Performance Food Group Co (PFGC) 2016 Q3 法說會逐字稿

Good morning. And welcome to the Performance Food Group third quarter fiscal 2016 earnings conference call. Today's call is schedule to last about one hour including remarks by PFG's management and the question-and-answer session. I would now like to turn the call over to Mr. Michael Neese, Vice President , Investor Relations for PFG. Please go ahead, sir.

Thank you, Crystal. Good morning and thank you for joining us. We are here this morning with George Holm Performance Food's CEO and Bob Evans, Performance Food Group's CFO to discuss our third quarter fiscal 2016 business results. During our call today unless otherwise stated we are comparing third quarter and first nine months results versus the same period in fiscal 2015. Earlier this morning we issued a press release regarding our third quarter results. You can find our earnings release on the Investor Relations section of our website at pfgc.com. Our remarks and the earnings release contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking statements section in today's earnings release for various factors that could cause actual results to differ materially from projections. On today's call we may reference certain non-GAAP financial measures. Descriptions of these non-GAAP financial measures and reconciliations to the most closely comparable financial measures calculated in accordance with GAAP are included is today's earnings release and in our presentation slides. Now I would turn the call over to George.

Thank you, Michael. Good morning everyone and thank you for joining us today. PFG's results for the third quarter were strong and in line with our expectations. Our double-digit adjusted EBITDA growth for the third quarter and first nine months reflects strong performances in our businesses. We grew our total cases by 4.1% and we feel we gained market share. Our largest segment Performance Food Service posted its 27th consecutive quarter of growing its independent case volume and excess of 6% over the prior year and our proprietary Performance brand case volume grew by double-digits. We expanded margins through a combination of improved mix and effective cost management across our entire Company. Our strategic initiatives remain on track and as a result we have increased the bottom end of our EBITDA growth outlook from 9% to 10% so that our new EBITDA growth outlook for this fiscal year is 10% to 12% reflecting our strong year-to-date results.

These results reflect the strength of our diverse business model with a focus on strong independent restaurant and Proprietary brand growth in Performance Food Service. Consistent chain restaurant business in PFG Customized and growth in Vistar's candy snacks and beverages business. We couldn't achieve these results without effort of PFG's great people. I would like to highlight an unselfish act by one of them in March while making a special delivery in Lebanon, TN, Brad Anderson of Performance Food Service, witnessed a vehicle veer off the roadway into a parking lot. Realizing that the driver was in distress and experiencing a medical emergency Brad pulled over and rushed to the driver's side to offer aid and to ensure the driver got the medical attention needed. The elderly driver had just left the dialysis treatment and experienced a drop in blood pressure which led to him passing out behind the wheel. He was eventually taken back to the hospital and is doing fine today. Thank you, Brad, for that example of going beyond the call of duty.

It's also worth mentioning that we were recently ranked in Forbes listing of America's 500 Best Large Employers in 2016, we were ranked higher than other companies in our industry. I want to thank our associates across the country for their hard work and commitment to our terrific company. Let's turn to our third quarter and first nine months highlights. For the third quarter case volume grew 4.1%. This is consistent with our growth target of 3% to 5% and net sales grew 3%. Gross profit dollars grew 6.5% while gross profit per case was up 230 basis points. Adjusted EBITDA grew 10.2%. Adjusted EBITDA margin as a percentage of gross profit expanded 60 basis points to 15.9% and adjusted EPS was $0.15 per share or 36.4% higher than the previous year.

Those are all results were quite consistent with our first nine months of 2016 where case volume true 4.5%, net sales increased 4%, gross profit dollar increased 6.7% to $1.4 billion and we grew adjusted EBITDA by 11.4%. Adjusted EBITDA margin expand to 80 basis points to 17.4% of the gross profit dollars and adjusted EPS was $0.61 per share, which is 35.6% growth rate versus the prior year. Before I get into our segment performance I would like to highlight a new customer whom we will have the pleasure of servicing in our Customized business . We are excited to announce that we have secured Red Lobster as a key customer to our Customized division. Red Lobster is an iconic market leader and the world's largest seafood restaurant company, seafood restaurant company, I should say. Our new opportunity is a testament to our capabilities in foodservice distribution, the value of our supply chain efficiencies and our shared commitment to providing high-quality products and a world-class service to Red Lobster's millions of loyal customers. Under the multi-year partnership PFG will provide distribution solutions to all of Red Lobster's 670 plus restaurants in the United States.

