Executives
Brian Brown – Director, IR
Fernando Aguirre – Chairman, President and CEO
Jeffrey Zalla – CFO and SVP
Analysts
Vincent Andrews – Morgan Stanley
Karen Eltrich – Goldman Sachs
Heather Jones – BB&T Capital Markets
Carla Casella – JP Morgan
Bryan Hunt – Wachovia Securities
Reza Vahabzadeh – Barclays Capital
Chiquita Brands International, Inc. (CQB) Q3 2008 Earnings Call Transcript October 30, 2008 4:30 PM ET
Operator
Good day, everyone, and welcome to the Chiquita Brands International third quarter financial results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations, Mr. Brian Brown. Please go ahead, sir.
Brian Brown
Thank you, operator. Welcome to the Chiquita Brands International third quarter 2008 earnings conference call.
On the call today are Fernando Aguirre, Chairman and Chief Executive Officer, and Jeff Zalla, Chief Financial Officer.
After today's prepared remarks, we will take questions as time allows. If you have not received a copy of today's press release, you will find it on the company's Web site at chiquita.com or you can call Chiquita Investor Relations at 513-784-6366.
Before we begin, let me remind you that this call may contain forward-looking statements concerning operating performance or industry developments. Factors that could cause results to differ materially are described in the Safe Harbor section of today's press release and in Chiquita's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q.
Now I'd like to turn the call over to Fernando Aguirre.
Fernando Aguirre
Thank you, Brian, and good afternoon and welcome. We are pleased to have this opportunity to discuss our third quarter 2008 financial and operating results. I will start by reviewing key highlights from the quarter.
First, we increased net sales as well as operating and net income versus the year ago period. The pricing discipline and focus on profitability we have instilled in our banana business has improved our performance for the fifth consecutive quarter and it is a great testament to the strength of our strategy to drive profitable growth. We also reduced our debt significantly by using $75 million from the sale of Atlanta AG to repurchase $91 million of our senior notes at attractive prices which represent a long-term value for our shareholders.
The financial fundamentals of our business are strong. Our focus on debt reduction combined with our improved operating performance and refinancings earlier this year have resulted in a strong and healthy balance sheet with ample cash and liquidity. We are also in an enviable position in terms of debt maturities with no more than $20 million due in any year all the way through 2014. In fact, because of our strong financial position, the recent upheaval in financial markets has made Chiquita an even better investment alternative compared to many other companies.
We also took an important step during the quarter towards our long-term goal to become a global leader in branded, healthy fresh foods. We entered a joint venture agreement in value added fresh produce in China with Haitong Food Group, a company known for its high quality products. We believe that their local expertise combined with our strong brand and marketing capabilities will position us to successfully enter this promising market with new products within the next year.
We continue to make our products more convenient and available to consumers. We are pleased with the execution and results in Europe of Just Fruit in a Bottle, our line of 100% fresh fruit smoothies and we are confident in our long-term success with this important innovation for Chiquita. We continue to gain distribution and to increase both revenue and value share in key markets and we are beginning to enter new convenience channels beyond grocery retail.
Our premium Gourmet Cafe line of single serve salads is now available throughout the Midwest and our ACV distribution is climbing and nationally has already achieved a 20% level. You can now find Gourmet Cafe at Wal-Mart, Super Value, Albertsons, Meijer, Kroger, and HEB among others. We anticipate that this product will do well in traditional grocery outlets, and very importantly, can broaden to other channels, such as convenience stores, universities and cafeterias.
Let me also comment more generally on the current global economic environment and how our business is well-positioned to outperform despite these adverse conditions. First, our experience is that bananas are recession resistant. The banana business fundamentals are strong and our outlook remains positive. Here is why. Supply is expected to remain relatively tight in Latin America. The pace of cost increases has moderated, especially, as fuel has declined. Pricing remains strong in North America and stable in Europe on a local currency basis. And demand remains strong with dollar sales in the United States up 16% while volume is down only 2% due to tight industry supplies.
The turnaround of our North American banana business is worth highlighting as a major achievement. One of our goals is to have each of our operations earn more than our cost of capital. Our banana business has met that threshold this year for this first time in many years.
Now let me add some common sense to all this data. Bananas are a food staple and a great value compared to other food items, especially, in North America where a banana sells on average for only $0.30. Nowhere else in the grocery store can consumers find such a great value in any food item.
Second, with respect to salads we are confident that we will succeed in this category over the long-term although we have seen some shifts in consumer behavior. Based on recent data, we can draw the following conclusions. Consumers are still buying the same number of bagged salads on each of their trips to the grocery store. Even the most price sensitive consumer group, households with earnings less than $55,000 a year, have not changed their purchasing behavior. Dollar volume for heads of lettuce is actually down 1.5% year-on-year while value added salads are up 3.5%, so we know consumers are not trading down to commodities.
