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Chiquita Brands International Inc. (NYSE:CQB)

Q3 2009 Earnings Call

October 27, 2009; 4:30 pm ET

Executives

Fernando Aguirre - Chairman & Chief Executive Officer

Mike Sims - Chief Financial Officer

Ed Loyd - Manager, Investor Relations

Analysts

Scott Mushkin - Jefferies

Vincent Andrews - Morgan Stanley

Jonathan Feeney - Janney Montgomery

Reza Vahabzadeh - Barclays Capital

Heather Jones - BB&T Capital Markets

Karru Martinson - Deutsche Bank

Arthur Winston - Pilot Advisors

Operator

Welcome to Chiquita Brands International third quarter financial results conference call. Today’s conference call is being recorded. I’ll now turn the call over to Ed Loyd, Manager of Investor Relations. Please go ahead sir.

Ed Loyd

Thank you, welcome to Chiquita Brands International’s third quarter 2009 earnings conference call. On the call today are Fernando Aguirre, Chairman and Chief Executive Officer; and Mike Sims, 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 website at www.chiquita.com or you may contact Chiquita’s Investor Relations department at 513-784-6366. Please note our press release includes reconciliation of any non-GAAP financial measures we mentioned today to their corresponding GAAP measures.

Before we begin, let me remind you that this call may contain forward-looking statements concerning operating performance or industry development and any such statements are intended to file within the Safe Harbor provided under the Securities Law’s, factors that could cause our results to differ materially or described in the forward-looking statements in today’s press release and in Chiquita’s SEC filings, including its Annual Report on the 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, Ed. Good afternoon and thank you for joining us today. We continue to carryforward the tremendous momentum we generated in the first half of the year and we are very pleased with our strong quarterly results, particularly considering the challenging economic environment, as well as historical seasonal swings during the period.

As many of you know, the third quarter is typically our weakest quarter. However, this year, we were able to deliver comparable operating income of $25 million, which is a significant improvement over a year ago, when we incurred losses of $4 million. In fact, this is Chiquita’s best third quarter from an operating income perspective in at least a decade.

This terrific performance is a result of very strong fundamentals, including better pricing, cost reductions, supply network efficiencies across the Board, and a relentless focus on executing our initiatives with excellence that continued to render the expected results and sustain our momentum.

We are making great progress towards our commitment of delivering sustainable profitable growth for our shareholders. We are very excited by the positive direction of our business and we expect to continue its transformation towards a more stable and predictable business.

In the last several months, our diversification strategy and particularly our portfolio management approach has allowed us to deliver consistent sustainable earnings growth. Together, our solid business and the North American and European banana businesses have overcome the seasonal ups and downs, and have even out earnings volatility that each of our businesses would have on their own.

Our third quarter results are an excellent example of our portfolio management. We were able to use the continued cash flow generated from the North American banana and salad businesses to overcome the relatively low seasonal pricing in the European banana business.

Let me share some of these specifics. We increased operating income in the salad segment by $32 million versus year ago by driving sustainable cost reductions throughout the manufacturing and distribution network, including a major product rationalization. Our profit improvement initiatives continued to gain momentum.

In fact, we are more bullish about the future as we have increased our expectation for the full year, 2009 for salads operating income to between 7% and 8%. We are very confident in our ability to achieve this level of performance, even as we experience the historical seasonal weakness and our planned consumer marketing and innovation investments in the fourth quarter.

In bananas, we achieved operating income of $22 million in the quarter, as we used base price increases in North America to offset a reduction in fuel related surcharges, and better pricing in Europe to offset lower volumes and the lower value of the euro. The strong pricing discipline and focus on patient operations have enabled us to exceed even our own expectations and this did not happen overnight or by accident.

It has taken discipline, ingenuity, hard work, and commitment during the last 18 months, and we are very proud of the accomplishments our organization continues to deliver. We have achieved significant operational improvement, despite a difficult economic environment. Taking costs out of our business and appropriately sizing our manufacturing operations for the long term.

In very simple terms, we now have the operating structure necessary to grow profitability and out perform, regardless of whether or not the broader economy continues to remain sluggish. As a result, we expect to deliver a third consecutive full year of significant comparable operating improvement in 2009.

With these significant improvements in place, we are now squarely focused on pursuing growth opportunities by expanding our brands to leverage consumer trends, by expanding geographies and distribution channels and by exploring new, higher margin products.