We anticipate numerous strategic, financial and operational benefits from the distribution agreement. First, Red Lobster an it's Management Team have built one of the best and most enduring casual dining businesses in the world and winning it as a customer solidifies PFG customized position as the premier distributor to full-service chain restaurants. Second, the Red Lobster's network of US restaurants has substantial overlap with PFG Customized existing business which enables us to increase sales by over half a billion dollars annually from within our current network of distribution centers. We anticipate that the agreement will be accretive to adjusted EBITDA and adjusted EPS in fiscal 2017 and we expect it to improve the Company's return on invested capital. Finally, we will begin rolling out service to Red Lobster in our fiscal first and second quarters of 2017.

Now let me discuss our Q3 business and segment performance in more detail. We believe PFG grew share in the quarter since our 4.1% case growth exceeded forecasted real industry case growth of around 1% to 2%. Organic case volume grew 3.8% during the quarter, which reflected new and expanding business with Street customers in the Performance Food Service segment and a broad based growth in Vistar's sales channels. Net sales for the third quarter were $3.9 billion an increase of 3%. The net sales growth was primarily driven by an increase in cases sold. We estimate overall food cost deflation was approximately 1.3% in the third quarter. We witnessed deflation in center the plate categories like meat, poultry and seafood and to a lesser extent in dairy.

We are managing the deflationary environment well, as evidenced by the 6.5% growth in gross profit dollars which substantially exceeded our case growth rate. Operating expenses increased 4.4%. That's 210 basis points lower than our gross profit growth rate despite an increased investment in our sales force. This was driven by leverage of our fixed costs, the initiatives undertaken to reduce operating expenses, and by lower fuel prices. In the third quarter gross profit dollars rose 6.5% so that our gross profit per case rose 230 basis points. Our EBITDA as a percentage of our gross profit dollars at 15.9% is the best that we have done in the third quarter in our history. Our combination of strong case and gross profit growth plus effective operating expense management drove double-digit adjusted EBITDA and EPS growth.

Let's turn to the performance in our three segments. In our largest segment which comprises nearly 60% of net sales Performance Food Service net sales for the quarter were $2.3 billion an increase of 3%. The 3% increase in net sales was driven by a strong case growth, case growth was driven both by securing new street accounts and by further penetrating existing customers. Independent case growth has modestly accelerated as our fiscal year has progressed and now accounts for 43.2% of performance food services sales up 135 basis points over the prior year. Strong case growth combined with gross margin expansion from selling an improved mix of channels and performance brands drove EBITDA growth for the quarter of 19.3%. PFG's Customized net sales decreased 3.2% to approximately $958 million. The decrease was primarily result of a decrease in case volume which reflected trends in some of our customers in the casual dining segment. For the quarter segment EBITDA increased 1% driven by lower operating expenses which were partially offset by a decrease in gross profit and an increase in transportation wages and a increase in costs associated with upgrading a portion of the fleet.

Vistar net sales increased 9.0% to $651 million driven by broad-based case sales growth. Segment EBITDA increased 4.7% driven by solid case growth and by good operating expense control. In summary, all of our segments are executing their strategies to grow our overall adjusted EBITDA and EPS. Our organic case growth story remains strong. We have demonstrated a strong track record of growing our independent case volume in the 6% to 10% range. In fact, we have grown in this range over the past several years during a challenging macro-environment. We are very excited to begin distributing for Red Lobster since it will strengthen PFG's customized business for the long-term and help PFG attain a higher return on invested capital.

