Blackstone Inc (BX) 2006 Q4 法說會逐字稿

Good day and welcome to today's fourth quarter 2006 earnings conference call.

As I reminder today's call is being recorded for opening remarks and introductions I would like to turn the call over to Mr. John Austin please go ahead, sir.

Thank you, Mark and good morning, and welcome to Performance Food Group conference call and webcast to review the company's announcement earlier today.

Of its financial results for the fourth quarter and full year ended December 30, 2006.

This morning I'm joined by Steve Spinner our President and CEO.

Our call is primarily intended to review financial results for the fourth quarter and full year, 2006.

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

Let me first address some operating highlights and then turn it over to Steve for a more commentary on the quarter and year.

Before we start, let me say that certain statements that we'll make on this call maybe forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks that are based on current expectations.

Actual results may differ materially.

These risks are more fully described in our press release and SEC filings, in addition these remarks may include certain non-GAAP measures define by SEC regulation G. A presentation of those non-GAAP measures and comparable GAAP measures are available on our website.

Net sales and continuing operations for the quarter for approximately $1.5 billion an increase of approximately 3% from the year ago quarter.

Net sales for the full year were approximately $5.8 billion an increase of 2%.

Sales trends in the quarter and year reflect our previously announced exit of certain multi-unit business in our Broadline segment and more modest industry growth. [Inaudible]Exit of the multi-unit business in the first quarter of 2007.

A complete segment breakdown is included in our news release.

Inflation also during the quarter was proximate 1% both for the quarter and full year.

Gross profit from continuing operations increased 4% to $199.8 million compared to the year ago quarter, gross profit margins increased 16 bases points to 13.51%.

Gross profit for the year increased approximately 4% while gross profit margins increased 23 basis points.

The increase in margins for the quarter and the year is due primarily to the increase mix of street sales and by improvements related to our procurement initiative.

Gross profit margins in the quarter and year were also positively impacted by fuel surcharges, which were offset by incrementally higher fuel costs.

Operating expenses and continuing operation for the quarter were $177.1 million or 11.97% of sales an increase of 11 basis points versus the prior year quarter.

Operating expenses in the year prior year quarter.

Operating expenses in the year were $699.5 million or 12.01% of sales which represents an increase of 18 basis points.

Increase in net operating expense ratio during the quarter and the year is due primarily to our investments in our increased street sales force.

Additional information technology investments, stock compensation expense and to higher fuel costs.

Favorable trends and insurance costs partially offset that increase and operating expense ratio for the year.

Operating profit from continuing operations in the quarter was $22.7 million, and our operating profit margin was 1.544% reflecting an increase of five basis points verses the prior year quarter.

For the year, operating profit was $75.1 million and our operating profit margin was 1.29% reflecting a 6 basis points increase versus the prior year.

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

For the year, interest expense in the loss and sales of account receivable were approximately $9.1 million compared to $8.4 million in the prior year.

Primarily as a result of higher interest rates on the company's receivables facility.

Other income for the year was $2.5 million consisting primarily of interest income compared to $5 million in the prior year quarter which had been positively impacted by net earnings from our fresh cut segment.

Our effective income tax rate was 37.4% for the year which benefited both from various Federal tax credits and the reduction of accruals for tax contingency and statute of limitations expired during the year.

We continue to expect our tax rate to be approximately 39% for 2007.

Net earnings from continuing operations in the quarter were approximately $12.9 million or $0.37 per share diluted compared to $12.9 million or $0.35 per share diluted in the prior quarter.

Excluding the impact of stock compensation expense net earnings for the quarter amounted to 13.7 million or $0.39 per share diluted.

Net earnings from continuing operations for the year were approximately $42.9 million or $1.23 per share diluted compared to 41.8 or $0.95 per share dilute in the prior year.

Again, excluding the impact of the stock compensation expense net earnings for the year amounted to $46 million or $1.32 a share.

Diluted weighted average shares outstanding for the the year amounted to approximately $34.8 million compared to approximately $43.8 million in the prior year reflecting the use of the pros from the sale of our fresh cut business in the completion of our stock purchase programs in late 2005 and early 2006.

