Chiquita Brands International, Inc. Q4 2008 Earnings Call Transcript

Chiquita Brands International, Inc. (CQB)

Q4 2008 Earnings Call Transcript

February 19, 2009 at 4:30 pm ET

Executives

Brian Brown - Director, Investor Relations

Fernando Aguirre - Chairman, President and Chief Executive Officer

Jeffrey Zalla - Chief Financial Officer and Senior Vice President

Brian Kocher - President, North America

Analysts

John DeMarco - Janney Montgomerry Scott LLC

Reza Vahabzadeh - Barclays Capital

Presentation

Operator

Good afternoon. Thank you for joining Chiquita’s conference call. Should you experience any audio difficulties during the call contact us at 513-784-8357. Please standby and the call will begin in a few minutes.

Please standby we are about to begin. Good day and welcome to the Chiquita Brands International fourth quarter 2008 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 Corporate Communications, Mr. Brian Brown. Please go ahead.

Brian Brown

Thank you, Operator. Welcome to the Chiquita Brands fourth quarter and full year 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, joining for that portion of the call will be Brian Kocher, President of North America. If you have not received the copy of today's press release, you will find it on the Company's website at chiquita.com or you may contact Chiquita’s Investor Relations department 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 forward-looking statements 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 would like to turn the call over to Fernando Aguirre.

Fernando Aguirre

Thank you, Brian and good afternoon and thank you for taking the time to join us today. We welcome the opportunity to discuss our results for 2008 and the progress we are making to strengthen our business in 2009. As detailed in our press release for the full year 2008 on a comparable basis, we improved our income from continuing operations by $56 million. We achieved higher banana pricing in each of our markets and achieved the targeted cost reductions from our 2007 restructuring. These actions in addition to favorable euro exchange rates enabled us to more than over come unprecedented increases in sourcing costs in both bananas and salads, as well as volume declines in the salads category. We are pleased to have delivered year-over-year improvement in 2008, despite weakness in the general economy and we expect to do so again in the full year 2009.

In the fourth quarter, we incurred a loss of $33 million on a comparable basis. On a reported basis, we recorded a net loss from continuing operations of $411 million in the quarter primarily as a result of $375 million noncash impairment charge related to Fresh Express goodwill. This impairment charge resulted primarily from a sharp decline in market values in the current economic environment and lower category growth expectations due to recent negative volume trends in the value added salads category.

Jeff will discuss this charge with you in more details, but it is important to note from the outset that this noncash charge will have no impact on our day-to-day operations or on our liquidity, covenant compliance or borrowing capacity.

Fresh Express remains a vital part of our profitable growth strategy to be the leader in branded healthy fresh foods. We will continue investing and innovating in salads to leverage our number one market position and continue delivering the freshest highest quality product.

Throughout 2008, we made significant progress in shaping our business for the long term. We transformed the profitability of our North American banana business, earning more than our cost of capital for the first time in decade and our plans are to maintain this performance.

We successfully generated $65 million of savings from the business restructuring in 2007 well within our $60 million to $80 million targeted range. We sold Atlanta AG, a low margin distribution business, and used the proceeds to pay down debt.

We continue to expand our new product introductions like Chiquita-to-Go Bananas, Just Fruit in a Bottle Smoothies in Europe, we will make up salads and our line of healthy snacking product.

We also extended our geographic presence into Africa and China, and finally, we successfully refinanced our bank debt early in 2008 with more flexible of covenants on a very supportive bank group. As a result, we have ample cash and liquidity on a solid capital structure with no more than $20 million of debt maturing in any year until the year 2014.

Overall, we delivered a strong year in 2008 and positioned ourselves very well for the future, despite significant cost challenges and the over riding economic crisis. Looking ahead, we believe Chiquita is positioned to outperform in 2009 even during a period of general economic weakness. Very specifically, 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 of retail. Nowhere else in the grocery store can consumers find such a great nutritional and monetary value in any a single food item. That makes bananas recession resistant.

In 2009, results in bananas should continue to be resilient in North America where pricing remains stable despite a significant decline in fuel related surcharges. In Europe, we will continue to leverage our consumer brand preference and price premium, and results for the year will depend to a large degree or local pricing dynamics and the value of the euro, both of which faced challenges as we start the year.