However, consumers have been making fewer trips per month to the grocery store. And we have seen a small decline in unit volumes, although the category is growing on a dollar basis. In fact, total consumer consumption of all grocery items is up 3% in dollars and down 2.5% in units. Retail salads are performing at about the store average and better than some discretionary categories like indulgent snacks.
Pricing for retail value added salads is up about 7% for the year, far less than many other food categories. For example, eggs are up 16%, bread is up 12%, and yogurt is up 9%. IRI data indicates that nearly 10 million new consumers tried the salad category during the last year which reinforces our long-term view that this is a category with significant growth potential.
Now, let me provide you with an update on our four operating initiatives outlined last quarter. These are central to improving earnings in the salads category. First, since June 30th, more than 30% of our retail contracts have been renewed at higher prices. And substantially, all of our food service prices have increased. This will significantly improve profitability by customer getting us closer to our target returns.
Second, the Verdeli facility we acquired will be fully integrated into our network by the end of the year. This will significantly reduce temporary network inefficiencies we have been experiencing. By the start of 2009, the Verdeli facility will efficiently produce most Fresh Express branded products sold in the Northeastern United States. We eliminated more than 300 product SKUs in both retail and food service that were either unprofitable or too small.
Third, we implemented pricing mechanisms in substantially all of our contracts during the quarter to more quickly and fairly reflect market changes associated with fuel and fuel-related input costs. The sell-through of the fuel surcharge was implemented in early August. Much of it was reflected in the 5% increase in our third quarter price per case.
Finally, we are making progress towards a more efficient use of trade spending. Trade promotions per case are now below 2004 levels. We are currently shifting more of these dollars towards consumer focused marketing to highlight that Fresh Express products offer the best quality and value for money. We are confident that through the successful execution of these plans we will make significant progress in our salads business next year, but we still have more work to achieve our target returns in this category.
In conclusion, our balance sheet and liquidity are in excellent shape. The fundamentals of our banana business are strong. We are clearly focused on making significant profit improvements in our salad operations and we are confident about the future of the business. In fact, we believe we are better positioned than perhaps ever before to deliver consistent shareholder value over the long-term.
And let me remind you why we believe this is the case. We are in the sweet spot of a global market opportunity with powerful brands in Chiquita and Fresh Express in very basic categories that remain very affordable to consumers. We have the right strategy to capitalize on health and wellness trends. Our healthy alternatives to high calorie foods will serve our company well in meeting consumer needs. We have a solid management team that has demonstrated its focus on disciplined execution and improving results. We also have a strong capital structure and solid liquidity position. While many companies are focused on correcting their balance sheets, we strengthened ours before the financial turmoil began.
And despite the industry challenges we have faced, we continue to mitigate risks, build momentum and manage our business against clear performance targets. I am confident that we will achieve the levels of profitability and growth that we expect over time. Much of this confidence comes from seeing that as a total company we have achieved operating income improvement of more than $80 million so far this year despite unprecedented cost increases. And we continue to expect to achieve significantly better full year operating results.
While many other companies are restructuring their operations or addressing balance sheet concerns, we have already delivered in these areas and our year-to-date results demonstrate that we are a compelling long-term investment opportunity.
Now, our CFO, Jeff Zalla, will provide more detail on our financial and operating results for the quarter. Jeff?
Jeffrey Zalla
Thank you, Fernando. The following are some key highlights of our performance in the third quarter. Net sales rose 7% to $840 million. The Company reported a net loss of $6 million or $0.13 per diluted share. This compares to a net loss of $26 million or $0.61 per diluted share in the year ago period. This year's quarter includes a net gain of $10 million or $0.22 per share in the repurchase of senior notes. And last year's quarter included a charge of $4 million or $0.09 per diluted share related to the exit of owned operations in Chile.
The company reported an operating loss of $5 million, compared to a loss of $7 million a year ago. This improvement reflects higher banana pricing in North America, favorable average Euro exchange rates, and savings from our business restructuring, offset by continuing higher industry and product supply costs and weaker performance in salads.
Now, I'd like to turn to our segment results. In our banana segment, year-over-year sales rose 13% in the third quarter to $474 million and segment operating income rose to $22 million from $4 million in the year-ago period. Banana segment operating results benefited the most significantly higher banana revenues in North America as well as the favorable impact of the Euro. These benefits allowed us to overcome much higher industry costs, including the cost of purchased fruit and fuel as well as lower volume primarily in the European market.
Let me provide some additional perspective on recent price and volume trends in our primary market. In North America, year-over-year pricing increased 33% in the third quarter due to increases in base contract prices and surcharges on flat volume. October trends remained about the same.