The end of the quarter our balance sheet remained extremely strong.

Our debt to capital ratio was approximately 1.5% and again, this excludes the $130 million of interest in accounts receivable facility, which is off balance sheet.

As for working capital, our days outstanding in receivables remain flat versus the third quarter an increase by one day compared to the prior year quarter.

Inventory turns remain flat versus the third quarter and the prior year quarter and accounts payable flow increased 2% compared to the third quarter and decreased 3% versus the prior year quarter.

We continue to be very focussed on effective management of our working capital.

For the full year and continuing operations depreciation amounted to $25.6 million and amortization was $3.3 million.

Pretax stock compensation expense was $4.9 million versus 1 million last year and capital expenditures were $53.7 million versus $77.6 million in the prior year.

Resulting in free cash flow of $23.3 million for the year.

This represents an improvement of approximately $31 million versus the prior year due in large part to lower capital expenditures in our Customized segment.

Offset by some investments in our Broadline segment.

As we look ahead for the the 2007 year based on our current trends in our business, we expect internal sales growth on a consolidated basis to be in the the upper single digits for year.

Again, for the year we expect operating margins to improve in the range of 5 to 15 basis points for the full year.

We also expect to incur pretaxed stock compensation expense of approximately 7 to $7.5 million for the full year which reflects an incremental expense of approximately 2 to $2.5 million for the full year.

As we previously discussed, we expect the higher stock compensation expense to begin impacting us in the second quarter of the year as a result of anticipated timing of our annual equity wars.

Again as a reminder, given the anticipated higher stock comp beginning in the second quarter, anticipated startup costs associated with potential new business in our customized segment and higher overall insurance costs we do not expect the rate of earnings growth in the second quarter to be as strong as that in the other three quarters of the year.

We expect depreciation to be approximately 25 to $28 million for the full year.

Amortization to be in the 3 to $4 million range.

And capital expenditures to be in the 75 to $85 million range for the full year of 2007.

As a result, we continue to expect earnings per share to be in the range of $1.34 to $1.42 per share diluted for the full year and for the first quarter we continue to expect net earnings to be in the $0.17 to $0.20 range per share diluted.

With that I'll turn is it over to Steve Spinner our President and Chief Executive Officer for more clarity on the quarter.

Good morning, everyone and thanks for joining us today.

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

I'm quite pleased by the commitment our associates have made to our key strategies and changing culture.

This commitment was demonstrated through improvements through our service levels productivity and earnings despite modest industry growth.

During 2006, we realized significant progress in the transformation of our company to a more standardized, efficient and focused organization.

We adopted new technologies to enhance our service levels through customers, invested in our sales force to drive higher margin sales growth, and began to leverage our consolidated Broadline purchasing power through process improvement and category management.

We're strong financially.

Our team is committed.

And we're focussed on executing our strategies and building on our core values as we lay the foundation for long-term growth and profitability.

Now, I'll review our result for the fourth quarter and full year.

During the fourth quarter and throughout 2006, we made a significant investment in the expansion of our sales force and successfully increased our higher margin street sales by approximately 8% for the quarter and the year.

This growth reflects a vibrant and highly motivated and trained sales force of over 1,000 strong.

We anticipate continued productivity gains and positive top line sales momentum in the coming year as we continue to leverage our investments in driving profitable sales growth.

Our overall internal sales results for the fourth quarter reflect our previously announced exit a certain lower margin business in late 2005 and early 2006 as well as the continued moderate growth trends in our industry.

Let's talk a minute about the our Customized segment.

Our Customized segment generated sales of approximately $598 million in the quarter and $2.3 billion for the year, an increase of approximately 5% for the quarter and the year.

Our Customized segment experienced deflation of approximately 2% in the quarter and for the year, resulting in real sales growth of approximately 7% in the quarter and the year.

The increase in sales for quarter and full year was a result of growth with existing customers.

Operating margins for the quarter and full year increased 15 basis points and 20 basis points respectively compared to the same prior year periods.