Vistar continues to shift its focus on channel mix to toward higher gross margin per case and make small fold in acquisitions. We have a strong pipeline of potential acquisition candidates and we will remain disciplined in our approach to acquiring companies. We continue to make investments in our business without losing sight of generating strong cash flow and continuing to pay down debt. I started up this call by saying that we can't build PFG without great people and I would like to say something about one of the very best. As we stated I think today's earnings release, Bob will be retiring from the Company. We will miss Bob and his insight on the business. I thank him for his many contributions over his time here. In particular Bob led the Company in our critical transition from a private to public company with a very successful IPO and enhanced capital structure. During his tenure PFG has grown its sales by more than 50%. He leaves us with a very solid financial foundation not least of which is our excellent finance team.

I personally wish Bob the very best as do all the PFG associates and I will now turn this call over to Bob.

Thanks, George. Before I get into my prepared remarks I want to take a moment to say thanks to George, our Board, certainly my finance team and really all the PFG people who have made this such a great adventure for me the past seven years. I think we have built the best growth company in the foodservice industry. I mean we grew during the recession, we have grown during the recovery, we have grown organically, we have grown through acquisitions and not only have we grown the topline but we have also grown our margins, too. So I am really proud to have been part of this team and as well as we have done I am completely confident that PFG's best days lie ahead. I intend to remain a shareholder for the quite some time to come so, George, you're the architect of our growth and our leader so let me thank you personally as well.

Okay. Now, for those prepared remarks. I will briefly go through our detailed financial results, discuss our cash flow and balance sheet and wrap-up with our fiscal 2016 outlook. Our third quarter results saw PFG successfully grow both share and profit margins. Third quarter case growth of 4.1% continued to exceed forecasts for industry real growth. Gross profit dollars rose 6.5% to $481 million and our gross profit per case rose 230 basis points. This increase in gross profit per case as driven by favorable mix shifts especially towards independent in Performance brands in our Performance Foodservice business. Operating expenses rose 4.4% or 30 basis points per case as result of fixed cost leverage, initiatives undertaken to reduce operating expenses and lower fuel prices.

The combination of strong case growth and the favorable spread between gross profit and operating expense per case enabled us to grow adjusted EBITDA dollars by 10.2% to $76 million and our gross margins as percentage of adjusted EBITDA rose by 60 basis points to 15.9% an all-time high for the third quarter. Let me underscore for a moment what we're doing to expand our margins. In Performance Foodservice our focus remains to shift our mix towards independent and proprietary Performance brands. We do target 6% to 10% growth in independents and 1% to 4% faster growth in Performance brands and as George mentioned we have been delivering that consecutively for 27 quarters. In Vistar our focus on penetrating new channels that leverage three things. Our existing distribution network, our large variety of candy smack beverage and other SKUs and our flexible delivery network that spans full truckload orders to small package deliveries.

In Customized our focus is winning new customers like Red Lobster that leverage our existing distribution network. These efforts have expanded our adjusted EBITDA margin by 210 basis points over the last five years and by a further basis -- by a further 80 basis points in fiscal 2016 year-to-date. Adjusted EPS in the third quarter advanced 36% over the prior-year period to $0.15 per share which benefited from a favorable tax rate and other items. For the quarter the income tax rate decreased 630 basis points to 39.4% and year-to-date the income tax rate decreased 250 basis points to 40.6%. The decreases in the tax rates were a result of the reduction of non-deductible expenses and state income taxes as a percentage of income before taxes. For the fiscal year our effective income tax rate continues to be projected at approximately 41%.

As we stated in our last quarter's earnings call, PFG borrowed $200 million under the ABL facility and used the proceeds to repay $200 million aggregate principal amount of loans under our term loan facility. This payment plus the lowering of the interest rates under the ABL facility will save PFG cash interest of approximately $9 million over the next 12 months which is expected to translate into $0.5 per share after-tax. In the third quarter there was a one-time non-cash charge of approximately $5.8 million or $0.3 per share related to the term loan repayment transaction and can be found in the interest expense line of the P&L. Turning to PFG's cash flow in the first nine months PFG delivered $118 million from operating activities versus $28 million in the prior-year period an improvement of $89 million.