In our core European markets, pricing was flat on a local basis and 11% higher on a dollar basis in the third quarter. Volume decreased by 6% due to tight industry volume conditions and our continued focus on maintaining our premium product quality and price differentiation rather than market share. In October, the volume trend continued to improve but remained below year ago level.
Pricing in October has been a bit lower in both local currency and dollars in comparison to October last year which benefited from a reduction in European supply caused by Hurricane Dean.
In our salads and healthy snacks segment, net sales increased by 2% from the year ago quarter to $325 million. Operating results were a loss of $8 million compared to income of $7 million a year ago. Operating results in both periods included $6 million of investment spending behind the successful expansion of Just Fruit in a Bottle to six countries in Europe.
Operating results in the 2008 quarter were impacted by higher industry and production costs which were partially offset by improved pricing. Net revenue per case in retail value added salads rose 5% in the third quarter versus the year ago period while volume was 2% lower, similar to the decline in unit volume across the entire category.
Our healthy snacks category, including Just Fruit in a Bottle, is currently generating operating losses as we invest in establishing these new products. Given their success in the marketplace, we believe that this spending is prudent and will lead to both long-term growth and attractive long-term financial return.
The salads category is generating operating income, but not equal to our cost of capital which is the minimum threshold we have established for all of our businesses. However, as Fernando outlined earlier, we have a clear plan to improve margins in this segment.
In our other produce segment, net sales decreased 14% to $42 million primarily due to the exit of owned operations in Chile. Operating income improved to break even, compared to a loss of $5 million a year ago principally because last year's $4 million charge for exiting owned operations in Chile did not repeat. While this segment will continue to be seasonal, we expect it to deliver stronger operating income and cash flow in future years.
Turning to our outlook and to various performance and risk assumptions for the year which are summarized in the outlook section of today's press release. For capital expenditures, our current estimate for the full year is between $50 million and $55 million. Our fuel hedging position which provide about 75% coverage for the balance of the year would generate a $27 million gain in 2008 based on current forward rates, an improvement of $15 million compared to 2007.
In response to the recent dramatic drop in fuel prices, we have increased and extended our coverage through 2011. We are locked in at 75% coverage for 2009 at swap rates only 3% above those we had for 2008. And we have approximately 75% coverage for 2010 and 55% coverage for 2011 at rates that should be attractive.
To mitigate foreign currency risk, we hedge our net Euro cash flow exposure. As I am sure you are aware, the Euro has declined in value in recent weeks. Today's Euro spot price of about $1.29 per Euro compares to an average Euro spot price in the fourth quarter of 2007, a $1.44 per Euro. Our put options are providing valuable protection.
For the balance of 2008, we are about 75% hedged with options at an average rate of $1.40 per Euro. Based on current Euro forward rates, we estimate hedging cost at approximately $3 million for 2008, an improvement of $16 million compared to 2007. For 2009, we are about 75% hedged at an average rate of $1.39 per Euro. And for 2010, we are a little more than 30% hedged at an average rate of $1.41 per Euro.
Let me now turn specifically to our outlook on operating performance for the year. So far this year, we have demonstrated enormous resilience in managing through a rising cost environment. We have generated total benefits of almost $380 million which have more than overcome almost $240 million of higher industry and other product supply costs that flow through our results. We have generated these benefits primarily through pricing, including fuel and other surcharges, especially in bananas, Euro exchange rates, the benefits of our restructuring program, internal cost savings initiatives and fuel hedging gains.
We continue to be pleased with the implementation of the business restructuring we announced last year. We have realized restructuring savings of $54 million in the last three quarters and expect to deliver $65 million to $68 million for the full year 2008.
Our full year outlook for higher industry and other products supply costs is detailed in today's press release. We have reduced our expectations for industry costs by $15 million to $20 million as a result of recent fuel price reduction, but have increased the expectations for other product supply costs to reflect approximately $20 million of additional costs already reflected in our third quarter results and an expected $20 million to occur in the fourth quarter. These additional costs are primarily related to transportation and network inefficiencies in our salad operations as well as lower banana farm productivity due to weather.
In addition, I want to comment on a few other items that will impact results during the fourth quarter. First, we have decided to relocate our European headquarters from Belgium to Switzerland to optimize our long-term tax structure. I mentioned last quarter that this was under consideration. We expect to incur one-time costs related to this relocation in the range of $15 million to $25 million, of which approximately $5 million to $9 million will be recognized in the fourth quarter 2008 and most of the remainder will be incurred during the first half of 2009.
Second, we expect to incur higher than normal legal fees as we continue to vigorously defend pending civil litigation related to Columbia. Fees could be in the range of $3 million to $5 million.