As we have said previously, we will strengthen our long term competitive position by expanding consumer loyalty and preference for our products and accelerate profitable growth in 2010. We began testing consumer marketing for Fresh Express branded products in the third quarter and are encouraged by the early data and success we have achieved.

In addition to delivering meaningful improvements in brand awareness with consumers, we achieved our target for increased sales. Initial results from this campaign show that consumers reward us with their grocery dollars when they are reminded of the quality and freshness advantages that our products offer. Our data indicates that advertising the Fresh Express brand in the United States can produce growth and profitability.

As a result, and as already anticipated in our previous earnings outlook, we are expanding this advertising campaign nationally. Additionally, we are focused on expanding consumption of our products. The average U.S. consumer buys Fresh Express salads only once every other month and we are the largest share of the category. If we were able to get these consumers to buy Fresh Express just once per month we would double our salads business.

In dollar terms, this would nearly double our revenues in salads from about $1 billion to $2 billion a year. This is an appropriate time to underscore the importance of consumer marketing even in the context of the current economic environment. Public data indicates that foot traffic in grocery stores is actually up between 6% to 8%. We also know that a year ago, about 40% of consumers were making purchase decisions at the store.

Today, only about 17% of consumers are making those decisions at the store. Therefore, people are making more shopping lists at home and deciding to stick to those lists. Our consumer marketing approach is focused on reminding consumers why they should include our brands on their list at the time they make a decision to buy our categories.

Across our product offerings we are currently underrepresented in certain geographies in Europe and North America and believe that by achieving our average European or North American market shares in these areas our business could grow by more than 15%. Our teams are currently testing new programs, and we anticipate heavy revenue and profitability growth over the next three years as a result.

We are also underrepresented in certain sales channels, especially non-grocery retail channels. Approximately 50% of all produce dollars are spent outside the retail grocery store and we believe that this is a significant area where we will be well positioned for additional growth. We currently have dedicated resources driving our go-to-market strategies in at least six different channels worldwide.

Gourmet Cafe, Chiquita go and Pineapple Bites are perfect examples of products that enable us to capture non-grocery opportunities at convenience outlets, gas stations and coffee shops. Additionally, with the extended Shelf Life provided by the superior stay fresh Landec Technologies we have expanded the presence of single-serve bananas to more than 20,000 convenience and coffee shop outlets.

Incidentally, most of the growth achieved through both expansion of geographies and channels is a very efficient profitable strategy as we will leverage existing sourcing, manufacturing, and distribution networks most of the time. Expansion of existing platforms allows us to leverage our company wide product and consumer know-how, and is inherently less risky than developing entirely new platforms from the ground up.

We also continued to explore opportunities to deliver higher margin products. We are very pleased with the ongoing rollout of Juice Fruit in a Bottle in Europe, which is available in nine European countries following our introduction in Finland and Norway during the third quarter.

We continued to maintain and grow our position in nearly all markets in which we compete, even in the current tough economic environments and we are looking for ways to expand our distribution in a more cost efficient manner. Factoring all of this together, we are confident that we have the right strategy in place to leverage global health wellness trends, and believe we are positioned to win in any economic environment.

We have the structure to continue generating improved profitability, even if a category remains relatively flat due to the economic environment as we are position today capture growth to benefit our bottom line. While we see some United States grocery retailers moving increasingly towards private label, especially in lower priced items, our focus remains on generating profitability on our high quality premium brands, rather than just gaining volume, even if that entails giving up additional share points to achieve our target profit margins.

The current economic recession has surfaced new challenges such as the temptation of customers to try private label products. We are very confident that the superior quality of our products are world class food safety standards, our customer service, innovation and consumer marketing in combination with our strong brands will continue to position us to win.

We will continue to improve in each of these areas and are confident that we have extraordinary opportunities to win distribution and gain profitable volume in various channels, which represent significant growth opportunity. As a summary, there are four simple, but fundamental reasons we are feeling very confident about the future.

First, we have delivered sustainable earnings growth by maintaining pricing and cost discipline, despite a tough economic recession. Second, we have executed our plans very well on every significant initiative over the last 18 months, which builds our confidence to meet future challenges. Third, we will continue driving waste out of the system and maintaining a focus on profitability, regardless of the economic environment.

Fourth, we are exploring new growth through innovative product platforms, expansion of channels and geography. I am pleased with the remarkable transformation that Chiquita has achieved over the past two years, and I am confident that we will continue to benefit from the changes that we have made. We’re very excited about the future of the company and look forward to continuing to deliver profitable growth. Based on the outstanding profit results so far this year, I am confident that we will continue to build on that momentum.