Turning to salads we need to first acknowledge that we are disappointed with current market performance of both the category and Fresh Express. Salads had a difficult fourth quarter, based on retail scan data, value added unit volumes were down for both the category and Fresh Express. Clearly, the current economic environment has made our challenge more difficult, particularly as consumers have been making fewer trips to the grocery store. However, we are committed to delivering better performance and we are executing a plan that makes us confident that we will turn this business around.

Let me share some details of our 2009 program to improve salad profitability. First, we have completed the full integration of the Verdeli facility into our product supply network. This will significantly reduce the costs that hampered our results in 2008. We are now producing and distributing Fresh Express products in the Northeast efficiently.

We have also made improvements in every other manufacturing plant, further strengthening our overall network capacity, service levels, and product freshness. We have eliminated a high number of our unprofitable SKUs and reduced our production overhead costs. These changes allow us to gain profitable new retail distribution, including some new and expanded accounts which will begin to benefit our results in the second quarter of this year.

Second, we continued a price up in each contract we renew. Since last June, we have renewed about 50% of our annual retail volume and we have another 25% coming up for renewal in 2009.

In our food service channel, we are doing the same as we strive to ensure that each contract generates an adequate return. We expect this to significantly reduce our food service volumes in the short term. In fact, food service volume declined 25% in the fourth quarter and maybe 50% lower for the full year 2009, as we are committed to profitability and are unwilling to accept any unprofitable volume.

However, shifting our capacity to serve customers in higher margin retail salads is absolutely the right step to position ourselves for much stronger long term profitability in our salads operations.

Third, our recent product introductions demonstrate that we will continue to lead the category in consumer focus innovation. For example, we are encouraged by the recent introduction of Tender Ruby Reds and Sweet Tender Greens, both of which achieved more than 30% distribution in eight weeks. We have also launched three family size clamshells that have outperformed sales of similar bags by 60%. Through these introductions we have added new customers, increased sales and added contribution margin.

As part of healthy snacking as we generate higher revenues in the initial launch markets for Just Fruit in a Bottle in Europe, we expect our total annual investments to be lower in 2009 by as much as $10 million. Just Fruit in a Bottle continues to be recognized for superior product quality, which is driving increasing sales and strengthening our position as the number one brand of smoothies in nearly all markets in which we compete.

We are also looking for cost efficient ways to strengthen our distribution and expansion into other markets. Although the current outlook for the general economy is uncertain, we expect to achieve significant progress in our salads business and the salads and healthy snacking segment this year but we still have much more work to do and I will update you on our progress during the year.

We continue innovating towards high margin products and diversifying our portfolio and we are on track to achieve our long term target of generating at least 5% of revenue from new higher margin products. As part of our efforts to drive improved results, I am pleased to report that we delivered our expected $65 million of savings from the 2007 business restructuring and we also exceeded our internal cost savings target of $30 million. These helped us to more than overcome the unprecedented cost increases we saw in 2008.

Given the current economic environment as we prepared for 2009, we needed to focus on improving our cost efficiency. In fact, we have been very aggressive in our cost structure and overhead expenses. We literally declared war on costs and made several difficult decisions in the last two months.

I believe this is very important to set an appropriate tone at the top. Starting with me and the executive leadership team we froze salaries for 2009, reduced the bonus payment by 25% for 2008 performance and we also eliminated the first of three years in our long term incentive program, but we will follow our normal compensation principles for employees below the executive level for bonus and salary increases, we eliminated another 170 positions and reduced other benefits and discretionary spending.

In summary, we are well positioned for 2009 and while there will be quarter-to-quarter volatility; we are committed to generating even better results for the full year on a comparable basis over 2008.

From a financial perspective, our balance sheet and liquidity are in excellent shape. We are focused on the right priorities to drive profitability and because of the actions we took in 2008 we believe we are ahead of the pack. We have the right strategy in place to leverage global health and wellness trends. Consumers know and trust our brands, and our products are in basic categories that are very affordable. We also have a leadership team that is disciplined and very willing to make some sacrifices to help us all accomplish our goals.

