Blackstone Inc (BX) 2007 Q4 法說會逐字稿

Greetings and welcome to the Performance Food Group fourth quarter 2007 earnings conference call.

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

(OPERATOR INSTRUCTIONS)

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

Thank you, Mr.

Austin, you may begin.

Thank you, Ryan.

Good morning, and welcome to our conference call and webcast to review the company's announcement earlier today of the fourth quarter and full year ended December 29, 2007.

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

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

I will briefly address our financial highlights for the quarter and year and Steve will provide more insight into our operating results and expectations.

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

These statements involve risks and based upon 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 financial measures as defined by SEC Regulation G, and a presentation of those most directly comparable GAAP measures and a reconciliation of the non-GAAP measures to the GAAP measures are available on our website.

Before I begin with my financial review for the fourth quarter and full year, let me update you briefly on the status of our pending merger with Vistar Corporation, a portfolio company of the Blackstone Group and Wellspring Capital Management.

Since announcing the merger agreement on January 18, 2008, we filed our preliminary proxy statement with the SEC and we and Blackstone have each made our initial Hart-Scott-Rodino filings.

A copy of the preliminary proxy statement which includes a copy of the merger agreement, is available on the SEC's website.

We will not be discussing the merger in detail on the call, but reiterate that subject to the satisfaction of customary closing conditions, including shareholder approval and the expiration of the waiting period under the Hart-Scott-Rodino Act, we continue to expect the transaction to close in the second quarter of the year.

In regard to our financial performance for the fourth quarter and full year 2007, net sales for the quarter were $1.6 billion, an increase of approximately 10% from the year ago quarter.

Net sales for the full year were $6.3 billion, an increase of approximately 8% over the year ago period.

Sales trends in the quarter and year were impacted by the roll out of the previously announced new business in our customized segment, increased sales to existing customers in both segments, and continued growth in our broadline street sales.

A complete segment break down is included in our news release.

On a consolidated basis, inflation remained high in the quarter and was approximately 6% for the quarter and 5% for the full year.

Our gross profit increased 7.4% to $214.7 million compared to the year ago quarter, while gross profit margins decreased 35 basis points to 13.16% from 13.51% in the prior year quarter.

Gross profit for the year increased approximately 6% while gross profit margins decreased 21 basis points for the full year.

The decline in gross profit margin in 2007 as compared to 2006 is primarily due to inflation and to a lesser extent by the impact of our sales mix between multi-unit business and street.

Even though inflation caused a gross profit margin to decline, our gross profit dollars were not impacted as much as it relates to our gross profit margin.

Operating expenses for the quarter were $188.6 million or 11.56% of sales, a decrease of 41 basis points versus the prior year quarter.

Operating expenses for the year were $737 million or 11.7% of sales, which represents a decrease of 31 basis points.

The decrease in operating expense ratio during the quarter and year was due to increased sales partly driven by inflation and improved operating efficiencies offset in part by increased provision for bad debts in the fourth quarter.

Operating profit in the quarter was $26.1 million and our operating profit margin was 1.60%, reflecting an increase of six basis points versus the prior year quarter.

For the year operating profit was $87.2 million, and our operating profit margin was 1.38%, reflecting an increase of 9 basis points versus the prior year.

For the year, interest expense on accounts receivable were $9.9 million compared to $9.1 million in the prior year primarily as a result of the increased expense associated with a capital lease at one of our facilities and costs on the company's receivables facility.

Other income for the year was $4.3 million, consisting primarily of interest income, compared to $2.5 million in the prior year, which was positive impacted by an increase in our cash balance available for investment.

Our effective income tax rate was 37.3% for the full year.

The decrease in the effective rate from the year-ago period was primarily due to the recognition of certain tax benefits, and a statute of limitations that expired during the year, partially offset by an increase in our state tax rate.

We expect our tax rate to be approximately 39% for 2008.

Net earnings from continuing operations in the quarter were $15.1 million or $0.43 a share diluted, compared to $12.9 million, or $0.37 a share diluted in the prior year quarter.

Excluding the impact of stock compensation expense, net earnings from continuing operations amounted to $16.2 million, or $0.46 per share diluted, compared to $0.39 per share diluted in the prior year quarter.

Net earnings from continuing operations for the full year were $51.1 million, $1.45 per share diluted, compared to $42.9 million, or $1.23 per share diluted.

Again, excluding the impact of stock compensation expense, net earnings for the full year amounted to $55.3 million or $1.57 per share diluted compared to $1.32 per share diluted in the prior year.