In the first nine months the Company invested $68 million in capital expenditures versus $63.7 million in the prior year and we invested $40 million in acquisitions relative to $0.4 million. This cash flow has enabled us to pay down debt and to reduce our financial leverage. PFG's net debt at the end of the third quarter stood at just over 1.2 billion dollars a decline of $291 million versus the comparable prior-year period. Our net debt to adjusted EBITDA leverage was 3.4 times at the end of the quarter which is a decrease of nearly 1.3 terms. The decrease in leverage was approximately half from the primary proceeds of our IPO and half from operations. In terms of our fiscal 2016 outlook, PFG increased the bottom end of our EBITDA growth from 9% to 10% such that our new EBITDA growth outlook is 10% to 12% which reflects our strong year-to-date results. The comparable full year fiscal 2015 adjusted EBITDA was $328.6 million. The fiscal 2016 outlook does include a 53rd week which falls in the fourth quarter.

The Company anticipates the extra week will add approximately 2 percentage points to the fiscal 2016 outlook for adjusted EBITDA. And with that, operator, George and I will now be happy to take questions.

(Operator Instructions).

First question comes from the line of John Heinbockel with Guggenheim Securities.

Hey George. A question. If you break your independent case growth down into existing customers, right, more with them, and the new customer additions how does that break down percentage-wise roughly? Has that changed a lot in the last two years and I'm thinking is it more difficult because a lot of your competitors are more focused on independent case growth as well. Is it more difficult to win over a new customer than it might have been a couple of years ago?

Well, we don't give those numbers, but I can give you kind of some general statements, I guess, here.

Yes.

The biggest part of our growth comes from new customers and that's been the case as long as I have been in this business and looking at that new (inaudible) penetration. Where we have been improving -- I think that's why we're seeing some kind of continued improvement as the year goes in our independent growth and we're getting closer to that top end of our range actually, in March we were able to exceed it, is because we're not losing quite as much business as we have in the past. I think that's just a reflection maybe of the independent being a little more stable ground financially and we're penetrating a little better than we were before within existing customers. I mean I would like to think part of that is that we're doing a better job, but I also think that's a reflection that the independent customer is a little stronger than they used to be, but if you really look at those three components of new business an lost business an how we're penetrating it really hasn't changed that much over the last five years. Just -- just slightly better with the loss an slightly better with the penetration.

And then obviously it would have a positive impact, right? You think about those components that would be -- the margin composition of that of losing less and penetrating more is incrementally better, right?

Yes. I think that's one of the reasons why we're just under 20% growth in EBITDA and that -- in that division for us so far this year. I think they're getting a great benefit from that.

All right. And then just secondly with regard to the Red Lobster onboarding, is there any capital that you have to outlay for that and any up front integration costs that you might bear early in the next fiscal year and then how do you think about sort of the incremental profit margin? So you bring on the $500 million obviously it leverages fixed assets. So you would think the incremental margin to you is better than the average, you know, how do you think about that?

Yes. I'll try to not make this too long of an answer. If you look at our numbers for last quarter for Customized you see that we had a fairly substantial drop in our case growth. Our customers aren't struggling that much. Part of it is because we have not renewed some contracts, not real large accounts, but to make the capacity to handle Red Lobster available, and as we get into this -- deeper into the fourth quarter, we're going to have a little bit more of that. We are not trending our number of drivers or our number of warehouse people because we want those fully trained people onboard. We're utilizing seven of our distribution centers and those seven centers by that time will pretty much be -- well, they will be entirely full-service restaurants.

The Red Lobster contract and how we do business with them is -- is real consistent with our other contracts. So we do feel even though it's very low gross margin business that it will be accretive as far as EBITDA as a percent of sales or our EBITDA ratio is for our customized business. The other thing with it is that when we look at the SKU base of the contracts that a we're not renewing versus the SKU base for Red Lobster, we will not be adding additional SKUs at all so we will not need any brick-and-mortar for this business and we're going to need just slightly less than 50 new drivers so for the most part we will have that driver pool on hand because of the business that we're not renewing and we will be getting those drivers on early. It's -- you know, we still have I think as the whole world knows there's still a driver shortage so we're making sure we get them on early we get them fully trained and ready to go and then we will have a business there that will be quite accretive for Customize and we'll also at the same time add a half a billion of revenues but it will actually reduce the complexity of the business.