We are pleased that we increased comparable earnings and improved our financial condition in 2008, particularly given the most challenging economic environment in decade. These are times of dramatic change, but we will remain flexible to adapt ourselves. I believe it is imperative that we manage our business with short term focus but also with the long term aspirations. We have to manage the current challenges that we cannot lose site of our long term goals.

As a management team, we believe that it is our job to continually improve our earnings year-after-year, despite whatever challenges we face. The economic crisis makes us move with guarded optimism but we are confident that our plans are right for the times and that our people will continue to drive costs out, to manage for profitability and to innovate the drive growth in both revenue and earnings.

I look forward to updating you on our results as we move through the year. Now, I will ask Jeff to provide more detail on our financial results for the fourth quarter as well as our outlook for 2009. Jeff?

Jeffrey Zalla

Thank you, Fernando. As detailed in today’s press release on a comparable basis our full year income from continuing operations was $49 million or $1.12 per diluted share, and our fourth quarter loss from continuing operations was $33 million or $0.74 per diluted share.

On a reported basis, we recorded a net loss in the fourth quarter of $411 million, which includes a noncash impairment charge of $375 million for Fresh Express goodwill which resulted from our annual intangible asset impairment review. This noncash charge was necessary to reduce the book value of Fresh Express goodwill through its estimated fair value in light of weak, economic and financial conditions as well as lower growth trends in the value-added salads category. Importantly, this charge does not have any impact on our day-to-day operations, on our investment plans for salad or on the Company’s liquidity, covenant compliance or borrowing capacity.

In the bananas segment, year-over-year sales grew 9% in the fourth quarter to $496 million and comparable operating income was $13 million versus $32 million on a year ago period. The decrease in operating income was due to higher product sourcing costs, lower fuel hedging results, and lower average euro exchange rate. The result included about $8 million of higher products by cost as a result of flooding in Panama and Costa Rica.

Fuel hedging represented an $8 million loss in this year’s fourth quarter, compared to a gain of $7 million in a year ago quarter or a $15 million negative variance. In North America, year-over-year banana pricing increased 34% in the fourth quarter due to increases in base contract prices and surcharges on flat volume.

January price trends remained about the same while volume was lower due to a shorter first week of the month. In our core European market in the fourth quarter, banana pricing was flat on a local basis and 7% lower on a dollar basis. Volume decreased by 2% due to tight industry volume condition and our continued focus on maintaining our premium product quality and price differentiation rather than market share.

In January, local prices were about flat and dollar prices were about 8% lower than the year ago quarter on volumes that we are down in double digit mostly due to the shorter first week of January and the exit of certain unprofitable volumes in the UK.

In our salads and healthy snack segment, net sales decreased by 10% from the year ago quarter of $295 million primarily due to reduction in food service volume, which declined to 25% as we exited certain contracts that were not efficiently profitable.

Net revenue per case in retail value added salads grows 6% in the fourth quarter versus the year ago period. The fourth quarter of 2008 was impacted by higher industry and production costs which were partially offset by improved pricing. Comparable operating results were a loss of $14 million versus a loss of $2 million in the year ago quarter. These results for the quarter include $8 million of investment spending and the successful expansion of Just Fruit in a Bottle in six countries in Europe versus $5 million a year ago. The total investment in Just Fruit in a Bottle throughout 2008 was $26 million.

In January, retail value added salad volumes were down in mid single digits as expected due principally to the exit of unprofitable SKU and pricing per case continues to trend up about 5% versus year ago. As Fernando outlined earlier, we have a very clear plan to improve margins in this segment.

In our other produced segment, net sales decreased 17% of $48 million primarily due to the reduction of lower margin sales of Mexican vegetable. Comparable operating income was $2 million versus breakeven results a year ago. This segment will continue to be seasonal but we expected to deliver stronger operating income and cash flow in future years.

Now, let us review our outlook for 2009. First, let me say that even inherent risks in our business we do not believe it is prudent to give guidance in the form of point estimates for net income or EPS. This is doubly true in the current economic environment. However, let me share with you how we are thinking about the broader trends in our business in 2009.