Diluted weighted average shares outstanding for the year for 35.2 million, compared to 34.8 million in the prior year.

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

Our debt as a percentage of total capital was approximately 1.1%.

Again, this excludes $130 million of interest in accounts receivables sold under out receivables purchase facility.

As for working capital, our days sales outstanding in receivables remained flat at 18 days sales outstanding versus the third quarter and decreased one day compared to the prior year fourth quarter.

Inventory turns increased by one day versus the third quarter and prior year fourth quarter to 17 turns.

Accounts payable float was 110% of inventory which remained constant compared to the third quarter, and decreased 2% versus the prior year fourth quarter.

For the full year in continuing operations, depreciation amounted to $26.7 million and amortization was $3 million.

Pretax stock compensation was $6.6 million versus $4.9 million in the prior year and capital expenditures were $74.9 million versus $53.7 million in the prior year, reflecting the capital requirements associated with construction of replacement facilities at two of our broadline locations Springfield, Massachusetts, and Cairo, Georgia, and our continued investment in information technology.

Free cash flow for the year was $12.8 million compared to $23.3 million in the prior year, and that decrease was obviously impacted by the amount of capital expenditures versus the prior year.

As we look ahead to the 2008 year, based upon current trends in our business, we still expect internal sales growth on a consolidated basis be in the mid to high single digits for the year, depreciation to be $28 million to $32 million for the year and amortization to be in the $3 million to $4 million range.

We expect capital expenditures between $30 million and $40 million for the year with includes approximately $10 million in costs associated with the implementation of our current financial applications with SAP.

We also expect to incur pre-tax stock compensation expense of approximately $8.5 million to $9.5 million for the full year, which represents an incremental increase versus the prior year of $2 million to $3 million.

We expect adjusted net earnings per share for the full year to be in the range of $1.53 to $1.65 per share diluted, excluding the previously announced facility closing costs, and unadjusted net earnings per share to be in the $1.39 to $1.49.

.

This guidance also excludes any costs associated with our pending merger with Vistar Corporation.

With that I will turn it over to Steve to comment on, to give you more granular insight into our operating

Thank you, John, good morning, everyone.

I would like to add some comments regarding fourth quarter and year-end performance.

Three years ago we set out on a core strategy for Performance Food Group and focused on three areas of our business: growing our street sales, operational excellence, and category management.

We believed these initiatives would drive growth in the most profitable areas of our business, improve the efficiency of our operations and enhance our financial performance.

We continued to make progress in these initiatives and this progress is reflected in strong financial performance in both the fourth quarter and full year.

We are also dealing with the challenge of increasing food inflation, growing concerns about the economy, slower industry growth and the need to grow larger as we seek to better leverage our scale and infrastructure.

PFC made significant progress in 2007 thanks to the hard work and dedication of our associates in further developing and implementing our core strategies.

We continue to realize significant progress in the transformation of our company to a more standardized, efficient, and disciplined organization.

Our expanded technologies further improve customer service levels, and operational efficiencies.

Our sales force continue to drive higher-margin sales growth, and we have undertaken additional opportunities to leverage our scale and aggressively manage costs.

We have been pleased with our company's steady progress in real sales growth which continues to outpace our industry.

However we have not seen any moderation inflation and we are continuing to watch economic and consumer spending indicators closely.

We remain committed to our focus on operational excellence and improving our levels of service across every point of our company.

To support this process, we have made major investments in new systems including the continued rollout of voice selection technology in our warehouses which we believe will further enhance our service to customers by increasing accuracy and efficiency.

We have been successful at achieving industry-leading standards throughout our business, and we have done so efficiently with an eye on long term returns.

We took a disciplined approach to sales rep growth, given the industry and economic environment.

Since 2005 when we undertook an initiative to increase our sales force, we have added 26% more associates, bringing our total street sales force to more than 1100 at 2007 year-end.

We have supported this growth with the addition of a common training curriculum designed to provide our sales force with the added expertise to support our customers and grow our businesses.

We will continue to be opportunistic in developing profitable new business opportunities that focus on street sales growth, as well as multiunit customers that meet our profitability objective.

We completed 28 supplier reviews during the year, and we continue to focus on improving negotiated programs with suppliers, honing efficiencies in our procurement practices, and further leveraging our national supply chain.

Our objective remains focused on enhancing our operating margins as well as enhancing the value we bring to our customers.

For 2007, PFG brand sales increased to 27% of our street sales, and we expect to continue the expansion with prime penetration of our product-level products, including new products like the recent I will introduced PFG naturals, an organic product line.