Third, we would expect that due to higher full year earnings for 2008, our cost for incentive compensation will be approximately $6 million higher in the fourth quarter compared to last year.
Finally, I'd like to comment on our capital structure which has placed us in an excellent position to withstand uncertainty in current global financial market. As Fernando mentioned, in September and October, we applied $75 million of the proceeds from the sale of Atlanta AG to complete an open-market repurchase program for a combined $91 million in face amount of the Company's senior notes.
In connection with this program, we realized a $10 million gain in other income in the third quarter and we will realize a further gain of $4 million in the fourth quarter. These repurchases, at an average yield of 12%, represent an excellent long-term value to the company and will reduce our future interest expense by close to $8 million per year. Our total debt to capital ratio now stands at 44%, close to our target of 40%.
In addition, we have ample liquidity. We have $150 million in cash and $129 million in borrowing capacity under a five-year revolver with a syndicate of highly rated commercial banks. Further, our debt maturity profile is very attractive. We don't have any more than $20 million in principal maturities in any year until 2014. So despite the current market turmoil, we are in excellent financial condition.
In summary, we made steady progress in the third quarter. Our strategies are working to more than overcome full year increases in industry and other product supply costs. With the exception of significant recent weakness in the Euro, we are pleased with the improving fundamentals of the banana business. We have a clear plan to improve performance in salads. Our innovation efforts are on track. Investors can take comfort in our very solid capital structure and financial discipline. And we continue to expect strong year-over-year improvement in operating performance for the full year 2008.
At this time, Fernando and I would like to open the call for questions. We will take as many questions as time allows. Operator?
Question-and-Answer Session
Operator
Thank you. (Operator instructions) We will take our first question from Vincent Andrews with Morgan Stanley.
Vincent Andrews – Morgan Stanley
Hi. Good morning, everyone, or good afternoon. I keep saying that. Sorry. Good afternoon.
Jeffrey Zalla
Hi, Vincent.
Vincent Andrews – Morgan Stanley
I guess, Jeff, if I could just ask you, if I take out the $0.22 from the gain, you then lost $0.35 in the quarter versus a loss of $0.56 last year. And if I walk all the way back to June when you issued that guidance in mid-quarter update and ultimately came to the conclusion that you were going to have a loss in line with last year. I mean this is much better than last year. And I'm just not clear from your prepared remarks exactly what took place relative to your earlier expectations that allowed you to do so much better.
Jeffrey Zalla
Well, on an operating income basis, Vincent, results we're a little better than last year, $2 million better. On a net income basis, we were benefited, as you noted, by the $10 million gain on the senior note repurchase. We were also benefited by $3 million lower interest expense and a $6 million swing to our benefit in income tax. That led to the improvement in net income performance year-on-year.
Vincent Andrews – Morgan Stanley
Okay. So those were things that you did not – obviously, the $10 million I understand you didn't expect the time because you hadn't closed Atlanta yet. But the balance of that was stuff you were not anticipating?
Jeffrey Zalla
Correct. The focus at the time was on operating income performance.
Vincent Andrews – Morgan Stanley
Okay. Maybe that wasn't clear to me at the time. Okay. I guess my next question then is for Fernando. In the value added salad space, you talked about the category growing 3%. But if we break that 3% down into different segments, are they all growing at 3% or are the certain segments of the category growing faster than others? And how do you feel that you are positioned relative to the different segment growth rate?
Fernando Aguirre
Vincent, year-to-date, we, Fresh Express, we're essentially stable versus year ago on year-to-date and the category is up about 3.5%. In general terms, we feel very good about this because as we've talked before, this is a category that some people were a little concerned that it may see an impact. But as I noted in my remarks, even heads of lettuce are down in unit terms. And we are up as a category as well. So we are very, very comfortable with the way we are seeing consumers interact.
And as I mentioned in my prepared remarks, we are some of the most basic food categories. And the fact of the matter is that even with the financial turmoil, we all have to eat and we all have to eat some of the most basic food items. And both bananas and salads are some of the most basic ones. So we're feeling pretty confident that this is going to at least continue this way. And frankly, once the financial situation gets better, then we will recuperate the growth.
Vincent Andrews – Morgan Stanley
Okay. I guess and then one last question and then I'll pass it along. Just generically in your conversations with retailers, the last – this year has been a pretty good environment for raising prices kind of in anything in food, simply because the retailers have been pretty well aware of the substantial input cost inflation that has taken place across food. And as that is starting to unwind, are you starting to see, whether it's in relation to what you do or just kind of more broadly speaking, are you starting to see any retailer pushback on further price increases?