First, in 2008, we did a great job executing against the challenges we face and especially in transforming the North American banana business which is our number one priority, and then achieving our cost reduction target.

Year 2009 is shaping up to hold similar challenges. We have several trends going against this. Higher product supply costs in bananas, a significantly lower euro exchange rate and sluggish local banana pricing in Europe at the start of this year. However, we have some positive trends that are significant as well. Our plan for salads should deliver us significant improvement year-over-year. We have continuing strong banana pricing in North America. We continue to attack costs aggressively, and will be investing less in startup losses in Just Fruit in a Bottle. So, we do have some significant challenges but we are working aggressively to overcome them. Where we will end 2009, it is hard to say at this point particularly given the uncertainty in the economy, but we believe that we can deliver total Company results in 2009 that are an improvement versus 2008 on a comparable base and that is what our incentive compensation targets are tied to us achieving.

Now, for a few segment specific comments, in the bananas segment, overall supply and demand remains relatively favorable with tight supplies in Latin America and relatively stable consumer demand.

Banana sourcing and production costs are expected to increase in 2009 compared to 2008 due primarily to purchase fruit contract pricing, government imposed exit prices, and close to $30 million of incremental sourcing and logistic costs from flooding that occurred late in 2008 in Costa Rica and Panama.

Reductions in fuel related costs will be partly offset by fuel hedging results which at current forward rates would generate losses in 2009 versus a gain in 2008. As we all know, fuel has been especially volatile lately and hedging serves to mitigate that volatility, but our hedging program presents a challenge for us in 2009, including in relation to competition which typically does not hedge much of its fuel exposure.

Banana pricing remains favorable in North America. In fact it is expected to remain relatively stable despite a significant decline in the amount of fuel related surcharges. Local European banana pricing is less certain due in part the higher first half volumes in the French West Indies compared to the post hurricane dean period a year ago.

We also expect the much lower euro exchange rate. The euro average of $1.47 in 2008 and we are about 75% hedged at $1.39 in 2009 versus a current spot rate of about $1.27 per euro. Our put options are providing valuable protection but currency will be a significant challenge in our European banana business in 2009 if local prices do not increase to compensate for the year-on-year decline in a value of euro.

Our present plans do not contemplate a reduction in the European tariff on banana imports in Latin America. If the tariffs were reduced, that would lower our costs and benefit our results.

We do expect to generate significantly improved results in our salads and healthy snack segment in 2009 as a result of the profit improvement strategies for salads which Fernando discussed, plus as much of $10 million in lower startup losses for Just Fruit in a Bottle. In keeping with the target for individual market to reach breakeven at the end of their third year after market launch.

In terms of consumer trends in salads, we are seeing consumers make fewer trips to the grocery store. However, they are still purchasing the same number of bagged salads on each of their trip. We are not seeing consumers trading down to commodity heads of lettuce, which are actually down slightly in both of volume and dollar terms year-on-year, all value added salads or up at least in dollar terms. We continue to be the market leader in this category and our focus on profitability rather than market share position as well for 2009 and for the long term.

In addition, I want to comment on a few unusual items that will impact reported results during 2009.

First, as we announced in the third quarter, we are relocating our European Headquarters from Belgium to Switzerland to optimize our long term tax structure. We expect to incur one time cost related to this relocation in the range of $19 million to $23 million of which $7 million was recorded in 2008, with most of the remaining $12 million to $16 million coming during the first half of 2009. This will continue to be a reconciling item in arriving at comparable net income figures for the year.

Second, in January 2009, the Company sold its banana operations in the Ivory Coast. The transaction was expected to result in a pretax net gain of $3 million to $5 million, as well as tax benefit of approximately $4 million. These asset sale related items will contribute to reported net income in the first quarter of 2009, but will be excluded in arriving at comparable net income for the quarter and the year.

Third, beginning in the first quarter we will be applying the new accounting standard regarding convertible notes. This will have no impact to the Company on a cash basis but it will increase reported interest expense by approximately $7 million in 2009 and increasing amount in later years. We will consider this as an add back in arriving at comparable results for 2009. More information about this accounting change will be included in our upcoming 10-K filing.