Our goal is to increase our brand penetration to 30% of street sales by end of 2008.

In 2007 we focused on building capacity through renovations and construction of new facilities to expand our distribution system.

In 2007 and early 2008, we opened broadline replacement facilities in Cairo, Georgia and Springfield, Massachusetts, and we completed an expansion of our St.

Louis, Missouri location.

This increased capacity will support growth with new customers, provide enhanced services for our existing customers, and make us more operationally efficient.

In customized distribution we added a significant new customer, O'Charley's, and in 2008 we added Joe's Crab Shack.

Together this will add approximately $270 million in annualized sales.

The roll out of O'Charley's was completed in the fourth quarter and we have now completed a rollout for Joe's.

Customized distribution remains the industry's leading perishable exports, and we continue to excel in the delivery of fresh products like seafood and meat to produce and dairy.

To further support our growing footprint and customer's needs we continue to anticipate a ninth distribution facility west of the Mississippi river beginning late in the year.

We have invested in information technology and are well underway to standardize our core financial systems, including applications for vendor receivables, accounts payable and general ledger.

This information technology platform is enabling our shared services center in Columbia, South Carolina which will be operational in mid 2008.

We believe that the standardization and centralization of these financial processes will drive greater cost efficiencies, support certain long term category management initiatives and serve as our platform for future growth.

To support this effort, we have expanded our training efforts and we remain committed to our continued development of our associates in other areas throughout the company.

Throughout our business, PFG is driving results, despite challenging macroeconomic conditions.

During the last several years, PFG invested heavily in building improvements and technology.

In 2008 as we expect CapEx spending to moderate, we will focus heavily on return on capital, free cash flow and driving appropriate returns from our prior year's investments.

As we execute our core initiatives we are positioning PFG for the future.

It is a future that rests on the shoulders of our associates, whose skills, hard work, and commitment to serving customers are the backbone of our success.

As now know we announced in early 2008 that PFG's board of directors has signed a merger agreement with the Blackstone Group and Wellspring Capital Management.

We filed our preliminary proxy with the SEC on February 15 and filed our Hart-Scott-Rodino filing with DOJ and FTC last week.

We are continuing to work towards closing, which we expect to occur late in the second quarter.

If you would like more information, you can access our preliminary proxy publicly filed with the SEC.

In closing I would like to thank you for joining us today and your interest in our company.

We are ready to take questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Chris Ruth with Piper Jaffray.

Just a couple questions.

On prior calls you talked about food inflation and how embedded in that there is a tradeoff between sales goods as a percent of margin, inflation numbers rise and fall against your expectations.

But, you know, inflation has been high for quite some time.

Are you saying that given the nature of your business, your profit dollars are basically immune from a 6% inflation number on a long term basis and if commodity prices do not cooperate in the inflation range, aren't you concerned about earnings pressure?

Sure, Chris.

First of all I would not character rise it as immune from inflation pressures.

We talked about this actually on the last couple of calls as we were citing to see inflation up in the mid single digit range, which is, as you mentioned, very high historically.

We have had three plus quarters of that kind of inflation.

The comment we were trying to make on gross profit dollars was more along the lines of given our mix of business and the fact that a lot of multiunit business is priced on a fee per case, that tends -- the escalation in the actual food cost, while it will pressure the percentage margin, does not have a significant impact on what your gross profit dollars are.

So I would definitely not characterize it as immune, but certainly that helps mitigate any of that significant inflation.

It is absolutely a challenging environment, especially as things are continuing to ramp up.

Now, you know --

I think that, you know, high inflation just causes a lot of difficulty in looking at your percentage rate.

We tend to look at our actual dollars as well as our per case statistics as opposed to using the percentage rates.

They just get so distorted.

Do you still expect from what you have been reading some sort of inflation alleviation in the back half?

That is what the industry says.

They are certainly indicating that is going happen.

We have not seen any indication of any fall off in the inflation.

Okay.

And I had one quick question.

Have you hedged your fuel for '08?

I think in the last call, you suggested that some time soon.

We have been working hard on that issue.

To date we have hedged approximately 13%, 14% of our fuel, and we are still waiting to see where the price ultimately ends.

So, to date, we are about 13%, 14%.

Okay.

Thanks for taking my questions.

I will pass it on.

Our next question comes from the line of Meredith Adler with Lehman Brothers.

Hey, guys.

I was wondering if you could talk about whether this kind of environment, high inflation and maybe slowing traffic, especially for the casual dining chains that you service -- does this encourage them to stay put with a supplier, or are they likely to make changes in this environment to find ways to become more efficient?