Fernando Aguirre
Well, I can only speak for our categories as far as what retailers – how retailers have reacted there. In general terms, they're pretty happy with our performance and they are very happy with their performance in our categories and with our brands. As we reported before, we are – we have much better profitability, but the retailers also made better money. If you compare the pricing, for example, in value added salads of 7% for the year and as I mentioned eggs are up 16%, bread is up 12%, yogurt is up 9%.
So, in general terms, even with our more significant price increases in salads, it's still a category that hasn't grown and hasn't increased as much as the others. And bananas, the best thing I can tell you is, as I mentioned, one banana cost $0.30. I can't find any other food item in the store as a consumer for that kind of a value.
Vincent Andrews – Morgan Stanley
Okay. So you're not seeing any pushback?
Fernando Aguirre
No.
Vincent Andrews – Morgan Stanley
Thanks a lot. I'll pass it along.
Jeffrey Zalla
Vincent, just one more comment. Your first question about results for the quarter, notice that these third quarter results in '08 reflect a $4 million benefit on the income tax line. A big portion of that are items that were resolved favorably to the company during the quarter for resolution of audits that were underway for expiration of statute of limitations. Those are the kinds of things that are difficult to predict in advance.
Vincent Andrews – Morgan Stanley
Thank you, Jeff. That's very helpful.
Jeffrey Zalla
You're welcome.
Operator
And we will take our next question from Karen Eltrich with Goldman Sachs.
Karen Eltrich – Goldman Sachs
Thank you. You guys, even before the Atlanta AG sale are generating a ton of free cash flow this year. How are you prioritizing use of that free cash flow in terms of share repurchases, debt reduction and potential acquisitions?
Jeffrey Zalla
Karen, we have – we are focused quite a bit on improving operating performance as well as the cash flow, as you note. Our number one priority has been debt reduction. We've been clear and steadfast about that commitment for several years and we have acted on it with discipline all along, including in this quarter with the $75 million repurchase of senior notes. We think at a 12% yield that's a terrific investment and helps improve the balance sheet while keeping tremendous liquidity both in $150 million of cash on the balance sheet and $129 million of borrowing capacity under the revolver. We – and the board obviously made a choice in prioritization when we purchased the senior notes. At present, we don't have significant acquisitions on the horizon and our priorities will remain debt reduction at least until we hit our target of 40% total debt to capital.
Karen Eltrich – Goldman Sachs
Great. And definitely congratulations to you on buying in the bonds. I wish more companies saw the return on capital of that investment. Second, with salad, it sounds like you're doing a lot of the right things to get the business back on track. What do you think timing is to return to profitable growth? And is it hinged upon the integration of the businesses or is there also do you think that you need to rev up the line a little bit more with new product introductions? What kind of are the key catalysts we should be looking for in salads?
Fernando Aguirre
That's a good question, Karen. And I'll tell you, we – since August – essentially in the middle of the summer, we began incorporating and executing our plan. And based on what I described, 30% of retail contracts have been renewed at higher prices. The Verdeli facility is essentially fully integrated. And we will see the effects of that in the next two months or three months. We've eliminated more than 300 product SKUs. We have the pricing mechanisms which incidentally are very, very transparent as far as fuel surcharge is concerned. So it goes up and our contracts go up. And if it goes down, they will go down, but that's been extremely transparent. And yet, we have also made some permanent price moves on contracts.
So we are very, very comfortable with that. And then we're moving on to trade spending. So each one of these items – we already seeing some of the results. I do expect that at the beginning of next year we will see even more results and it will just continue. We're not delivering the target margins that we had established for this category. And we have – our management is very disciplined to follow their execution to get to those target margins.
Karen Eltrich – Goldman Sachs
Great. Thank you very much.
Jeffrey Zalla
Thank you, Karen.
Operator
Thank you. And we will take our next question from Heather Jones with BB&T Capital Markets.
Heather Jones – BB&T Capital Markets
Good evening.
Jeffrey Zalla
Hi, Heather.
Heather Jones – BB&T Capital Markets
Hey. Good job on the balance sheet. It looks very good. I have a few questions. I first want clarification on the comments on EU pricing in October. You said a bit lower than last year. I was wondering are we talking about a low single digit rate?
Jeffrey Zalla
Yes. It's slightly below for us, Heather. Recall that last year, Hurricane Dean hit in August. It temporarily boosted pricing in the market, so October got the biggest benefit of that last year. But it was pretty short-lived. So compared in this month of October to a year ago, pricing in a local currency basis for us is a little lower although the comps get a little better in November and December.
Heather Jones – BB&T Capital Markets
As far as EU goes, have you seen any changes in purchasing behavior the past month or so? And just wondering given the rapid decline in the Euro what's your perspective or expectations are for potential improvement in local pricing?