Finally, I want to comment on our capital structure, which has placed us in an excellent position to withstand uncertainty in global financial market. At year end, we had $77 million in cash and $129 million in borrowing capacity under a five-year revolver with a syndicate of highly rated commercial banks. Further, we do not have any more than $20 million in principal, maturing in any year until 2014. So, despite the current market turmoil we are in a very strong financial position and expect to remain so.

In summary, we significantly improved our comparable results in the full year 2008, despite an extraordinary downturn in the entire economy. We have demonstrated our ability to significantly improve profitability in bananas, despite unprecedented cost increase. We have made progress in executing our plan to improve performance in salads, our innovation efforts on track. Investors can take comfort in our very solid capital structure and financial discipline and we expect to deliver year-over-year improvement in comparable results for the full year 2009 versus 2008.

At this time, Fernando, Brian 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

(Operator Instructions) Your first question comes from the line of Jonathan Feeney - Janney Montgomerry Scott LLC.

John DeMarco - Janney Montgomerry Scott LLC

This is actually John DeMarco on behalf of Jonathan. I know you gave the number. I missed it. The costs impact of the flooding that you felt during Q4.

Jeffrey Zalla

During the fourth quarter was $8 million.

John DeMarco - Janney Montgomerry Scott LLC

Okay. And you expect $30 million for 2009 during the first half presumably?

Jeffrey Zalla

Close to $30 million that are incremental, John, year-on-year and those will be spread really through the first three quarters.

John DeMarco - Janney Montgomerry Scott LLC

Okay. What are those costs specifically that are resulting from the flood? What is it that you are…?

Jeffrey Zalla

We had about 1,300 hectares of bananas that were flooded late in 2008 in Costa Rica and Panama. So, we have two costs as a result of the flood. One, we need to go out and secure replacement volumes so that add logistic costs. It also adds incremental logistic costs to ship that volume. In addition to that we have got increased costs in maintaining the owned farms that drive productivity and restore those plantations.

John DeMarco - Janney Montgomerry Scott LLC

Got it, and were those hectares primarily owned land or…?

Jeffrey Zalla

Yes. Those were owned. That is correct.

John DeMarco - Janney Montgomerry Scott LLC

Okay. Thank you. And then just sort of one last subject on switch in the salads, can you give a little more color on the 25% volume decline, I guess that was just food service salads, specifically how much of that decline was from customers that went to zero versus just existing customers ordering less because of their own traffic problems?

Brian Kocher

John, we went through a pretty aggressive process throughout 2008 to position our food service channel and really focus on driving profitability. So, the significant portion of that reduction volume is the result of their views for customers that were low margin or no margin that we agreed to exit because we could not get a value that we were providing with the customer.

So, most of that volume was as a result of us driving our profitability initiatives throughout the food service channel.

John DeMarco - Janney Montgomerry Scott LLC

I got it. So, excluding, if you could strip away the impact of your higher return thresholds you are requiring from your customers. Is there any reason to believe that the rest of the business would look any different from sort of general food service trends or a probably decline in line with food service traffic? Is that a fair assessment?

Brian Kocher

The vast majority of the decline in food service volume was our driving profitability.

John DeMarco - Janney Montgomerry Scott LLC

Okay. And can you remind me, I think you went through this at your analyst day, off the top of my head, I cannot recall for sure. How much of salads and healthy snacks is food service related?

Brian Kocher

Yes. It is about 25% now.

Operator

Your next question comes from the line of Reza Vahabzadeh - Barclays Capital.

Reza Vahabzadeh – Barclays Capital

Just to give the pricing for January, any comments on where you are on pricing in Europe in February?

Fernando Aguirre

No comments for February, Reza, in general. I would say that our pricing in local currency terms in January which is flat was better than what we thought the bottom the market and we have seen the bottom of the market being sluggish and coming up the normal season or up trend in pricing. There has been a lot of competition at the bottom of the market we have not seen the movement that we typically do or that what we would expect in response to the relatively low value of the euro compared to year ago and the fact that we do see price the supply cost increasing so now we watch that every week and would hope and expect to see more the seasonal up trend in local pricing.