Now, I’ll ask Mike to provide more detail on our financial results for the third quarter as well as our outlook for the balance of the year. Mike

Mike Sims

Thank you, Fernando. Again, we are pleased to have for the first time in several years, posted a profit in our typically weak third quarter. Comparable net income improved by $24 million to $9 million, or $0.20 per diluted share, bringing year-to-date comparable net income to $126 million, or $2.7 a share.

The key drivers of these improved results were stronger salad margins and lower borrowing costs, net of increase taxes on income. In fact, consolidated gross margins for the quarter improved by nearly a third to 16.5% and this translated into the $29 million of comparable operating income improvement, Fernando mentioned earlier.

While net sales were lower this quarter, the decline was due primarily to reductions in food service volumes in salads that we began exiting late last year, and less favorable exchange rates for European sales. I’ll speak more about these items in the context of our business segment results.

For bananas, third quart sales and operating income were roughly flat at $472 million and $22 million respectively. Here the key factors. In North America, we grew banana volume by 3% versus 2008, while pricing was flat despite a 70% decrease in the company’s price surcharge for fuel costs.

In our core European markets, banana pricing was up during the quarter by 10% in local currency and 3% on a US dollar basis. Pricing remained stable throughout the quarter in part due to lower competition from summer fruits until late in summer. Volume decreased 16% as we chose earlier this year not to reenter contracts below margin sales, particularly in the U.K. and France, and we continued to focus on maintaining our price premium and profitable volume.

In other European markets and the Middle East, our banana volume increased as we continued to develop a consistent year round service delivery to longstanding customers in the region. Finally, as we’ve discussed on previous calls, banana costs have trended higher versus 2008, as a consequence of higher purchase fruit contract pricing, government imposed exit prices and the tale of last year’s flood impacts.

In our salads and healthy snack segment, net sales decreased by 11% from the year ago quarter to $289 million, primarily as a result of our decision to reduce food service volumes and discontinued certain retail products that did not generate sufficient profit. Absent to this structural change, which is contributed to lowering our overall cost structure, while improving our profitability and flexibility to add profitable growth. Salad and healthy snacking revenue would have been 1% lower.

Operating income in the salad and healthy snack segment was $24 million, compared to a loss of $8 million in the year ago period. This $32 million improvement was driven by cost reductions, and network efficiencies, with some benefit from lower net fuel costs. We grew Fresh Express branded retail salads volume by approximately 1%, while the category was relatively unchanged. Pricing for retail value-added salads was just less than 1% higher than year ago higher levels, even after reduced in fuel surcharges that reduced average pricing by almost 1%.

As Fernando noted, our outlook for full year 2009 remains very strong and I’d like to review, how we’re thinking about the broader trends in our businesses for the rest of the year. While fourth quart results are likely to be sequentially lower than the third quarter, due to seasonally lower turnover in salads and our planned investments in consumer marketing, we continue to extend the year-to-date improvements and deliver a significant full year 2009 net income improvement on a comparable basis versus 2008.

Much of the improvement has resulted from plans we put in place last year to achieve sustainable cost reductions and network efficiencies in salads. Based on these results, we now expect to deliver operating margins in salads of 7% to 8% for the full year 2009, even after factoring in the normal seasonality in salads and higher investment in consumer marketing and innovation this year.

While our year-over-year improvement in salads will not be a strong in the fourth quarter, we do continue to expect sustained cost performance. In addition, full year results in the salads and healthy snack segment will also reflect reduced startup losses and just fruit in a bottle. In the banana segment sourcing costs will likely be higher than in 2008, due primarily to purchase re-contracting pricing and government imposed exit prices. The bulk of incremental flood related costs that affected year-to-date results now largely behind us.

North America we expect pricing to remain relatively stable, even after a significant decline in fuel related surcharges as a component of price. Local European banana pricing, which is set weekly, is less certain and is dependent on many industry factors. In our traditional core markets, we so far continued to realize favorable local currency pricing comparisons on lower volumes, similar to the pattern for the last two quarters.

However, competitive supply from EU and ACP sources continued to exceed 2008 levels, while demand from Russia remained significantly lower for the last several years and these factors may moderate the degree of year-on-year pricing gains we achieved during the fourth quarter. At the same time, the euro is today trading at an exchange rate that is approximately 15% higher than at this time last year and a continuation of this trend would be favorable for our fourth quarter sales.