Jeffrey Zalla
We have not seen any significant change in consumer buying behavior in the category. We've seen local prices up to this week remain pretty stable at the bottom end of the market despite the currency reduction. Although, it stands to reason that cannot remain for long. Any reasonable observer would expect that local Euro pricing is going to respond if the dollar value Euro remains weak for an extended period of time.
Heather Jones – BB&T Capital Markets
Okay. On your – in the press release it talks about in the Fresh Express business $3 million due to the amortization of pre-paid customer incentive. I was wondering if you could explain that.
Jeffrey Zalla
Sure. It was an accounting adjustment that we made in this third quarter to correct for the amortization of some customer incentives. And while the amounts were not material in any prior period, the accumulated result was $3 million for this third quarter. That was for a customer for which we've renegotiated a contract, and for the next two years, the terms are more favorable to us than they have been up to now.
Heather Jones – BB&T Capital Markets
This is not going to be a hit every quarter. This is sort of a [inaudible].
Jeffrey Zalla
Correct. It's one-time.
Heather Jones – BB&T Capital Markets
Okay. And as far as – I was wondering going and staying with Fresh Express, I was wondering if you could elaborate – it sounded like in the press release that you raised your other cost guidance by I think it was $20 million or somewhere in that range, due to the issues with Verdeli. And I was just wondering if you could give us more color as to actually what's going on there, why it's worse than you initially expected and your confidence that this will be cleared up by early '09.
Jeffrey Zalla
Heather, if we did, say, $20 million in the third quarter which already is reflected in our results, $20 million for the fourth quarter, and it relates to the Verdeli. So for example, we have – we're integrating the network of processing facilities on logistics and distribution. So and we're streamlining SKUs. So we've had excess trucking and logistics costs, cross docking costs, excess overhead costs, other costs in the production environment that we are incurring because we are not yet operating at the level of efficiency that we expect –
Heather Jones – BB&T Capital Markets
So is this like – this is like $40 million – am I understanding –
Jeffrey Zalla
Well, it's not all Verdeli. Remember that the other major element is lower owned farm productivity in bananas. So we have seen both lower productivity than expected in Central Americas due particularly to an extended drought earlier this year in Costa Rica and Panama especially. And we've seen only very slight impact from recent flooding. But overall, our costs are higher as a result of lower productivity.
Heather Jones – BB&T Capital Markets
In Central America and productivity at Verdeli.
Jeffrey Zalla
Correct.
Heather Jones – BB&T Capital Markets
And what is the status on the consolidation of Verdeli. I guess –
Jeffrey Zalla
As Fernando said, we expect that the consolidation to be complete by the end of the year. So you'll see significant improvements in that in Q1.
Fernando Aguirre
And just on that point, Heather, the plans originally when we made the acquisition, the plan was to integrate within three years. And because of the restructuring decision that we made a little bit after the acquisition, we've accelerated those plans. And in the end, it's going to end up being about a year and a half after acquisition when we will have the integration completely done. So from all practical purposes, we're ahead of schedule and we will be doing the integration in about half of the time from where we originally started.
Heather Jones – BB&T Capital Markets
I don't know how much this has cost all this year, but it sounds – the Verdeli consolidation sounds like it's a sizable amount. But I'm not really concerned with this year, but wondering about '09. I mean are these – I guess Q2 through Q4 it sounds like it's probably cost you on the order of – in excess of $20 million. Is that – are these costs that will go away next year and then we can expect to be added to Fresh Express earnings or will some of these costs recur in '09? And if you could give us some color on that?
Jeffrey Zalla
The large majority of these costs are going to go away. The inefficiencies are going to go out of the network because we'll take facilities out. We'll have less freight. We'll have less cross docking. We'll have more efficient production and manufacturing and distribution processes.
Heather Jones – BB&T Capital Markets
And as far as the recent flooding we have seen in – I saw some number out of Honduras about 3 million to 4 million boxes gone. And I think there was some flooding in Guatemala. Did any of this affect your farms?
Jeffrey Zalla
For us, it affected less than – fewer than 100 hectares in Honduras. And the estimate that you sited seems high to us based on what we know.
Heather Jones – BB&T Capital Markets
For the total company – I mean country?
Jeffrey Zalla
That's current. Now, some of the independent grower farms that supply us in Honduras have been flooded, but not with significant direct impact to us.
Heather Jones – BB&T Capital Markets
Okay. And what about Guatemala?
Jeffrey Zalla
The impact has been small overall.
Heather Jones – BB&T Capital Markets
Okay. Okay. And –
Jeffrey Zalla
And in Guatemala, not on Chiquita owned farms, only in certain independent grower farms and to a smaller scale.
Heather Jones – BB&T Capital Markets
Okay. Then my final question is going into Q4 what kind of benefit do you all anticipate seeing from Asia, the pricing strength that we're seeing in Japan?