Reza Vahabzadeh – Barclays Capital

And then when you talk about in the outlook about improved earnings in 2009 on a comparable basis is that weighted the second half, the first half? Is that driven by EBIT improvement or interest expense reduction? Any comments on that, not to give exact numbers but just a color on that?

Brian Kocher

It is difficult in this economic environment to give guidance by quarter and right we are not going to do that but our guidance is for the full year were the total Company and items that would be reconciling between as reported, and comparable income would be, for example the convertible adjustment which will be throughout the year and the headquarters moved which will be principally in the first half.

Reza Vahabzadeh – Barclays Capital

Okay and as far as the product cost in the banana side excluding flooding cost how should we think about product cost on that fund? Is it going to be in a rising at the same rate as in 2008 or any comments on that would be appreciated?

Fernando Aguirre

Sure. We saw an unprecedented cost increase in 2008 driven by commodity cost input, aggressive competition for purchased fruit. We do not expect the same magnitude of cost increases in 2009. We do expect the cost be higher driven principally by higher cost for purchased fruit which is both as a result of contract negotiations and Government imposed net price increase for example in Costa Rica.

We do expect fuel to be down but not by an amount that that would offset that and the fuel reduction in cost as well, at least for us, be offset by negative variance by year-and-year in the result of our fuel hedging program.

Reza Vahabzadeh – Barclays Capital

And then on the cost savings funds, the cost saving that you would be generating in 2009, will they be weighted towards the second half, first half? Any comments on that would be appreciated?

Fernando Aguirre

We typically give guidance for the full year about that and we communicate by quarter what the results are. This year as you can tell from our press release, we are taking a different view about guidance. We are giving directional input for the Company as a whole but not blind item detail or something like internal cost saving so we have been clear at this internally; management programs are tied to that total Company net income and you can expect us continue to try to drive cost efficiencies throughout the organization.

Operator

Your next question comes from the line of Heather Jones – BB&T Capital Markets

Heather Jones – BB&T Capital Markets

One, I was wondering in the quarter, the cost of the banana result even adding back the $8 million in cost efficiency with Costa Rica flooding, it looks like your cost increase target for the year will exceed the top end of that. What caused the pricing? What kind of the currency and the volume all those things to be roughly in line with were we expected that the earnings will fall shorter? I am just wondering did you exceed the high end of your guidance on industry cost increases.

Fernando Aguirre

No Heather, we were in line in terms of bananas. We did have the flood impact. We also have the euro impact which weakened further at the end of the quarter. That we have $8 million from the flood, we had $7 million from the weaker euro than we have expected earlier. That was plus weakness in a salad volume in cost or what we would view to be the principle by risk and what are comparable result versus analyst expectations for the quarter.

Heather Jones – BB&T Capital Markets

As far as the year earning was there anything other than the revenue line. We assumed the 137 for the quarter see you are a little shy that was explained with disparity. Was there something about the timing or the cost to be a greater impact than it normally would have or…

Fernando Aguirre

It actually came in a 132. That is difference between 132 and 137 was $7 million in respective impact to revenue and P&L for the quarter expense share.

Heather Jones – BB&T Capital Markets

So this was there a greater proportion of because you have 75% that was where the $1.40 for 2008.

Fernando Aguirre

Yes correct.

Heather Jones – BB&T Capital Markets

So was this is a greater proportion of your plan revenues coming late in the quarter or something?

Fernando Aguirre

No I am just saying. You are comparing to an average for the quarter? I understand the average came in the lower and that effect impacted us $7 million on the quarter.

Heather Jones – BB&T Capital Markets

What is North American pricing? Banana pricing due in January?

Fernando Aguirre

Yes, North American banana pricing in January was about the same trend that we have seen recently.

Heather Jones – BB&T Capital Markets

That is up in the 30s?

Fernando Aguirre

That is right.

Heather Jones – BB&T Capital Markets

As I am thinking about this is last year in February you have exceeded that force majeure surcharge, is that out there timing like late February or so. Should we start to expect price to flatten out or because of the fuel surcharges that you actually set pricing to be down year-on-year for the rest of the year post February?