Finally, I’d like to comment on liquidity and capital structure. Debt reduction continues to be a priority for the use of available cash. During September 2009, we purchased $25 million of senior notes in the open market. These purchases included $16 million of 7.5% senior notes and $9 million of 8.78% senior notes acquired a price is close to par value. We acquired another $6 million of notes in early October, which moves us even closer to our goal of three times debt to EBITDA target.

We now expect annual interest costs to range from $55 million to $57 million, a 20% reduction compared to 2008. At quarter end, we had $176 million in cash. $128 million in borrowing capacity under a five year revolver with a syndicate of highly rated commercial banks and no more than $20 million in principle maturing in any year until 2014. In short, we are managing our balance sheet to provide near term protection with flexibility to pursue long term investment and growth opportunities.

In summary, we have demonstrated an ability to take costs out our business and a commitment to pricing discipline that drives comparable earnings improvement. Our profit improvement plans in salads and bananas have enabled us to deliver better profitability on less volume. We are poised to expand our existing product platforms into new geographies and channels and our solid capital structure and financial discipline positions us well to capitalize on future investment opportunities as they arise.

For all these reasons we are confident that borrowing any unforeseen weather or other event risks, we’ll deliver significant improvement and competent income for the full year 2009 versus 2008, at this time Fernando and I’d like to open the call for questions.

We’ll take as many questions as time allows. Operator.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Scott Mushkin - Jefferies.

Scott Mushkin - Jefferies

Just want to talk about two or three things. First of all, banana volumes in Europe. That seems to be falling sequentially down 15.5% I think if the latest quarter. Can we talk a little bit more about what’s going on there? What your expectations are for the EU and this a trend you think is going to continue?

Fernando Aguirre

Most of the volume reductions there are the choice that we made to stop unprofitable customers, mostly in the U.K. and France. That was very specifically the impact in the third quarter, we are being very disciplined in terms of pricing in terms of profitability by customer and for those customers that are not reaching the target margins then we are not renewing those contracts.

So most of this is really our own decision to not renew those contracts. The trend, as far as the future concerned, is you know the European business is much more dynamic than in the US, because there we price weekly, we also negotiate a volumes on a weekly basis. I don’t see this changing majorly, but clearly most of this has been our own choice.

Scott Mushkin - Jefferies

So, of that 15.15%, Fernando, is it all of it or is it in the core markets you are down 5%? How should we look at that?

Fernando Aguirre

About two thirds that have declining in the third quarter were due to the U.K. and France.

Scott Mushkin - Jefferies

The trend there, is that somewhat stable or is that been accelerating or where has that been?

Fernando Aguirre

If you take out, if you exclude that two thirds, the trend is roughly the same maybe even a little bit slower in the third quarter following the first and second quarter.

Scott Mushkin - Jefferies

The second question banana pricing in the U.S., I think we had some research out last week talking about what Wal-Mart’s doing. We had Fresh Del Monte give their opinion, as we go through that the contracts here in the North American market, what’s your take and what the retailers are doing and will it spill over?

Fernando Aguirre

What we have seen so far is, there are some retailers who as I mentioned in my prepared remarks, some of them are choosing to try private label. They are choosing to do that mostly in low price categories, low price brands. That is their own choice as you know, their margins are quite healthy and they can afford to reduce their pricing, because their own margins, but their margins are significantly higher than any of the margins that we generate.

So far, we have pretty much remained with our own discipline to deliver our own target margins and so far, we have seen nothing, but pricing to continue at the levels that we wanted them, but they are making their own choices, and they can, because they have pretty healthy margins.

Scott Mushkin - Jefferies

Do you anticipate, where costs are going next year? That you’ll actually need cost or price increases to recoup the costs, or is flat good enough next year?

Fernando Aguirre

Well, I think it’s early to speculate what we’re going to see, but clearly we’re going in with a discipline to achieve our target margins and if cost are going over, then we obviously would of to get pricing, but we won’t speculate on future pricing.

Scott Mushkin - Jefferies

One more and then maybe I’ll turn it over although I have a few more. You mentioned in your prepared remarks Fernando that, you’re obviously doing a lot more advertising and so I wanted to tie that into particularly on salads. If I was going to look at the normalize, kind of what you guys think the right EBIT margins are for that salad business, including the marketing expenses, the ad expenses? What do you think if we look out over a multi-year period what are the right margins?

