progress in the growth of higher margin street business in the quarter and we expect continued productivity from our sales team during the fourth quarter and the coming year.

The investment in our sales force continued to negatively impact our operating margins in the third quarter by approximately 2.4 million.

We remain committed to our sales growth initiatives, particularly in light of our success in achieving a higher mix of street sales growth.

While we anticipated our investment in an expanded sales force would yield an increasingly higher rate of growth in Broadline sales during the second half of the year, our resulting return on these investments have been slower than we previously anticipated.

In addition to growing our street sales, we are also working aggressively to develop new business opportunities with multi-unit customers in the Broadline segment.

We plan to be opportunistic with potential multi-unit customers who demand a high level of service that we are capable of providing while at the same time meeting our profit objectives.

We're beginning to see some positive momentum in new business coming on board during the fourth quarter.

On the procurement side of our business, we continue to gain traction in the early stages of our new category management programs as we work to improve our vendor negotiations by leveraging our common item data platform to focus on SKU profitability and reduction in costs to goods.

The process of streamlining our procurement process is a long-term initiative that has yielded steady improvement throughout the year and continues to progress, but again at a slower pace than we previously anticipated.

Since we maintain control of the procurement cycle related to Broadline street business, our continued efforts to increase our mix of street sales should contribute favorably to higher long-term returns resulting from our new procurement and category management initiatives.

Our procurement programs contributed favorably to the gross margin improvement in the third quarter and we expect these initiatives to become a significant contributor to the expansion of our operating margins over the next several years.

In the area of operational excellence, we continue to achieve improvements in our warehouse efficiency.

During the third quarter, our productivity improved, as warehouse pieces shipped per hour increased by 11% over the prior year and higher fuel costs during the quarter partially offset these improvements.

In addition, our service level to customers continues to improve as we view operational excellence as a key point of differentiation, and our completion of PFG's standardized operations platform throughout our companies will drive continued improvements.

Our operating margins increased 17 basis points compared to the prior year quarter and gross margins improved by 55 basis points in the quarter, primarily as a result of an increased mix in our street sales and improvements related to our procurement initiatives.

During the third quarter, our continued development of our information technology infrastructure negatively impacted our results.

However, we experienced favorable trends in our insurance costs as a result of our improvements in safety and risk management programs.

We also completed the construction of a new replacement facility in Broadline and started construction on a second replacement facility.

We continue to focus on improvements in our overall leverage, expense leverage, given our exit of multi-unit business earlier this year, our continued investment in the expansion of our sales force and the current trends in our industry.

As for our expectations for the balance of 2006, based on current trends in the industry and in our business, we expect overall Broadline sales to increase in the low single digits for the year and we expect very modest improvement in Broadline operating margins for the year.

While we revised our fourth quarter outlook, we remain very committed to our core strategies.

Although near term costs associated with these initiatives have impacted our results, we believe they will drive long-term shareholder value.

I'm very pleased with the commitments that our associates have made toward embracing these transformational initiatives.

We're now ready to take your questions.

Thank you, gentlemen.

Ladies and gentlemen, we will now be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, please limit your questions to two per participant.

Our first question is from Simeon Gutman with Goldman Sachs.

Hey guys.

Despite the easy hurricane comparison, you obviously didn't recapture all of what was lost on Broadline last year.

Steve, you mentioned that even though the labor investments were embedded in guidance, they weren't hitting their return thresholds.

Can you just speak to that a little more?

What were those return thresholds?

Is it not enough productivity on the top line or is it some cost elements?

Well, I think it's a couple of areas.

It's not just the street sales.

On the street sales side, the gross margin just didn't come on as fast as we had hoped, but we also had some costs on the IT infrastructure that's driving a lot of our procurement initiatives, that we're very confident that we're going to see those benefits.

It's just taking a little bit longer.

Yes.

Simeon, I might add to that, on the sales rep productivity, we are seeing positive momentum in the amount of sales that those new reps are generating.

I think we were in an average of about 160 more reps in the third quarter than we did in the prior year quarter compared to about 155 or 156 more reps that we had in the second quarter.