Our Customized segment has been successful throughout 2006 and leveraging its available capacity to drive operational efficiencies and enhance our service through existing customers.

As we previously disclosed, we do anticipate the acquistion of new business to come on line in the second half of the year.

We talk now about Broadline.

Our Broadline segment generated sales of approximately $882 million, an increase of 1.5% versus the prior year quarter.

Inflation was approximately 4% during this quarter, reflecting a decline in real sales of approximately 2.5%.

Broadline sales for the full year were unchanged compared to the the prior year.

Inflation was approximately 3% for the year, reflecting a decline in real sales of approximately 3%.

Our Broadline sales trends in the quarter and full year reflect our previously announced exit certain lower margin multi-units and trends excluding the exit of multi-unit business Broadline sales increased approximately 7% in the you are qa.

Our higher margin street sales continue on grow at a strong rate of approximately 8% in the quarter and full year as we maintained our focus on the growth of higher margin street sales.

For the full year, street sales represented approximately 50% of Broadline sales compared to approximately 46% in the prior year.

Our investment in street sales force continue to fuel the growth of higher margin street business in the quarter and we expect to gain continued productivity from our sales team in the coming year.

While our investment in the sales force negatively impacted Broadline operating margins in the fourth quarter, I remain pleased with our improvements throughout the year.

For example, in addition to street sales growth of approximately 8% for the year, our gross margin for delivery increased approximately 7%, our street line items for delivery increased approximately 6% and our sales at PFG brands to street customers increased 10% for the year.

These results are particularly encouraging in light of the number of new sales reps we've added throughout the year.

And this is a strong indication that our focus on account penetration through effective sales training and our commitment to driving up service levels are, in fact, delivering results.

In addition to our street sales focus, we will continue to be opportunistic in developing profitable new business opportunities with multi-unit customers in the Broadline segment.

Our procurement programs contributed favorably to the gross margin improvement in the full year and we expect our initiative on driving SKU profitable improvements in our negotiating programs and reduction in cost of goods to contribute favorably to our operating margin improvement this year.

Broadline operating margins increased 6 basis points compared to the prior year quarter and gross margins improved by 27 basis points in the quarter, primarily as a result of increase in our mix of street sales and by the improvements related to our procurement initiative.

In addition the implementation of our web enabled matrix stage pricing system is on schedule.

For the full year, operating systems remained unchanged while the gross margin improved by 42 basis points compared to the prior year.

Primarily as a result of our improvements in our procurement program.

Our investments in our Street sales force and information technology continue to impact our operating margins for the fourth quarter and for the full year.

In the area of operational excellence we continue to achieve improvements in our warehouse efficiency and service levels our productivity improved for year as warehouse pieces shipped per hour increased by approximately 10% over the prior year.

Higher fuel costs partially offset these improvements.

For the continue the implementation of our proprietary GPS based on board truck computers we continue to increase our service levels to customers.

To recap company wide.

We continued our positive momentum in the quarter and full year as we successfully increased our percentage of higher margin street sales.

We completed the standardization of warehouse and transportation platforms and improved our on operational productivity.

In the coming year, we will continue to focus on driving improvements in our gross margin as we begin to leverage our Broadline category management programs.

In short, 2006 was a year of moving forward.

We're now ready to take some questions.

Thank you, sir. [OPERATOR INSTRUCTIONS].

Our first question have from Simeon Gutman from Goldman Sachs.

In the past you've mentioned it may take a couple of humbling years or a year of results in the industry to lower expectations for some of the private food service companies out there.

Was those six one of those years and are you seeing greater opportunities in the acquistion pipeline.

Let me see if I understand your first question.

Your first question relates to the growth of independent restaurant sales?

No, it's actually the same question, which is in the past, you have some of these private food service companies looking to get paid pretty rich multiples to be taken out.

You needed a year at least, they would be humbled by the results to probably lower the expectations a little.

Were those six one of those years and seeing more company of interest popping up?

It's hard to say.

We haven't seen a lot of M&A activity.

So one could make the conclusion that because there is not a lot of M&A activity as it relates to the independent food wholesalers for sale that they maybe humbled, in your terms, and since we typically pay a multiple EBITDA, you maybe right.