Fernando Aguirre

We believe that we, the pricing environment is stable right now and we will continue to try to recover our cost increases through pricing activity. We are going to drive for the profitability Heather.

Brian Kocher

Heather, we are going to expect stable pricing despite the fact that the fuel surcharge will come down as result of lower market price.

Heather Jones – BB&T Capital Markets

Stable does not mean flat year-on-year, you are saying stable relative to what it is now?

Fernando Aguirre

Correct that is right.

Heather Jones – BB&T Capital Markets

So it might be up for the rest of the year or so?

Fernando Aguirre

Correct, right.

Heather Jones – BB&T Capital Markets

Do you want to give us some rough ideas the $30 million on the flood cost, the Costa Rica minimum prices, the Ecuadorian price I mean don’t you have a rough idea of what your cost to be? Is it $60 million? Is it $70 million? I understand you are not put ting out hard targets but just give us an idea of the magnitude of this increases that you do have visibility into? What is your guesstimate as a total?

Fernando Aguirre

That they are higher than that, Heather. That there is significant year-on-year. This flood related cost or an incremental $ 30 million approximately in 2009. Two thirds of that of that is for [forcing costs], that is replacement fruit and cost on our own farm about $12 million but most of it is due to incremental shipping and logistics cost, get replacement. For example in Ecuador and we are not going to provide blind item guidance by cost. That serves to be confusing to any investor as we gave line-item details for cost but could not give a clear guidance and could not believe a prudent to give clear guidance for that price. Instead we are going simply guidance an expectation about the full year performance.

Heather Jones – BB&T Capital Markets

And what is the exception of fuel, I mean what do you expect some other cost reductions this year with regards the fertilizer, like in the Guatemala? What is your view as far as that?

Fernando Aguirre

You would normally think that fertilizers would drop because they are still related and fuel come down sharply but our current view of the commodity markets for fertilizer would say year-on-year, we are going to face an increase but notwithstanding the effect that fuel puts down itself and results where lower contracts in Guatemala and elsewhere or an outcome of negotiation but we do expect year-on-year increases in purchase of fruit cost as well as which we need to over come fruit pricing and other cost reduction action.

Heather Jones – BB&T Capital Markets

I have a follow up question just to get an idea of your stand you expect on a comparable basis year-on-year improvement. So comparable EPS for 2008 would be a $1.12 is that correct?

Fernando Aguirre

And that would be comparable.

Heather Jones – BB&T Capital Markets

Okay and so going in 2009, setting aside the relocation the convertible extra expense. Just wondering where in increase is coming because we are looking at a significantly lower euro. It sounds like another significant increase in cost. I mean are we looking for that massive of an increase in such express or you are expecting pricing to offset this cost in bananas or you could just walks us through where this levels are going to drive year on year improvement?

Fernando Aguirre

Sure. Well we are expecting long pricing in North America in banana but should sustained stable pricing year-on-year despite the fact the fuel surcharge would drop away as significant. We are taking aggressive action on internal cost control. We have got close to $10 million in lower investment and just Fruit in a Bottle and we do expect significant improvement in the salads operations in 2009.

Operator

Your next question comes from the line of Vincent Andrews – Morgan Stanley

Vincent Andrews – Morgan Stanley

I think you would have legal expense in the fourth quarter. I think you said a $ 3 million or $5 million? Could you tell us what that turned out to be?

Fernando Aguirre

Yes, that was correct. They were up actually $6 million versus a year ago, slightly above the high end of the range we have provided.

Vincent Andrews – Morgan Stanley

And there is also fresh expense for this year?

Jeffrey Zalla

Well, it is always hard to estimate what legal expenses will trend because it depends on some factors outside of our control.

Vincent Andrews – Morgan Stanley

Those things will be part of continuing operations, correct? Wherever they wind up being?

Jeffrey Zalla

Yes, that is correct?

Vincent Andrews – Morgan Stanley

Can you give us any sense as to what level of sales you are achieving in just Fruit it in the Bottle?

Jeffrey Zalla

We do not disclose that on our product line basis, Vincent.