Fernando Aguirre

What we said before, and we’ve said this very publicly is that, what we’re trying to achieve is a double digit margin for our product. What we’re now saying is, that we are pretty confident that we’re going to achieve between 7% ask 8%. That happens to be a little higher now than the margins that we saw when we first acquired the brand in 2005 that we’re very pleased with that. Yet we do believe that there is still a little bit of opportunity for continued growth.

Scott Mushkin - Jefferies

Does that include the marketing spend?

Fernando Aguirre

Yes, that does include the marketing expense.

Operator

Your next question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

Maybe just a follow-up on the last questioner’s question, Fernando, you said that your operating profit margin in salad is higher than when you bought the business. Are the operating profit dollars higher?

Fernando Aguirre

They’re roughly about the same.

Vincent Andrews - Morgan Stanley

I also would follow-up on, I’m just trying to understand Fernando, you brought up and discussed private label fairly in your extensive in your prepared remarks. I assume, you’re speaking specifically the salad business, or talking about the banana business?

Fernando Aguirre

I was referring to mostly about the salads business, that’s where we are seeing some action by some of their customers.

Vincent Andrews - Morgan Stanley

I guess maybe my next question then maybe we’ll come back to this issue, is if you strip out in salads, the sales that you walked away from that are causing you to have this negative variance year-over-year, what was your underlying rate of sales growth in the quarter?

Mike Sims

We on the retail business, through the volume and the aggregate by about 1%, at the same time we raised our pricing on a product by product basis by roughly seven tenths. You can find that buried in the press release someplace, but all in all retail sales we’re showing a slight growth.

Vincent Andrews - Morgan Stanley

Fernando, you’re suggesting that there is some private label pressure on that business that’s sort of accelerating in maybe during the quarter? Or what are you trying to tell us?

Fernando Aguirre

What I’m suggesting is, what we’re seeing in the store is that, a few customers are trying private label. Particularly, some of the low priced SKUs and we continue to see our volume continue to grow. Despite that, by 1%, really shouldn’t, I’m not going to cry victory over 1% volume growth, but certainly we are seeing that being the market leader, having the awareness that we have and frankly now, that we are spending in consumer marketing.

We’re pretty confident that we’re going to be able to convince the great majority of our consumers to continue buying Fresh Express. I think frankly, also from some of that effort from our customers, I think there will be some new consumers that will come into the category.

The other factor that I was trying to point out in my remarks is that, the fact of the matter is that there’s still, this is a very, very underdeveloped category, with people buying Fresh Express salads only every other month, and we believe there could be tremendous opportunity for growth. Obviously, anything that anyone can do to grow the category. I think that would be terrific for everyone in the category and we being the market leader, we believe we would benefit at least our fair share of that.

Operator

Your next question comes from Jonathan Feeney - Janney Montgomery.

Jonathan Feeney - Janney Montgomery

Two questions; first, wanted to be just so unclear, maybe a little bit thick about this, but when you say, Fernando in the release, at least as much improvement for the second half as the first half for the guidance. Is that in dollars, in terms of comparable earnings or is that in percentage in terms of comparable earnings?

Mike Sims

It’s Mike. We expect to hang onto all the improvements we have made so far in the year-to-date period. If you add up a number of the factors that we talked about in the release and I talked about in my remarks, there’s the potential that we can continue to improve year-on-year in fourth quarter, but I’m not ready to quantify that since we have a lot of moving parts now.

Jonathan Feeney - Janney Montgomery

When you say year-on-year, though you talking about…?

Mike Sims

Fourth quarter of this year versus fourth quarter last year.

Jonathan Feeney - Janney Montgomery

That’s dollars of net income, actually?

Mike Sims

Absolute dollars of net income.

Jonathan Feeney - Janney Montgomery

Secondly, maybe this is you too, Mike. I think you guys are, with the cash generation, you’re putting up there, I say you are rapidly approaching almost investment grade metrics here as far as the strength of the balance sheet. As we look forward to continued cash flow generation, would you look at bolt on acquisitions or share repurchase, which of those two would be the more attractive avenue at this juncture?

Mike Sims

Let me stay on message with this, which is debt reduction is the first priority. At appropriate prices for debt. We still want to get ourselves towards a more appropriate debt coverage ratio, which we’ve mention as around three times debt to EBITDA. We’ve reduced that by roughly $31 million, since we talked about that at the end of last quarter.

Jonathan Feeney - Janney Montgomery

If you look at the kind of numbers, like the guidance you just provided, certainly by the end of this year, it looks like you’d be under that level, righted?