Okay. Thank you.

Your next question comes from the line of Vincent Sinisi with Morgan Stanley.

Great thanks very much for taking my question. Good morning guys and, Bob, let me -- we're sorry to read the upcoming retirement but certainly wish you all the best and happiness in the upcoming retirement for you there.

Thanks, Vinnie.

But just wanted to ask you, guys just kind of more theoretically first question just kind of on the national account focus and obviously a nice win with Red Lobster. Is the right way to look at it that of course the major focus is as you said the higher margin, you know, more independent type of customers, but within more of the Customized and larger accounts is it basically a focus where you're going to be going after the highest volumes possible because that does ultimately help the overall margin and maybe not so much of a focus on maybe kind of the mid and smaller tiered accounts on that side of the business? Is that kind of how we should theoretically think of it?

Well, I think for the seven distribution centers that the Red Lobster business is going into, you know, you do things in this business and you learn from what you do, but those buildings are really geared to the large family dining, casual dining type of customer. Our expense ratios are very low as we introduce the different type of customer we found our expense ratios went up, not down, and this is a little bit kind of going back to our roots and within that type of distribution center, yes, this is the type of business that fits for us and that's not to say that we won't continue to pursue other types of national accounts, but we're more likely to handle those out of our Performance Food Service division.

Okay. That makes sense, George. Thank you and then maybe just a quick follow-up just in terms of the deflation number, the 1.3% that you guys mentioned. You know, maybe just by category kind of what was in line or -- or out of line versus your expectations an just general thoughts how you see that going forwards.

Yes. For the most part the story is unchanged from last quarter. It's the protein that we're seeing the deflation. It's just not quite to the extent that it was before. As we have, gotten into our -- a month into our fourth quarter we're really continuing to see pretty much the same. You know, we have got some relief from deflation in the dairy category just by lapping the real low pricing. I think that poultry and seafood are harder for us to gets a handle on what's coming up, but it does appear as if meat there's very inexpensive feed demand down, particularly export and we think that will probably continue to be in a deflationary kind of mode.

Okay. Thank you, George.

Most of our other categories we are not experiencing deflation right now.

Got it. Okay. Best of luck.

Yes. Thanks.

Your next question comes from the line of Zach Fadem with Wells Fargo.

Hi, guys. There's been so much focus on the independent customers I'm actually curious how the chain customers are doing within the broad line business. I know you have some faster growing chains in there. Perhaps you could update us on how that business has been trending and how do you think-- how do you think about growth for those customers relative to the market?

Well, some of the newer ones that we have particularly are showing very good growth in both stores and same-store sales. We're real careful not to comment on any specific customer that's more their job, but if you look at our chain business as a whole from the same-store sales point, it has been soft. Interestingly, March was our peak and independent as far as same-store sales and it was our trough in national accounts so it its just kind of is what it is today. The newer ones are -- many of them are doing very, very well, but it was certainly a softer quarter for that type of business.

Okay. Thank you.

Yes. Sequentially we have been a little bit slower with case growth. Obviously it hasn't had an effect on the bottom line, but all of that softness in excess of 100% of it actually is in our national account segment.

Okay. And when looking at just gross profit growth in excess of your operating expenses, you know, you have done a really nice job here of growing the spreads by at least 1% over the next -- over the last two years. As we look over the next couple of quarters do you think this can continue or would you expect that spread to begin to level off over the next couple quarters particularly with the new Red Lobster business coming on.

Well, as a percent of sales you're certainly going to see it continue because of the -- the size of Red Lobster and it has very high case cost and a lot of seafood and that's why, you know, we really need to look at it kind of segment by segment. But in our biggest category in Performance Food Service I think we'll continue to -- to grow our gross profit dollars at a faster rate than our sales. In Vistar that's something that we have always done. This was an unusual quarter for us from the standpoint that we did grow our sales faster than we grew our EBITDA.

We have brought some business that started this week that we brought on that we needed to get the drivers in place. We had to do some re-racking and some re-slotting to get set up to handle the business. It's dollar store business. It's business that we handle in other parts of the country. We just picked it up in new geographies. So we know we will climb the learning curve quick but we did experience some cost increases kind of getting ready there, but I expect them to be able to turned that around and begin to -- to grow their -- their gross profit faster than their cases as well.