So we continue to make that slight investment that was really not as driven from the cost side as it was, just the productivity is coming a little bit slower than we anticipated.

And if you look at the net impact of those new reps, we were at about $2.5 million in net costs in the second quarter and about $2.4 million in the third quarter.

So we're starting to see some positive momentum there.

It's just coming a little bit slower than we anticipated.

And the cycling of those reps begins -- or has started already or do we begin next quarter?

Mostly in the fourth quarter.

Okay, so and that being said, so the top line, at least from the independent customer standpoint has been getting better.

You're going to be cycling, you're going to start to cycle the exit of the multi-unit business.

Your corporate expenses were well-managed and I think you're going to start to lap those labor investments, so what's so different when we get to the fourth quarter that prompted your lower outlook?

Is it just that very tough Broadline comparison?

I think you've got a couple things that are driving that.

I think there's still some uncertainty in the industry.

The industry, according to Technomic, is growing about 1%, and that's caused some challenge for us in the customers that we already have because they're just not growing at the rate that we had hoped they would.

We're going to continue to invest in the sales force.

We're confident that, based upon the ramp up in the sales to independent restaurants that we experienced during the third quarter, we think that's going to continue throughout the fourth quarter and into 2007.

But that's slower than--

Right, but it's lower than we originally anticipated that it would be.

Now most of your initiatives, or most of the Company's initiatives, Steve, they've been in place, I would say, for at least a year or so now.

Some of them are coming slower than others, but are you seeing, are you starting to see some signs at least at the operating Company level of faster progress than we're seeing overall on a corporate basis?

These initiatives are business transformational initiatives.

They require investment in technology and infrastructure which we've talked about, but they also require a significant amount of cultural change.

It's not as easy as implementing a new operations platform, slamming it into an operating company and assuming that everything's going to be just fine.

It requires a significant amount of management and, like I said, a lot of cultural change.

We are starting to see a lot of that change take place at the operating company level.

We are now completley on a new operational platform in terms of the way we manage our fleet and our warehouse.

We're seeing quarter-to-quarter, year-over-year, significant improvement in our operational results.

We're a little bit behind on our procurement initiative and that's primarily been driven by some technology issues that we're working our way through.

So I think, in answer to your question, we're seeing the cultural change at the opco level.

We're seeing the cultural change at the corporate level.

We're starting to see the benefit of some of the technology and systems improvements that we've made.

It's, unfortunately, just taking a little bit longer than we had hoped.

But I am extremely confident that they are the right decisions and the right initiatives.

Got it.

And then lastly John, any updated thoughts on a potential buy back?

No, we'll continue to evaluate what the right capital structure is for the long run.

We obviously, as we said in the past, want to make sure we have plenty of flexibility and drive patterns.

We look at growth initiatives, be it internal infrastructure initiatives or acquisition opportunities that might come along.

So we will continue to evaluate that.

Okay, thanks.

Thank you.

Our next question is from Bill Chappell with SunTrust Robinson Humphrey.

Good morning.

First, just John, real quickly on the tax rate.

You said on a full year basis you're expecting 38%.

Does that imply close to 40% in the fourth quarter and any idea what tax rate will be for '07?

No guidance for '07 yet, but yes, the tax rate does come back up.

If you remember early on in the year, we were guiding to around 39% and fourth quarter will be in that neighborhood, just obviously the blended rate when you look at including the third quarter.

Should get us to about an overall 38% rate for the full year.

And when I'm looking at interest income and other income for this quarter, is that something we can extrapolate on a go-forward basis or any reason that would change?

I don't think there's any significant reason that would change.

Obviously what we do from a free cash flow perspective and investment in bricks and mortar or anything like that that would change our invested cash, but right now, I don't see any structural changes to things in the short-term.

Okay, and then just finally Steve, maybe talk a little bit about the pending sale of U.S.

Food Service.

I'm not sure if you'll comment whether you would look at that business, but does that change the competitive landscape being in new hands, right now, the uncertainty, does that help or hurt you?

Or on a go-forward business, could that help or hurt you?