They maybe waiting to see if the results improve.

Okay and then as for Customized in the sales visibility you have there.

It sounds like it's definitely coming in the back half.

John, if I heard you right, is that -- is that reflected now in the second sku where you're incurring cost ahead of that.

Is that one of the biggest reasons the second quarter earnings growth will be lower this afternoon the other quarters.

There's three primary components one is the startup costs.

Two is when we told you for the full year stock comp is going to be up 2 to $2.5 million.

That really starts to kick in the fourth quarter and as far as year-over-year insurance costs we're starting to see some of that in the second quarter.

I think all of those reasons are drivers and then in the latter half of the year obviously we're benefited some by the anticipated position of new business certainly helps the the back half of the year.

How do those items stack up in terms of magnitude?

I think relatively speaking I think the second quarter growth will be relatively flat, not much in the way of increases in the is second quarter where we do continue to expect increase in the third quarter.

Beyond that we're -- okay, but as far as those cost items, stock compensation as well as startup and Customized which one of those buckets will be --

All relatively in the same ballpark.

I don't think any one of them is heavier weighted then any other.

And the Customized new business is contained within your guidance but is there any -- I don't know if contingencies here and there where the new business will be bigger or less then what you guys expect?

It's kind of hard to comment on that.

I think we're just going to have to wait until we deal with a customer or customers and they can make disclosure at that time.

Okay.

Thanks, guys.

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

Good morning.

Good morning.

A couple things first following up on the Customized business and for the year would you expect the addition of the business to be accretive EPS, neutral or slightly diluted??

I would expect it to be slightly accretive for the full year.

It typically takes us a quarter or two to work that out so obviously the timing of when it actually comes on we're anticipating about the middle of the year.

But that might make the first quarter or so break even or so.

We do expect to incur startup costs in the second quarter in anticipation of that, but for the full year I think it will be kind of break even to slightly accretive.

Turning to Broadline, obviously a good sales growth number but how does that track with the increase in sales force on a kind of a year-over-year basis.

Are we at 50% utilization, 75%.

How do look at that?

We don't look at the sales capacity in terms of utilization by salesperson.

We typically tend to look at it in tenure so we get the greatest performance irrelevant starting at 18 months to three or four years.

So you feel like things are moving on track with the sales force increases you've had?

Absolutely.

Final question.

Tell us where we are on the IT rollout in terms of Is there a big chunk behind you or do you have a big chunk this year?

A couple of things, Bill.

Most of our prior IT investments have been on the operational side and I know we've talked about that on a couple of calls in the past.

Would be it GPS routing systems warehouse productivity systems.

Those kinds of things.

A lot of our focus for this year when we talk about what our plans we're really going to be more on the core transactional platform and that's where most of our investment.

We do expect to continue to investment IT I think our forecast for this year calls it to be somewhere in the $10 million ballpark of our CapEx is on IT.

Okay.

Thanks.

Yeah, okay.

Our next question is from Ajay Jain from UBS.

Good morning, just a couple of things, I wanted to clarify some of the numbers that I think Steve gave in his prepared comments on the Broadline segment.

First on the sales It looks like over the the past four quarters the growth was in the 6 to 9% range and I think you mentioned it was 8% for the year.

Can you confirm how much of that is being driven by higher drop sizes to your existing accounts and how much from sales to new customers.

I think I wasn't sure if I understood correctly.

It looked like you mentioned the sales from Broadline to existing customers grew by% for the year is that correct [inaudible] gross margin for delivery I think increased by 7% is that correct?

Gross margin I think increased by 7%.

The total street sales increased to 8%.

Those two statistics are a little bit confusing because one it's not necessarily connected to the other.

One is a measure of sales of gross profit per drop.

Okay.

So just I guess just sticking with the top line sales figure, can you confirm just relative to the 8% composite number and Broadline how much is coming from existing accounts versus new customers?

Yeah, we don't typically disclose that.

Okay.

I guess I'm just trying to get a better handle on how satisfied you are in terms of the sales productivity from your sales.