Okay. And if I could just ask one more, George, the $500 million of annual new Red Lobster business, is that net of the business exits that you're talking about or the decision not to renew certain Customized contracts.

That is a net number, correct.

Okay. Perfect. Thanks a lot, George.

Thanks.

(Operator Instructions). Your next question comes from the line of Edward Kelly with Credit Suisse.

Hi. Good morning, guys. Nice quarter and let me also say good luck to Bob. I'm sure you're going to be missed over there. George could we just maybe start off with M&A and, you know, where you guys stand today in terms of the potential pipeline that's out there for you? It's been a little while I guess since you have done something more material in this front, but I know it is an important part of your story going forward. Just kind of thoughts on what's -- what's out there and how we should be thinking about it.

Yes. You know, we have completed a couple small ones in the candy, snack and beverage arena. When it comes to Performance Foodservice, we're very active right now. We're comfortable that -- that we're -- that we've kind of got enough in the works that we will get some successes coming up. We're obviously very careful with what we do and what we pay and the type of business that we buy. I think that M&A is important to us. I don't think it's necessarily an important part of our story, though. I think organically that we can move along just fine. That said we are -- we are anxious to get some M&A done. We have people working hard -- we're visiting people and we feel good.

Okay. And then a follow-up on Vistar. You know, you mentioned bringing on some new dollar store business and retail is a good business there. Could you just maybe talk about the opportunity that you've got to grow Vistar in some of these higher margin channels and really kind of what you're seeing on that front?

Well, you know, we like to continue to kind of take our offering and introduce that product into different channels. We have been excite successful there. Even our retail business which I think everybody understands that retail has been quite slow, but we have been able to add more product to our offering. You know, we're continuing to do more kind of health and beauty aid type products, anything that's impulse buy. So that has helped us. You know, we supply customers everywhere from a FedEx, UPS type of delivery model all the way to 52-foot trucks and we have put an automated pick and pack distribution in place which we have been shipping now for just a few weeks. That's in Mississippi but basically in the Memphis area. That's going to be a big help for us in that smaller drop we do fulfillment for other people where it comes from us, but it's on their invoice. That business we expect to continue to see grow. You know, we just see opportunity in several areas. Hospitality has been a great opportunity for us. We can't really talk market share there because we're kind of creating the market as we get these hotels to put in pantries. You know, our core business the theater area, the retail, the office coffee service, they all continue to grow and we see a bright future in that business.

Okay. And then just last question for you. Can you maybe talk to what you're seeing in the industry from a competition standpoint whether that be pricing for the hire margin Street business or competition for sales people for instance which I know is -- is important as well?

Yes. I don't think we have seen any real change from -- from the last time that question came up which was last quarter. I think the market is still very competitive. Certainly when I talked to our people we had a group of sales managers in last night from around the country and you listen to them and it's a very competitive marketplace. I think that our major competitors are -- they're very focused and they do a good job and they're chasing business hard and we're chasing business hard and it's just a matter of executing and getting it.

Great. Thank you.

Thank you.

Your next question comes from the line of Bob Summers with Macquarie.

Yes. Good morning, guys. Can we just talk about the independent business a little bit. I mean it's obviously it's been exhibiting strength. It seems that we're now close to maybe fully recovered from the damage the recession has done, but I guess the questions I have are within that what kind of visibility do you get around new formation and then, you know, as you think about the cyclicality of the business, casual dining versus independents, I mean what's the right way to think about it? Or are we sort of entering a new paradigm at this point where because the independent restaurants are better on trends in terms of consumer tastes, profiles what they want that this relative growth could continue for a lot longer than maybe people think?