It seems to me that there would be some kind of conflict -- don't mess things up on the other hand, maybe you need to do something more aggressive.

Hey Meredith, I think that it is not so much a supplier based question in terms of the distribution as much as it is a supplier-based question in terms of the product they are ultimately serving in the restaurant.

When you get high periods of inflation, it causes restaurants to look at pricing on the menu; it causes them to look at the mix of products on the menu; it causes them to look at the value structure within specific geographies.

So, you know, obviously we are on the distribution side.

But I think what you see is a lot of restaurant operators very carefully looking at the products that they offer throughout their system and not so much the means that the products are getting to the restaurants themselves.

And do they -- are they indicating that they have some flexibility in terms of their menus?

Some of them have very special images for their customers and they would not have that much flexibility.

I am not sure we can really comment on that because we do not have enough visibility into that question.

Obviously the restaurants cannot randomly change their menu prices.

That takes a long period of time.

You know, so, I am not sure I can give you much more color than that.

Okay.

And just a question maybe for John about -- I might have missed this if you said it before, your category management efforts.

I think you talked about your own brand penetration going up.

Can you talk ability whether you are continuing to progress with the rest of your category management efforts?

Absolutely.

What I said in my comments is that we completed about 28 supplier reviews for the year, which was right on target with where we wanted to be.

We think that the completion of our financial systems roll out will significantly help move that project along at a much faster clip.

But it is very much a focal point for us.

It continues to be; we are making a lot of progress.

A lot more of the products that are purchased by our field operating companies fall within our umbrella of national programs.

So, yeah, it is still a very, very big part of who we are.

Quite frankly, it is the single biggest contributor to our gross margin initiatives over the next couple years.

Thank you.

Personally, I am sorry you are going private because I was looking forward to watching that improvement.

Thanks, guys.

Thanks, Meredith.

Our next question comes from Ajay Jain.

Please go ahead.

Hi, good morning.

I really have one main question related to the timing of the merger agreement.

At what point do you expect to file an updated version of the proxy statement, and when will the final version of the proxy be sent out for shareholder approval if that is something you can comment on at all at this time?

Quite frankly, Ajay, that is not something we can comment on.

Obviously the preliminary proxy was filed on the 15th of February, and we will work through that process, and you will be the first see it, I think.

But we will do that as expeditiously as possible.

To the extent there is any update on the status of financing, we can assume that will be communicated sometime after March 9?

We will not comment anywhere in the process but file all of our public documents as timely as possible.

Okay.

Thank you very much.

Our next question comes from an Andy Wolf with BB&T.

Good morning.

On the slower street sales growth last couple of quarters, is that more internal?

You touched on that you kind of managed the hiring of the sales force down this year.

Or is it really just more external, there's less business out there?

Or could you actually point to competition?

I think it is mostly a trade down that we are seeing down in the restaurants.

It is -- I don't think it is a factor of our hiring practices as much as it is the general economic condition in the industry.

The traffic and therefore the revenue through each customer that we sell has struggled.

That is as a result of a lot of factors, but I think the biggest one is a trading down effect in terms of frequency and the amount that the average consumer spends each time they go out to eat.

That was something we noticed in the third quarter and I know we talked about it on the third quarter calls was that was the first quarter that multiunit business actually grew faster than our street business in 2007.

We saw that same trend in the fourth quarter.

Okay.

And just on the deal, just want to check with you more using calendar and math.

There was a provision in there for 50 days to market the company for a better or different bid.

And using the calendar, that would leave about nine days left.

Is it a calendar or business day?

It was nothing but business days as mentioned.

Is there about nine or 10 days left?

It talks about it in the proxy and I refer you to that.

It expires on March 9.

That is what I was looking for.

And lastly, other income -- I noticed it was a decent amount was 8, almost $900,000.

Could you mention what that derived from?

We actually had a small investment in a B2B network.

That company was sold and we recognized the gain, that was about $800,000 in other income.

Thanks.

And good luck with everything.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from Ajay Jain of UBS.

Just one quick follow up question either for Steve or John.

Can you give any comment on current sales trends for the first six weeks for this quarter?

What you are seeing in both broadline and customized and any comment on the inflation mix as well?

I think generally speaking we are seeing more of the same.

Okay.

Thank you.

Thanks everybody.

Performance Food Group has been a company in motion, delivering results, enhancing our core business and investing in technology and people with an eye towards growth and profitability.

I am proud of what we have accomplished.

As we look to the future of PFG, I am confident that our legacy of success will continue.

Thank you and have a great day.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for your participation.