I would answer it this way in that we were pleased with the growth in our sales to independent restaurant operators , and we feel we're going to be on track to see the historical increase that comes from sales reps that have that 18 months or 3 year tenure.

Okay.

Great.

I was also hoping to quantify to follow up on Simon's question on some of the incremental costs.

I know John had provided color on the last conference call on depreciation and higher operation expense and slightly higher interest expense this year.

Is it possible to get any color on insurance premiums and the investment in the sales force?

Let me try on give you some granularity on some that.

Talk about stock compensation for the full year it's going to be 2 to $2.5 million higher given the timing of our option grants and restricted stock grants that typically comes towards the end of the first quarter so all of that incremental cost is really going to happen in the next -- or the second, third and fourth quarter.

So, if you succeed upgrading over that time period that's incremental, all call that in the neighborhood of $700,000 to $800,000 for each of those three quarters, incremental over the prior year?

Yeah, I guess I'm pretty clear on the depreciation and the options and the interest expense.

Okay.

But as far as the insurance premiums that you're expecting and some of the startup costs for the Customized business, and the incremental investment in the sales force, I was just wondering if you had any.

Like I said, we're expecting a 15% increase in total insurance cost this year.

As I mentioned to Sinon's question.

Those three stock comp and insurance are all of the same general magnitude.

We just talked about $700,000 to $800,000 in stock comp so that gives a relative number.

Great.

All right and so Steve, is it fair to say that you can kind of leverage -- you're expecting to leverage all of these additional expenses and also 25 to 30 basis points of operating margin improvement in Broadline?

In addition?

Yeah, I think our guidance, 25 to 35 basis points.

Our guidance for Broadline itself is 25 to 35 basis points for the full year.

Okay.

So answer to your question, yes.

And lastly, John, with the CapEx projected at 50% higher this year over '06, you don't foresee any need to drawdown on your revolver.

You still expect to be free cash flow positive?

Absolutely.

Okay on.

Great, thank you very much.

Thank you.

Our next question is from Eric Larson with Piper Jaffray.

Yeah, good morning, everyone.

Hey, Eric.

A couple of questions.

First, your PFGC brand you said was up 10% for 2006.

Can you give me what your Performance Food Group brands are as a percent of total Broadline or of total street sales and I'm curious which way would be the best way to measure that?

We typically disclose the brand sales as a percentage of street and that's roughly 24.5%.

As percent of street and that's probably the best way to look at it as street.

The other portion is really not something you can extend your brands in?

We can but I think it's a better measure to look at it as a percentage of street sales where we have the flexibility.

Okay, that's fair.

And then can you give us a recap of what your sales force investment was for the year in terms of head count and what you might expect head count in sales force investment for 2007?

Sure, Eric.

If you look at for the full year, we averaged about 15% more reps.

We started the year in the mid 800th -- 840 or so, 850 and we finished the year at just over 1,000. 1050.

So, actually started the year probably around 900.

Probably about a 15% increase in the number of reps.

The overall net investment in those reps ended up being around $9 million.

Now the one thing I might caution you to as it relates to that overall investment.

That's the total investment.

We would normally run at a clip of a 10% new investment.

Say about one-third of that is probably out of the ordinary.

Okay.

Does that make sense?

Yes, that does make sense.

When you say $9 million, that would be your all in cost.

That would be salaries plus benefits and everything.

Salaries plus benefits and incredible sales management.

Net of any contribution margin they might be providing.

So that's a fully loaded number then?

Correct.

Okay.

Then it looks like you had probably corporate overhead expense.

You made some good progress on that this year.

It looks like it was down maybe 2 to $3 million.

Around 27 or $28 million.

What might your corporate overhead number look like this year?

We're targeting to have a rea very modest increase.

Obviously the stock comp will drive that somewhat, 2 to $2.5 million but excluding that a very modest increase.

Virtually no increase in overall corporate costs.

So that means in you put your stock based comp in that number then you're actually showing internally some better improvement again year-over-year?

That's correct.

Okay.

Thank you.