We read the announcement yesterday just like you did.

We are, like I said earlier, extremely focused on seeing these initiatives through that we talked about, and that's our primary focus.

We'll see what happens with the U.S.

Food Service announcement.

We'll watch it unfold.

In the near term, I don't think that it's going to change the competitive landscape.

We're going to watch it just like you.

Okay, thanks.

Thank you.

Our next question is from Meredith Adler with Lehman Brothers.

Hi, guys.

I'd like to start by talking about sales.

If you know street sales are up and you know how much sales you got from the customers you fired, how much is the remaining business down and can you differentiate between their own business, their traffic being down, and them shifting their purchases with a different supplier?

Make sure, Meredith, we got all of your questions, but I guess were you asking about street sales being down because --?

No, no, no.

The rest of the business, because you know street sales are up, and you fired some customers, but obviously the rest of your street business, I mean your Broadline business, was down.

Actually, if you back out the multi-unit business that we left, our total sales adjusted was about 7%, an increase.

Right.

So the, that would imply that the other business made up for it -- ?

No, no.

No, sorry.

Basically flat.

No, our overall business, adjusted, is down.

But you've got to calculate the impact of the multi-unit business that we gave up.

If you adjust that, if you adjust for the multi-unit business we gave up, our net sales increase was about 7% without.

All right.

Another question is about procurement, and I know you talked about some technology issues, but are you getting pushed back from vendors because you're not yet as penetrated in street sales as some of your competitors or how important is growing the street business to being able to get more money from vendors?

Yes, I mean, that's a great question.

The, there's a couple of factors in the way we negotiate with suppliers and ultimately what will make our procurement initiatives succeed.

Number one, a key component to it is our growth in street sales because the products that our street sales customers are the products that we have programs with the suppliers on.

So that's certainly a key component.

Another key component is technology that allows us to aggregate our purchase volume so that we can intelligently go to our suppliers to use that aggregated data to negotiate as one as opposed to 19 different Broadline operating companies.

We converted to a common item platform within the last eight months or year or so.

We're about to convert to a common vendor.

Once we convert to a common vendor from a corporate office, we'll be able now to control where the Opcos are buying product, how they're buying product, and use that information to more effectively negotiate with the supplier.

The third component is just a cultural difference.

Two years ago, our operating companies negotiated directly with the suppliers, with not a lot of intervention by a corporate office.

Today the corporate office is negotiating the majority of those programs that the operating companies are utilizing.

So there's a little bit of push-back from the suppliers only because it's a change in negotiating style from what they're used to, but I'm very confident that over time, the procurement initiative is going to be the most meaningful initiative we have in terms of driving gross margin improvement.

When will the common vendor system be up and running?

Is that the part that's delayed?

Yes, that's one component to it.

We're slightly delayed on the common vendor.

We expect that the common vendor will be up and running somewhere around the end of the year into the first quarter.

Okay, thank you.

Our next question is from Jeff Omohundro with Wachovia Securities.

Thanks.

My, my first question, I guess is a little bit of a follow-up, just trying to understand what part of the category management that's under consolidation is the drag?

Is it the technology?

I think there's two parts here.

One, our expectation for what these, what the negotiations were going to drive to our margin was higher than what we actually achieved expected during the quarter and what we expect to achieve during the fourth quarter.

And the second part of it is that the technology platform that we are on has taken longer to put into place than we had originally anticipated.

It's a little bit more complicated.

Okay, and also in your prepared remarks, you talked a little about the industry, particularly when talking about the Q4 expectations, and relative to your original thinking, is it, is it the comparable sales of the customer base that isn't tracking as strongly as expected or is there also some sort of underlying shift in either development or closures?

No, I think you're right on.

I think that again, we had a big shift in, from chain to street.

Street quite frankly is growing slower than chain and we have not seen a meaningful improvement in the industry as it relates to the customers that we currently serve.

And some chains are growing slower than they had been.

So our sales are tracking somewhat behind where we had anticipated.

That being said, Steve mentioned that there is some new business that's coming on in the fourth quarter so --

Very good, thank you.