Mike Sims

I wouldn’t say yet. We have bracketed at the rates and we need to take out incrementally on top of our maturities roughly $75 million to $100 million to get up there. Now you can do the math and reduce, that we’d be somewhere in the 40s to 70s now. That being said, we don’t comment on acquisitions, the same consistent remarks that we made in the past. We have outlined the acquisition criteria and overtime we’ll always consider opportunities, but there are no acquisitions on a horizon for us at this moment.

Operator

Your next question comes from Reza Vahabzadeh - Barclays Capital.

Reza Vahabzadeh - Barclays Capital

Just one housekeeping question to startup with, how much banks that you have outstanding and how much bonds do you have outstanding?

Mike Sims

The bank debt at the end of the quarter is $185 million. The sum of all the senior notes and converts is $484 million. Okay, on a book basis giving it $669 million in the aggregate. There’s roughly $75 million of difference between a carrying value and kind of convert principle in the accounting rules that came in last year.

Reza Vahabzadeh - Barclays Capital

So the growth number you just mentioned is going to be higher than what you’re going to report in this 10-Q down the road, because of the converted accounting?

Mike Sims

That’s right, that convert accounting will amortize towards the principal value overtime assuming until conversion.

Reza Vahabzadeh - Barclays Capital

Then as far as the outlook for, fruit sourcing cost, you talked about, higher procurement costs and then higher exit fees, can you elaborate on that a little bit and can we talk about what kind of increase in costs we would expect kind of going forward and any kind of color at least around it?

Mike Sims

I think it’s a little premature for us to understand where contracts in the industry in general are going to fall out next year. Thus far this year the purchase per cost is probably in the aggregate about a quarter of costs of good sold in the business in that number has been up about 7% and recently in the quarter. So, that’s been sort of the trend rate in 2009 business.

Reza Vahabzadeh - Barclays Capital

What’s driving that 7% increase in purchase fruit costs?

Mike Sims

Industry supply and demand.

Reza Vahabzadeh - Barclays Capital

Then the exit costs that have been imposed, what’s the run rate increased as of third quarter?

Mike Sims

The exit price was raised from to the end of 2008 to around $7.17 a box that would up lifted them this year to $7.59.

Reza Vahabzadeh - Barclays Capital

That is very specifically for Costa Rica.

Mike Sims

Costa Rica.

Reza Vahabzadeh - Barclays Capital

Have there been other exit fee increases in other countries that you source from?

Fernando Aguirre

There is a standing price paid to grower exit price required in Ecuador for the industry.

Mike Sims

Typically what happens is with the exit price increases, obviously all the other countries and the growers look at that and tried to reference that point, but as you can imagine with the many contracts we have on the very well diversified sources, we don’t, we don’t use a specific benchmark because of the exit price and yet all the growers try to use that, but it lot depends on supply and demand. A lot depends obviously on the contracts so we have negotiated in the past and cost they have today.

Reza Vahabzadeh - Barclays Capital

Did you say that you think there is going to be more supply of bananas from ACP countries and is there any thought on supply look from Central America?

Fernando Aguirre

Right now, we continue to believe that the supply will be tight. Over the near term and by near term we believe over the next year to two years the supply worldwide will continue to be tight. As you know we have talked about two different new sources from Africa for us. What we have reported so far is that one of those projects, the project in Mozambique is very much on time and on track, but we are not going to see the benefits of that until early 2011. So from our own standpoint from Chiquita’s standpoint, we are diversifying our sourcing into some ACP countries, but it will not be a meaningful amount until after early 2011.

Reza Vahabzadeh - Barclays Capital

Then U.S. contracts, did they come up for renewal anytime of the year kind of spread out evenly today?

Fernando Aguirre

They come out very, throughout the year. I can’t say that it’s evenly. I frankly don’t even know, have that in my head as to whether it’s 25% each quarter, but we tried to spread amount as much as we can, we try to avoid the big contracts all falling in the same border.

Operator

Your next question comes from Heather Jones - BB&T Capital Markets

Heather Jones - BB&T Capital Markets

A few quick questions, as far as your commentary, regarding Q4 banana costs, based upon the comments you made during your prepared remarks, it sounds as if you were just pointing out that is going to continue into Q4 or were you pointing out it will get worse than Q4?

Fernando Aguirre

No, I was pointing out some of the industries factors may carry over from an old perspective our own production remember that we will be coming out of the back end of the lapping of the impacts of the floods that we have lived through. Late in the fourth quarter of last year, but we think those costs are mostly behind us and we will in coming quarters not have a recurrence of those, Heather.