Our next question is from Jeff Omohunro from Wachovia.

Thanks, I wonder if you could elaborate a bit on the Broadline margin expansion paid this year.

How should we think about it slowing out throughout the year in terms of gaining momentum kind of by quarter?

I think, Jeff, the way I would think about it is we do anticipate continued traction on the key initiatives we have, be it operational initiatives, category management and so I think they will continue to accelerate throughout the year.

We haven't provided disclosure around the synergies that we're going to get from each one of those specific initiatives, but these things happen over time as your sales force becomes more mature, as you start to use some of the technology to drive increases in our category management capabilities.

You could draw the conclusion that those things would tend to ramp up over time.

Okay.

And in looking at that CapEx number you provided, I think that you're planning on some fairly sizable investments in Broadline replaceability facilities I'm just wondering if we get more detail around the CapEx breakdown and what the run rate of CapEx might be.

40 to $50 million of the total is in new buildings or new building replacements and $10 million in IT CapEx.

Great.

Thank you so much.

Okay, thanks.

Our next question is from Ann Gurkin of Davenport & Company.

Good morning.

Good morning, Ann.

I wonder if you could just give us more detail on new capacity in the the Customized segment just examples of how you're getting benefit there?

Yeah, I mean the reason for the significant buildout in Customized a year ago was to take miles out of our distribution.

In other words to reduce the number of miles the average route runs so that we could be closer to the physical locations of our customers and Customized segment has done a fantastic job in moving those routes around in order to take advantage of that capacity.

Okay.

That's been the single biggest driver.

Secondly, I didn't know, given the news coming out of McClain.

I know it's different there.

They're distributing lot of beverages but didn't Know if you were reviewing what you charged weight-based items if you're looking at your free structure given news coming out of the McClain.

We look at all of the methodologies that to price to our customers.

And depending on the customer, we may utility a wide variety of techniques to do that.

I believe the McClain issue was related to a specific category of product.

Right.

So it's a little bit different then what we do as we're delivering a wide range of products to a wide range of customers.

I think their business is also sea store related that mix might be greater in the model strengths be things like that.

Right.

Fair enough.

Thanks very much.

Our next question is from Andrew Wolf.

I think you said you had 4% inflation inflation in Broadline.

Could you elaborate in how much of that is you think is permanent related to fuel and other factors and some [inaudible] [inaudible] related to the freeze in California.

It's hard to say whether it's long-term or not.

It was primarily -- that's where we saw the bulk of the inflation in the quarter and also had inflation in dry grocery and as a percentage.

The most significant inflation though it's a more shall smaller volume of product was in our chemicals and disposables.

It's very hard to comment as to whether it will be long-term or short-term.

Okay.

On those categories where it's a markup.

It's not a per case fixed per case like meat where it's actually a markup on the product cost.

Could you comment on is there any lag passing through those increased product costs?

I would say that it's different for the path along is different for multi-unit customers then it is for sales and restaurant operators.

Certainly, where you were on a cents per pound markup, the impact on the margin is different then if you're work on an percentive margin cost of goods.

There's not a long delay in cast a loans.

At the most it might be 30 days.

Okay.

Thank you.

Excuse me.

Last question is on your sales trend.

Could you comment on in light of the weather and the recent bad weather that's impacted some others just generally how sales have held up so far in the quarter?

I think generally speaking we're pleased with sales momentum we had in the fourth quarter and the sales momentum that continuing into the first.

There are certain pockets impacted by the weather but that hasn't been across the board.

Great, thank you.

Our next question's from Meredith Adler Neiman brothers.

Hi This is actually [Sean Roberts] calling in for Meredith.

Can you give a little detail about the cost that's involved with bringing a new customer on line?

Sure.

Typically have to add personnel in the warehouse in advance of gearing up for a large customer.

They need to be trained and ready to take on the additional piece selection.

We also need to add capacity in our fleet, tractor-trailers as well as drivers and have to be hiring in advance and trained on how to deliver product the PFG way.

So, generally speaking, when you take on a large piece of business, it requires a gear up in terms of both associates in the warehouse and drive staff as well as an increase in assets.