Thank you.

Our next question is from Ajay Jain with UBS.

Hi.

Good morning.

I also had a question on the third quarter sales trends.

Steve, you mentioned that in Broadline, the underlying sales growth was 7% adjusted for the exit of the unprofitable multi-unit business earlier in the year.

I just want to confirm whether there's been any additional customer rationalization in Broadline since the beginning of the year?

There has not.

Okay, and can you comment or quantify how much your drop sizes have increased both sequentially and year-over-year?

Yes, I think we talked about our drop size increased, I think it's about 5%, is that right?

Yes.

Sales were in that neighborhood.

Gross margin for drop is about 8.

8%.

So gross margin for drop, which is really the key indicator for us, was up about 8%.

That's really a factor of training of the salespeople, it's a factor of some inflation, but we were very pleased with our increases in our sales per drop and our accounting penetration, especially given the fact that we have so many new salespeople out on the road.

Okay, great, and lastly, just given that you're starting to get some better productivity from, from the new hires, do you continue to plan, do you plan to continue to invest in the sales force next year?

And just more generally, is there any kind of timeframe for when you're planning to issue your preliminary outlook for '07?

We, in answer to the first question, we are going to continue to invest in the sales force.

If you recall, we did a forced headcount expansion in the fourth quarter of last year.

That was a significant cultural change for the Company.

We think that at this point, we're comfortable with the operating companies adhering to a very specific headcount objective throughout the year.

In regards to the guidance for 2007, our hope is that we're going to be able to provide some guidance sometime mid-December.

Mid to late December, Ajay.

We're still in the midst of our planning process but hope to be able to give that guidance by year end.

Okay, great, so just to confirm, I think is it reasonable to expect that you're going to add another 100 salespeople next year?

We really haven't made those calculations yet.

I think our historic guidance, Ajay, was that we typically want to add about 10% to our sales force.

This last year was more like 20%.

So while we haven't finished our planning process to know exactly what that number is, it kind of gives you some relative ranges there.

Great.

Thank you very much.

Thank you.

Our next question is from Mark Husson with HSBC.

Yes, I just wanted to talk a bit about, obviously as you organize yourselves with vendors, the final course becomes quite important for some contracts in terms of vendor allowances for the year.

And if the industry's growing a bit slower and if you've given up some volume, is it a vendor allowance line that is not coming in as you're just not expecting to hit some of your targets?

I think it's an overall program.

It's having the ability to enhance the existing programs that we have using the aggregated data of the 19 consolidated companies.

There's a lot of suppliers that we are in the process of renegotiating with and it's just taking longer than we had expected.

It's overall cost to goods, Mark.

Obviously vendor allowances are a component of that but -- and year-over-year, we're still up and making progress in those.

It's just, as Steve had said earlier, just going a little slower than we had initially hoped.

And a second question on gross margin.

The traditional driver has been private brand.

Could you just give us a bit of an insight into how that has developed over the last little while?

Yes.

We are actually in the process of rolling out some additional branded, PFG branded products.

If you recall, we had held off for about a year or so as we evaluated the profitability of those, of those brands, both in terms of PFG as well as value to the customer.

We rolled out our, I think we mentioned in the last conference call, a new PFG branded produce program.

We're doing some ethnic brand extensions and rollouts.

So you'll start to see some modest growth in our sales of branded products over the next quarter, I would think, and certainly throughout 2007.

So finally, just on the idea of central procurement.

There are U.S.

Food Service, certainly in the old U.S.

Food Service business, was a central procurer of product, and Cisco is increasingly moving to a more centrally procured business model.

Is it -- are the vendors really having a cultural difference in trying to get their heads around negotiating with you as a Company when other people are doing something similar?

I think it's not just procurement.

It's supply chain management.

Procurement happens to be a part of it.

I don't know that the vendors are having a cultural difficulty with it as much as they're having difficulty understanding a new way of doing business that instead of negotiating for cost of goods, at least in PFG's case, we're looking to manage the entire supply chain, the FOB point, the way it's delivered, where it goes, what's the most efficient way to get it to the operating company.