Heather Jones - BB&T Capital Markets

On a year-over-year basis Q4 shouldn’t be any worse than it’s been year-to-date?

Mike Sims

The fuel costs are on the rise. That would be the one thing I would point out as you can track that one pretty readily.

Heather Jones - BB&T Capital Markets

As far as your push, you mentioned that you have 50% hedge for the first half of ‘10. Given where the euro is, typically in the past you’ve gone into a year having about 75% of your full year cost hedged?

Mike Sims

Right.

Heather Jones - BB&T Capital Markets

Are you changing that strategy at all, or should we expect you to laying in more covering as you head into 2010?

Mike Sims

We haven’t fundamentally changed the program, Heather, due to the volatility in the markets, this past did slow down the purchasing, because of the cost of the premiums were just much higher than the value that we saw in the benefit. So we’re constantly reevaluating that, week in and week out and month in month out. At appropriate levels we would continue to roll that program forward.

Heather Jones - BB&T Capital Markets

I just want to make sure I understood that the increased marketing spend in Q4 for pack of salads is going to be embedded in Fresh Express EBIT or will that be on the corporate lines?

Mike Sims

No, that will be on the Fresh Express EBIT.

Heather Jones - BB&T Capital Markets

For the 7% to 8% full year end includes that?

Mike Sims

That’s correct.

Heather Jones - BB&T Capital Markets

Finally on your Q4, color and I fully appreciate the puts and takes and we still have two more months left in the quarter, but for the full year, on a comparable basis, to be even with, I mean sorry, to have the same improvement as you had in first half of ‘09, would imply a loss of about a $1 in the Q4. So I guess I’m just trying to get a sense of is there something, it would imply no either a really poor performance of bananas or no improvement in Fresh Express?

None of which seems to jive with your other commentary. So I don’t know if you’re striking a note of caution, just given the volatility of the business, or is there something that we need to be aware of, a cost that’s coming up in Q4 that they were not aware of?

Mike Sims

No, not at all as I mentioned in one of the earlier questions. We’re expecting to hang on to all the improvements year-on-year that we have achieved on a year-to-date basis through the nine months on a comparable basis the income is up roughly $47 million. We’re about $43 million through the first half. So we’re not expecting to lose that ground. I guess the message there is, we’re looking to achieve the same or better results in the fourth quarter and without giving any more significant or specific guidance on the results out there.

Heather Jones - BB&T Capital Markets

One and then your debt-to-EBITDA again, assuming that you don’t have I mean on a trailing basis, is Q4 of this year, is at least as good as Q4 of last year on a net basis, you all are well below that three times. Is that three times you’re talking about?

Mike Sims

The way we calculate that, just for clarity, is we take the gross or the principle value of the debt, not the book value and we compare that against the trailing EBITDA. The trailing EBITDA or the LTM number on a comparable income basis would be about $217 million for the rolling four quarters. It’s about $220 million year-to-date. So that would leave us on a trailing basis about 3.4 right now.

Heather Jones - BB&T Capital Markets

Then my final question is, just going back to the North American market. As far as this promotional pricing that Wal-Mart has instituted everyone we have spoken to in the industry has implied that this would be funded by the retailers that initial indications are that contract pricing is moving up for 2010. Just given that, your contracts roll throughout the year, I mean, and to your point about fuel prices moving up.

I mean, what is your initial read? I understand that you still have a fair amount of your contracts left to price, but what is your read on the industry and the supply demand dynamic going into 2010?

Fernando Aguirre

Well, what we said, Heather, and we have been very disciplined in our pricing negotiations, to make sure the customer understands the types of margins we’re making, which are now certainly a lot better than they’ve been, but certainly also not anywhere close to the types of margins they make.

So we are very transparent with them to show them our margins to show them our cost structure and we negotiate on the basis. I guess that we believe are very reasonable and so what we have seen so far the moves they have made are moves that have been funded by them because they have very healthy margins.

In our case, we will continue with the discipline we have had over the last three years to try to achieve our target profitability by customer and if costs increased by more than what we expect, then we will certainly try to recuperate those costs, whether it’s fuel or even the cost of purchasing fruit.

We will be very disciplined and be very focused on our target margins, but as I said, the margins we have are reasonable, certainly a heck of a lot better than they’ve been ever in the U.S., but certainly they’re also quit a bit smaller than what the customers say.

Operator

Your next question comes from Karru Martinson - Deutsche Bank.

Karru Martinson - Deutsche Bank

When we look at the top line, are we done with kind of the low margin exit of food service sales, or is there more to come here in the fourth quarter?