Jeffrey Zalla
Well, we do expect benefit in Asia, due to price, and as well, lower costs. So – but remember that our business there is smaller than that of some of our competitors so that the dollar magnitude of the impact won't be as great for us as it would be for others.
Heather Jones – BB&T Capital Markets
If I remember correctly, in Q4 of last year, Asia was a big hit to you all. So I mean not only would you – I think it was a $6 million to EBIT in Q4 of last year. Is that not – would you expect to break even there this year or possibly make money? Is it going to be a big delta for you year-on-year?
Fernando Aguirre
It will be this year. That's right.
Jeffrey Zalla
We have in last year's fourth quarter some quality claims in the Middle East markets that will not repeat this year. And we are, as you mentioned, experiencing significantly higher market pricing.
Heather Jones – BB&T Capital Markets
Okay. Alright. Thank you very much.
Jeffrey Zalla
Sure. Thank you, Heather.
Operator
Thank you. We will take our next question from Carla Casella with JP Morgan.
Carla Casella – JP Morgan
Hi. My question –
Jeffrey Zalla
Hi, Carla.
Carla Casella – JP Morgan
Hi. How are you? My question relates to the pension. I'm wondering if you have any forecast yet for '09 whether you'll have to contribute a greater amount into the pension given the stock market decline.
Jeffrey Zalla
We do every year an actuarial calculation at the end of the year. And we contribute in cash about $9 million a year toward the under funded pension obligation. Those are obligations that are long-term in nature mostly to the retirees in our tropical operations. So it's feasible that we could be required to contribute several million dollars more next year, but it's not going to be a dramatic amount of money. And we'll note upon the completion of the actuarial review in the fourth quarter.
Carla Casella – JP Morgan
That's great. Thanks a lot. That's all I had.
Jeffrey Zalla
Great. Thank you, Carla.
Operator
Thank you. We will go next to Bryan Hunt with Wachovia Securities.
Bryan Hunt – Wachovia Securities
Good afternoon.
Jeffrey Zalla
Hi, Bryan.
Bryan Hunt – Wachovia Securities
Hi. I was wondering, Jeff or Fernando, if you could kind of rank the potential benefits in the salad business. Cutting 300 SKUs sounds like a substantial number. I was wondering if you could quantify the total SKUs, as one example. Again, if you could just talk about the priorities and the opportunities in the salad business. And the other part of that discussion if you could talk about – when are you going to have your total customer base on the contractual pass through of fuel and/or reset of your contracts overall. And then I've got a follow up.
Jeffrey Zalla
First, as to fuel, essentially, all the contracts in salads are now on our new fuel surcharge program that more quickly and fairly shares fuel cost with customers. So that's done and completed. In bananas, that's true for all of our customers and it has been true since the end of 2005. That program works extremely well. In terms of the salad business, the priorities are really, as Fernando laid them out in the discussion. Price is number one. We'll be keenly focused on renegotiating contracts with customers that allow us to earn a return on our cost to capital. We're clearly focused on overcoming the temporary network inefficiencies that we have been experiencing in the last couple of quarters. And we are likewise focused on making our trade spending more efficient.
Bryan Hunt – Wachovia Securities
Okay. And Jeff, looking at pricing and [inaudible] cost to capital, when do you think you're, again, through all your contracts negotiating higher pricing? Is that a Q1, Q2 event next year?
Jeffrey Zalla
Most will be completed by the end of Q1 next year.
Bryan Hunt – Wachovia Securities
Okay. And then additionally looking at the inefficiencies and being able to pull those out of the system. Is that a Q1 event?
Jeffrey Zalla
Yes. By Q1 that network will be in place, meaning, the full efficient integration of the Verdeli plant.
Bryan Hunt – Wachovia Securities
Okay. And my last question is if the board liked bonds at 12%, I think they are trading about 15% now. Does that imply that I mean that's the focus of debt reduction?
Jeffrey Zalla
We take each decision separately, Bryan. We did complete the program in October, the $75 million which was the amount that we chose to invest in the note. That is to balance our long-term goal toward total debt reduction and to balance the desire to always maintain ample liquidity. So we'll continue to look at opportunities to employ capital in the best way we see fit, but we are not going to speculate as to which instruments we would apply that cash to.
Bryan Hunt – Wachovia Securities
And if I look at your cash balance, how much do you need to run the business out of that $150 million? How much of that is excess?
Jeffrey Zalla
On a normal operating basis, we think of $35 million of a baseline level of cash.
Bryan Hunt – Wachovia Securities
Jeff, Fernando, thank you. Have a good afternoon.
Jeffrey Zalla
Sure. Thank you, Bryan.
Fernando Aguirre
Thank you, Bryan.