Bringing the inventory on board and things like that.

Okay.

And then in terms of the amount of capacity that will be available after bringing this new customer on is there still going to be excess capacity and have you been in any other conversations about condition additional customers?

We're always in discussion with quite a few customers.

Fortunately, we have a great reputation of being a leader in distribution and managing the cold chain to casual dining customers.

The best casual dining customers in the the U.S.

So, it's a hard question to answer.

We're always looking.

We feel we still have capacity more in some locations then others, but if you recall we did add quite a bit of capacity during '05 and the beginning of 2006.

Great, thank you.

Our next question is from [Dana Walt with Calla Manager Investments.]

Good morning.

Good morning, Dana.

Could you describe where you stand on the key front you were trying to get something resolved here in the the early part of '07 so you could go full boar?

Yeah, we -- what we had talked about was our common vendor platform and we're still on schedule in doing that.

We converted to the the common item platform last year.

We con Everett over the to a full data warehouse which gives us a great deal of business intelligence into either movement vendors, suppliers.

So, we are moving forward and we're on target to get that done in the time frame that we had previously disclosed.

Which I want to recall was this quarter?

Right.

So you're just about done?

Right.

Steve, some of these numbers went through very quickly.

Can you remind us what the gross margin change was for Broadline in Q4 and as well for the full year?

Sure.

Gross margin improved 27 basis points for Broadline in the quarter.

If there was a benefit from street, would it be intuitive that the gain would have been higher in Q4 then for the full year, and if not what were the issues and the comparisons?

I would say that your intuition is accurate.

Yet, it appears that gain was higher for the full year rather then the quarter.

Correct.

Can you explain that?

I think a lot of it is just the competitive nature of the business and new sales reps and how they're pricing but I think we're comfortable that we are continuing to gain traction on both sales volume and our category management.

The fourth quarter did not increase as much as the year, we also had a strong comp from last fourth quarter.

Final question.

As we look at a 25 to 35 basis points improvement in Broadline for '07, how would you expect gross margin and operating expense ratios to play leading to that outcome?

I think the big driver of the overall improvement will be improvement in the gross margin ratios.

So that will certainly be a significant contributor.

We do expect to still squeak out operational efficiencies while we're much further down the path on the operational -- that will absolutely contribute to some of our overall operating margin improvements.

Dana, I would say that there are really two things that are driving the margin improvements.

One is I talked about in my comments very briefly.

We are just about complete with the rollout of our web-enabled naturist based pricing system to our independent restaurant outfits.

We feel that, that is going to be a significant enabler to provide more accurate pricing which will drive throughout the year.

At the same time as we finish our conversion to our common vendor platform and continue to culturally change the way we negotiate our national programs, those two things combined, one in the gross margin, one in the selling margin will drive the most significant portion of our improvement.

One last clean up matter.

You've been describing this net cost of the sales force add as the year progressed.

What did that number look like -- I suppose we get back into it but what was that number for Q4?

It's about 2 million down [Inaudible] in Q4 which is incrementally done from the third quarter.

The net cost or that net investment, there will be always be some net investment if we're adding the sales force to our sales force.

So, I would caution you the sales force to our sales force.

So, I would caution you to say all of that is not kind of one time or unusual.

It is more on the lines of a third that for the year.

And the issue of reaching a crossover point for reps?

Where they start to become productive, once again, the new reps that measure is all for reps that have been with us less then a year.

Typically, you don't reach a crossover point for those reps.

It's remain kind of a 18 months to two years when they really start contributing.

Again, the new reps that measure is all for reps that have been with us less then a year.

Typically, you don't reach a crossover point for those reps.

It's remain kind of a 18 months to two years when they really start contributing.

So, by definition it's going to be a negative number.

That's going to be a negative number.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS].

At this time Mr. Austin, we have no further questions.

I would like to turn it over to you for any further or closing comments.

Want to thank you all for joining us today and for your interest in our company we're looking forward to a very good year in 2007 as we continue to build on the foundation we've established as a more standardized and efficient and focused food company.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.