Mike Sims

I think that we will see a little bit more run on that. We didn’t start exiting until late in the quarter at the end of last year. So there will be some comparison in the top line as a result of that.

Karru Martinson - Deutsche Bank

Then when we look to the fourth quarter year-over-year, a year ago the flood costs that were anniversarying about an $8 million impact correct?

Mike Sims

That’s correct.

Karru Martinson - Deutsche Bank

On that $6 million, October buyback, do you have a split as to, was that all in the 2014 or the 2015?

Mike Sims

It was all the 2014.

Karru Martinson - Deutsche Bank

When you look at kind of the big picture longer term, what do you feel is the impediment to getting that consumer to try Fresh Express each month versus every other month?

Fernando Aguirre

No, what I was going to say is that we’ve talked about this in a way in which for some of us who spent time in consumer marketing land. It’s amazing that the category has been created without really any consumer marketing at all. We believe that by talking to the consumer and expressing our advantages and expressing the reasons why they should be buying Fresh Express in our case. Then we do believe there will be more consumers that will try them and will stay with the category.

So I’m not surprised, frankly, by the low level of significant consumer development in the category, because we really we as an industry and we as a category have never really spent against the consumer and this is the first time that anyone in the category talks to the consumer directly, we are expecting an uplift. We have seen already some volume gains out of the testing that we conducted and so we are expecting that volume will increase.

I was also describing the foot traffic in stores and what consumers are deciding today a lot of consumers are deciding what to buy at home, already. So to the degree that we create more awareness of our brand and the advantages that we have, we believe that consumers will remember to put us on their list and that’s where they’re making most of their choices and they go shopping.

Karru Martinson - Deutsche Bank

Then lastly, just for clarification on the three time debt to EBITDA and following up on an earlier question. At 217 of LTM EBITDA, on a net basis it would seem you guys are already below that three times test. Is that how you guys look at it or do you look at it as a gross basis?

Mike Sims

We’ve been running that test on a gross basis. If you do it on gross basis, that was about $7.44 at the end of the quarter. That would dropped down by another roughly $9 million in the fourth quarter with maturities in $6 million that we bought.

Operator

Your final question comes from Arthur Winston - Pilot Advisors.

Arthur Winston - Pilot Advisors

I have two questions. Number one, going forward in the next 12 to 24 months, where do you see unit sales growth, and which businesses?

Fernando Aguirre

We see unit sales growth in salads and bananas, Art. Obviously, because the salads category being as underdeveloped as we believe it is. I would guess that we would see that more in the salads category, but clearly we are expecting and planning for both bananas and salads to grow.

Arthur Winston - Pilot Advisors

Do you have enough capability of sourcing or buying bananas? If somehow you found an outlet to sell them, either in the United States or elsewhere other words you could get the bananas if you found someone to buy them?

Fernando Aguirre

Well the market is tight as we said before, but yes, we could. We certainly, we have a sell diversification, we obviously plan way ahead and our people are very ready to be able to do a lot of good things to make that happen and make sure we don’t fail our customers, so yes, we have a customer will be able to sell them bananas.

Arthur Winston - Pilot Advisors

Next question trying to clarify the earnings going forward, which a lot of things have been said and yes, it is easy to understand. The 7% do 8% profit margin on Fresh Express includes the marketing expense I think you said?

Fernando Aguirre

That’s correct. Yes what I also said by the way, this may not have been clear some comment was made earlier as to the margins at the time we acquire Fresh Express and that margin was about 6%. The operating income margin was about 6% and so that’s the one margin I’m referring to as we expect for the year to be between 7% and 8%. So, it would be a little bit ahead, a little bit higher than when we bought Fresh Express. We are obviously very, very happy with that.

Arthur Winston - Pilot Advisors

Your answer on the private label, that was mainly if not all associated with Fresh Express as opposed to bananas or am I wrong?

Fernando Aguirre

That’s correct that we are seeing most of that activity in the salads category.

Arthur Winston - Pilot Advisors

The last thing is on a comparison, which you guys alluded to for the fourth quarter, there was $8 million of incremental flooding expenses in quarter for ‘08 that for the most part won’t be around now?

Mike Sims

We had there were some charges on the properties and some unrecovered fixed costs associated with the plantation let them we should start seeing the fruit back as we move into the later part of the year next year.

Ed Loyd

Thank you 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

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

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Source: Chiquita Brands International Inc. Q3 2009 Earnings Call Transcript
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