Operator
Thank you. And due to time constraints, we will take our final question from Reza Vahabzadeh with Barclays Capital.
Reza Vahabzadeh – Barclays Capital
Good afternoon.
Jeffrey Zalla
Hi, Reza.
Reza Vahabzadeh – Barclays Capital
On the pricing front for on a local currency basis in Europe, you mentioned October was down little more than mid-single digits. Would you anticipate a more balanced pricing trend in the rest of the quarter generically speaking based on supply and demand sort of flattish or – ?
Fernando Aguirre
Reza, what I said was that local currency pricing is down a little. It's only down a little at present for us versus October a year ago. Recall that a year ago October was strong in the market because of the aftermath of Hurricane Dean. That benefit a year ago was short lived. The local currency comp would naturally get better for November and December. They should get even better assuming that the trade increased local pricing in order to compensate for Euro weakness. That's what one would expect people to do. So we'll see the degree to which it actually comes to fruition in the balance of the year.
Reza Vahabzadeh – Barclays Capital
Got it. And on the Euro front, you are obviously fairly well-hedged. I think you mentioned 75% for the next five quarters it would take.
Jeffrey Zalla
That's current. And we're hedged to the degree of a little more than 30% for all of 2010 as well.
Reza Vahabzadeh – Barclays Capital
Okay. So the portion that's not hedged, I guess that would be a partial offset to the portion that is hedged and to the extent that the Euro is now down 10% year-over-year.
Jeffrey Zalla
It's correct. We hedge with put option and we get the full benefit of any decline in the Euro below the strike price to the degree that we're hedged. We're hedged 75% the next five quarters, as you say, and a further 32% for all of 2010 at levels that are pretty strong, $1.40 for the balance of this year, $1.39 for next year, and $1.41 for 2010. And the portion that is unhedged, naturally, we are not protected against. So that would be a negative unless local pricing responds.
Reza Vahabzadeh – Barclays Capital
Got it. Okay. And now on the bond repurchases the Euro restrictions in your bank agreements and your bond agreements, do they allow for more bond purchases post your October purchases? And if so, what's the basket remaining?
Jeffrey Zalla
They do, Reza. I don't have the amount off the top of my head. There is some amount permitted. But it's, I believe, less than the amount that we have already completed.
Reza Vahabzadeh – Barclays Capital
Okay. Got it. The packaged salad category, Fernando, based on Neilsen data, it looks to be softening at least a bit in the retail channel. Obviously, there are other channels that we don't see as well. How should we think about packaged salad category going forward? Is it as – are the volume trends as vibrant as you would have expected or is there need for more marketing?
Fernando Aguirre
The volume trends are not as vibrant as we expected. But actually, the category, according to IRI, you said Neilsen, but according to our data from IRI, year-to-date the category is up 3.5%. And it's been roughly like that even recently. So give or take a few, anywhere between 2% to 3% growth even in the last four weeks to eight weeks. So I'm – we're seeing category growth. Now, it's not the type of growth that we want. And therefore, yes, we do – we are spending time and money in making sure that we are talking to the consumer. That was one of the comments I made in my prepared remarks that our spending we're trying to shift some trade spending into consumers so that we can revitalize the growth with the consumers. But it is – the fact of the matter is this is a category with tremendous opportunity. 10 million new consumers came in this year. We can have – some of those repeat, then the category will start seeing even better growth than we have seen so far.
Reza Vahabzadeh – Barclays Capital
Got it. And then lastly for Jeff, D&A was $5 million lower year-over-year. Should we expect the same kind of D&A year-over-year decline in the fourth quarter, Jeff?
Jeffrey Zalla
We should, Reza. Few things have happened. One, we sold the ships in mid-year 2007. And some of the assets that we acquired with Fresh Express in mid-2005 only had a three-year life, so they were fully depreciated as a mid-year. That's why you began to see a benefit in Q3 and it should continue.
Reza Vahabzadeh – Barclays Capital
And is that gain on that ship still running through Europe now?
Jeffrey Zalla
It is and it will continue to until 2014, because it's amortized over the initial seven-year life of charter back period on the primary vessels we sold.
Reza Vahabzadeh – Barclays Capital
Still about $4.5 million?
Jeffrey Zalla
Per quarter. Correct.
Reza Vahabzadeh – Barclays Capital
Thank you.
Jeffrey Zalla
Sure. Thank you.
Operator
Thank you. And with that, I'd like to turn the conference back over to Fernando Aguirre for any additional or closing remarks.
Fernando Aguirre
Thank you, operator, and thank you all very much for your questions and for joining us today. We look forward to updating you on our continued progress in the quarters ahead. Thanks again.
Operator
Thank you. This will conclude our conference call today. We do appreciate your participation. You may have a great day.
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