Vincent Andrews – Morgan Stanley

I just hear you are just spending $26 million and it sounds like a lot of money. I though it might be helpful to know what type of return you are getting on that already from a revenue perspective?

Jeffrey Zalla

It was significant amount, $26 million in 2008 because it could be as well as $16 million in 2009 what we instead is we have achieved in market position. The number one position in almost all of the markets that we launched and we are on track to hit our target in each of those countries which is the breakeven P&L result by the end of year three after market launch. We view it as highly successful.

Vincent Andrews – Morgan Stanley

And then on salads, I am just trying to make sure I understand what Fernando said which was that, your retail sales were down 4%. The category was down 4%. People are going to supermarket less but they are buying the same amount of salad, is that all correct?

Jeffrey Zalla

That is roughly right.

Vincent Andrews – Morgan Stanley

How did your salad in category go down 4% then?

Jeffrey Zalla

The volume is down but remember the revenue because the pricing that we took for the last four or five months, then the revenue was up, revenue for case which is what we will always measure.

Vincent Andrews – Morgan Stanley

When you are saying people are buying the same amount of salad you are talking about from a dollar perspective? I understand it.

Jeffrey Zalla

Correct. What I said was fewer number of trips but same number of bags that the buy per trip.

Vincent Andrews – Morgan Stanley

Okay I get that piece now and just maybe a follow-up on that so when you are talking about salads getting much better in 2009, it sounds like a lot of it has to do with the savings coming from Verdeli. What about from the top line perspective?

Fernando Aguirre

Yes, I think there are a couple of reasons why we are confident that we will be able to improve it the salad business in 2009 and a lot of those are the actions that we took in 2008. Remember we have taken pricing in 2008. We have been able to integrate the Verdeli business and now that operation is complete so we will have results in 2009. We also have some of the service volume that has come out of the system and we have been able to reduce our production overhead to help match that and there is other improvements that we have in the manufacturing environment which will allow us to profitability gain from distribution. Some of which we have already been rewarded with and new and expanded distribution that will start right in the second quarter of 2009.

Vincent Andrews – Morgan Stanley

It is fair to say that you are leaving money on the food service contract that you walked away from and so that makes up for what otherwise would have been lost to economies scale from more production.

Fernando Aguirre

Yes.

Vincent Andrews – Morgan Stanley

Okay and so your related issue is you are able to find a new home for that volume and you do it profitably, there is upside to it but otherwise there is no downside to not producing a volume?

Fernando Aguirre

That is right.

Operator

Your last question comes from the line of Ben Mackovjak - Rivanna Capital

Ben Mackovjak - Rivanna Capital

Can you give us guidance for tax rate for 2009? Is 15% fair?

Jeffrey Zalla

Well the tax rate is difficult to forecast with any precision and it depends on the jurisdiction and the mix of earning.

Ben Mackovjak - Rivanna Capital

So similar to what it seems in 2008?

Jeffrey Zalla

Yes that is right although in reality the amount of tax expense can be vary considerably base on the resolution of tax contingencies during the year that is particularly true as in companies like us adopted 10/48 a couple of years ago. So you can expect some significant quarter to quarter volatility in the rate.

Ben Mackovjak - Rivanna Capital

How much of the fuel expense for 2009 is hedged?

Jeffrey Zalla

We have hedge about 75% of the fuel use in ocean transportation of banana from Latin America to North America and Europe.

Ben Mackovjak - Rivanna Capital

Can you tell us what average price?

Jeffrey Zalla

I do not have that. I do have that, average rate up for Rotterdam barge fuel of $353 per metric ton.

Ben Mackovjak - Rivanna Capital

How did those contracts become unprofitable? The ones you walk away from. I assumed when you signed them they were profitable?

Fernando Aguirre

I think there are a couple of things. One, we have seen unprecedented cost increases throughout last year certainly in 2008 and even through to 2007 and some of these contracts were a little bit longer term in nature so that was certainly one area that changed the economic profile features of the contract.

Jeffrey Zalla

Thank you very much for your questions and for joining us today. We look forward to updating you on our progress in the year ahead and that concludes our call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!