And I think that's where the industry is struggling a little bit.

Okay, that's useful.

Thank you.

Thank you.

Our next question is from Eric Larson with Piper Jaffray.

Mr. Larson, your line is live for questions.

Hello?

Hello.

My question is, your rep increase year over year is about 10% and I think that was your goal for 2007.

I think I also recall that you would like to add another 10% to your rep count next year?

Is that correct?

Eric, yes, you're close.

I think the 160 average reps that we had in the third quarter is actually more like an 18% increase versus the prior year.

We had right around 900 or so, in that neighborhood.

So it's a little bit higher than the 10%, but you're right, in that our long-term guidance is that we typically want to drive about a 10% increase in our sales rep headcount.

Okay, and back to the question on, on sort of U.S.

Food Service.

I don't know how the business is being sold, but maybe as a whole unit, but have you heard of any opportunities of picking up separate operating companies in the U.S.

Food Service sale?

No, I mean, we read the announcement yesterday just like you did.

So we don't have any information that would lead us to believe that that's taking place.

So next year, in modelling, if it's fair to put another let's say 8 to 10% in your reps, that would be a reasonable expectation?

Again, we haven't given '07 guidance yet so we're still working the planning process.

I think that's a good long-term range to think about as far as 10%.

Thank you, fair enough.

Thank you.

Our next question is from Bill Leach with Neuberger Berman.

Good morning.

If you take the low end of your guidance for the fourth quarter, it's a 9% decline, you'll have about 7% fewer shares, it looks like, so I missed the beginning of the call, but why is the fourth quarter so much worse than the third quarter, and why wouldn't this dribble over to the first part of 2007?

I think, Bill, it's really just a matter of, we're looking at where we see the business trending, where we see the industry growth trending and the fact that our original guidance, if you look at our current guidance for the fourth quarter, that puts us into the low end of the range that we had previously given.

I don't know if you remember back on our second quarter call.

Our view was that if the industry picks up and improves, we'd be at the higher end of our guidance back then, but if things didn't improve, we'd be kind of middle or low end of the guidance.

And our revised guidance kind of does bring us down into that low end of that guidance range.

So we'vee looked at our trends, looked at things that are going on, looked at the fact that the productivity out of the new sales force is coming a little bit slower than we anticipated.

I think while we feel comfortable making progress on the procurement side, that is also coming a little bit slower than anticipated and obviously our traction there, in part, is driven by street sales growth.

So that's where we see things trending and that's where we think the appropriate guidance is.

Certainly if you take a look at some of the key indicators, you're starting to see some of the traction in terms of gross margin, in terms of increase in street sales.

So these things are starting to happen.

They're just not happening at the pace that we had hoped.

Right.

It just seems kind of dramatic to go from 25% EPS growth to basically none or slightly down.

Is it just because it's a tougher comp year to year?

Partly, it's a tougher comp, absolutely.

That's where we see things trending at the moment.

Okay.

Thanks.

Thank you.

Our next question is from Andrew Wolf with BB&T.

Good morning.

I just need some clarification, probably because I wasn't listening well enough.

On the street sales, they ramped from 6% in second quarter to 9% third quarter and I really couldn't discern, you might have clearly stated it but I couldn't figure maybe, what they're doing now and what you expect for the fourth quarter.

And so, sort of the, and secondly, well that's the first question.

One of the differences between the second and third was we had a higher inflation in the third quarter than we did in the second quarter.

We are seeing positive trends in the ongoing street sales growth.

It's been pretty consistent with what we saw in the third quarter.

But again, the total street sales growth, even the 9% fell somewhat short of where we had hoped it would be.

Got it.

I understand, Steve, you're below, with the reps up 18%, obviously you wanted something better by now, but is it -- are you saying the 9% is, or the 4.5% real or whatever that you were getting on the street has somehow decelerated or it's just stayed, it's about where it was, currently it's about where it was in the third quarter yet still below plan?

I wouldn't say it had decelerated at all.

On the contrary, I think that it's moving in the direction that we want it to move.

It's just not moving fast enough.