Well, I think one of the things that's really helped is the independent appears to have pretty good access to capital today. I think that coming out of that great recession that it was very hard for somebody to -- to get the capital unless they wrote a very big check to open a restaurant. So I do think that's helped. I do think they are more on trend and they can move quicker. I think that it's an industry that it's hard to -- to track the numbers. I think that this is just my opinion and our people's opinion. I think the independent is probably doing a bit better than they're getting credit for when you look at numbers that get released. And, I look at the -- at the big chains and I think they're working really hard. They are doing what they can do to -- to appeal to a wider customer base and I think at some point some of them get traction today I think at some point more of them will get traction, but it's just a changing and how people consume and what they want to eat and -- and I think that's just changes faster than it used to change and today at least for now the independent just changes quicker.

Okay. And then just one housekeeping item when you had -- when you take a step back and you think about your three year plan and you had an acquisition number there or not in there, I mean is -- is the Red Lobster deal bigger than something that you had originally contemplated?

Yes. Bob. If you go back and you look at kind of the three year plan we (inaudible) with analysts during the IPO standpoint that was all kind of an organic growth plan. There were no acquisitions built-in and at that time we were kind of assuming that Customized was going to be kind of -- have the same rough customer base that it has right now. We thought we might get a few small wins in, but we didn't anticipate anything as large as Red Lobster, so yes, this is a little bit incremental to--

Yes. Because as we looked at our -- our planning going forwards back then we really will a low expectation level for our Customized business.

And one thing about a customer the scale of Red Lobster for us that's a -- to your point it's as big as an acquisition of a -- on the M&A side. Obviously, you know, when you buy something on the M&A side it's what you always, Red Lobster, you know, we anticipate a good, long relationship with them and, you know, the culture -- our culture and their culture fit just really well together so we're really excited about having them as part of the family.

Yes. And I think we need to be a little careful here. I mean when you say $500 million, that sounds look a very large number. Remember, our cases and up is where our profit is an these are very expensive cases on the part of the seafood part of it. It's going to be a nice incremental increase for us in our Customized and we will operate with extremely low gross margins, but it's not the impact of buying a company with $500 million in revenues. It's definitely not that kind of impact.

Okay. Thank you.

Your next question comes from the line of Andrew Wolf with BB&T Capital Markets.

Thanks. Good morning. George, I was also going to ask you about the nature of the competitive environment and -- but let me sort of look at it a different way. It looks like you and some of the other large players are doing good with local business. You have been for a long time and some of the other players more recently. Do you have a sense if that implies that smaller players for structural reasons or any other reasons at least some of them are struggling in seeding share, which often happens in many industries to larger players.

I think logic would tell me that either the growth of the independent business is understated or they're -- there has to be somebody that's losing that business. When I ask our people their opinion of where they're getting the business, they pretty much feel it's dependent on how the competitors do in that market. It's pretty evenly split. So I don't think that our growth probably has any big impact on any individual competitor of ours, but obviously if the market is growing 1% to 2% and the big players are growing substantially better than that, then there's someone that's -- that's probably going backwards.

And one of the other things to call to your attention, Andy, is the fact that we say we're going to grow independent 6% to 10% in cases year-over-year and we're going to grow our brands (inaudible) faster than that, you know, we have been growing brand substantially faster than cases and that's one of those things that the large broad line companies have a good brand portfolio and some of the smaller independents obviously don't -- aren't enough scale to develop their own.

That's very true. That's very true.

You know, even for us as we get larger we find that we can do a deeper offering of our brands just by having the scale to -- to pack it in a brand that we can really support.

Okay. That's really interesting actually. You know, how much runway do you have to continue to enhance the brand versus, either industry best practices or internal goals and, is it still multi-year penetration opportunity?

We believe so, yes. Part of it is just our brand will -- will think just naturally be a little bit more successful than our case growth and we certainly have product areas where we don't have as complete an offering as -- as our larger competitors do and as we get bigger we'll just continue to increase that offering.

Yes. Andy, our brands penetration on -- in the street business is in the low 40% of the business. You know, our largest competitor is closer to 50% and we have got some of our (inaudible) right now that are well above 50% already so yes, we think there's a ton of runway.

(Operator Instructions). At this time there are no further questions. I will now turn the conference back to Michael Neese. We would like to thank everyone for their participation on today's call. Have a great day.

We would like to thank everyone for their participation on today's call. Have a great day.

This concludes today's conference call. You may now disconnect.