Okay, great, that's number one.

Number two, why?

Is it more?

You're talking about the industry.

What about competition?

Cisco has been pretty aggressive.

They're the biggest guy out there.

I think that when you hire a new salesperson, there is a science to it.

We tend to split routes where possible, where we move existing customers from more mature territories to those that are relatively new, and historically, we see a bump in those sales when we make that transfer.

Unfortunately, we're just not seeing the improvement in driving more business from those customers that are transferred.

And I think that's, I don't think that's a, an issue of the competitive landscape because I don't believe that the competitive landscape has changed.

I think it's more a matter of the overall difficulty that a lot of the independent restaurants are having in growing their business and competing quite frankly with some of the chains.

Okay.

Just in terms of existing accounts, penetration, doesn't sound like much same store sales, but on the street, whether, that 9% lift, where's it coming from?

Existing?

Better penetration with existing accounts or picking up new accounts that the drop size just isn't big enough to get to leverage yet?

I mean, certainly a large portion of it is coming from increasing sales to existing customers.

That's where we've really spent a tremendous amount of time on the training platform to make sure the salespeople that are new, and existing that have been here for quite some time, understand how we go to market.

It is quite different than how others go to market and we spend a lot of time teaching our sales force and our management staff how to become more important to the customers that we already have because they are the least expensive way for us to grow our sales.

A large part of the increase is coming from sales to existing customers so that's evidenced by our increase in gross margin per stop and average drop.

And last question, on the quarter's guidance, it's a pretty wide range, and as the last questioner pointed out on the low end, it's down, but on the high end, it's up okay against a tough comparison.

Could you discuss what are the leverage points in there?

Some more sales trends and where they end up or is it more some of the expense items?

Although it sounded like, at least on the category management side, that's not going to really kick in until next year.

Yes, I think it's both to be honest, Andy.

I think some of it is sales momentum.

At this point, we're not anticipating significant pick-up in the industry just based on how the last couple of quarters have trended.

But we're seeing out there, some of it's leverage points obviously that are traction on the category management side, but expense controls and other pieces.

I think, Steve had commented on the fact that IT costs were up year-over-year for the third quarter, some of those type of investments.

So it's both, both sales momentum and then some of the expense related components as well.

Okay, so everything else being equal, it sounds like to hit the low end, the $0.32, you would have to see sales trends slow from where they are now, the growth rates, is that -- ?

That's probably getting a little more granular than I want to get as it relates to the guidance.

I mean, I think that range is what we're comfortable.

Obviously, it's a little bit wider, maybe $0.01 or $0.02 wider than we've historically given, but that's what we think is the appropriate range right now.

Thank you.

Thank you.

Our final question is from Bob Cummins with Shields & Company.

Thanks very much.

I have a question on the Customized side.

Following the expansion of your facilities a while back, I know that you've been anxious to add some new customers in that area and we don't seem to be seeing the progress that one might have expected.

Is that just inertia on the part of customers in making a change?

Are your terms too onerous for the people that you've been talking to?

Are they satisfied with their existing arrangements?

Just am I right that you're behind schedule in adding new business and what seems to be the outlook for the next six months or so?

Yes, Bob, I don't think we're behind in taking on a new customer in the Customized segment.

We work very hard with customers to make sure it's a good match for them and obviously a good match with us.

These tend to be very, very long-term relationships that require a tremendous amount of energy both in terms of the customer and PFG, to get these programs moving forward.

There are a lot of great opportunities out there that we are considering and we're certainly hopeful that one or more of those opportunities will come into fruition sooner rather than later.

Certainly we built the new buildings and added the capacity with the hope of adding new customers and that's still our belief.

Okay, thank you.

Thanks, Bob

Thank you.

Gentlemen, there are no further questions.

Do you have any closing comments?

Sure, I want to thank you for joining us this morning.

We're excited about our future and the transformational initiatives that we are driving towards.

We appreciate you again joining us this morning and have a great day.

Thank you.

This concludes today's conference.

Thank you all for your participation.

You may disconnect your lines at this time and have a wonderful day.