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Chiquita Brands International, Inc. (NYSE:CQB)

Q1 2010 Earnings Call Transcript

April 29, 2010 4:30 pm ET

Executives

Ed Loyd – Manager, Corporate Communications & IR

Fernando Aguirre – Chairman, President and CEO

Mike Sims – SVP and CFO

Analysts

Vincent Andrews – Morgan Stanley

Mark Blaine [ph] – Janney Montgomery Scott

Heather Jones – BB&T Capital Markets

Reza Vahabzadeh – Barclays Capital

Ed Aursh [ph] – Cantor Fitzgerald

Mike [ph] – Jefferies & Company

Operator

Good day and welcome to the Chiquita Brands International first quarter 2010 financial results conference call. Today's conference is being recorded. At this time for opening remarks and introduction, I would like to turn the conference over to Ed Loyd, Director of Corporate Communications & Investors Relations. Please go ahead.

Ed Loyd

Welcome to Chiquita Brands International First Quarter 2010 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.chiquitabrands.com or you may contact Chiquita Investor Relations department at 513-784-6366. Please note our press release includes reconciliation, U.S. GAAP of any non-GAAP financial measures we mention today.

Before we begin, let me also remind you that this call may contain forward-looking statements concerning operating performance or industry development and any such statements are intended to fall within the Safe Harbor provided under the securities laws. Factors that could cause results to different 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 report on Form 10-Q. Now, I would like to turn the call over to Fernando Aguirre.

Fernando Aguirre

Thank you, Ed. Good afternoon and thank you for joining us. We welcome the opportunity to provide more insight on our results for the first quarter of 2010, an update to our expectations for the year and highlight the progress we are making to strengthen our business for the long term. Our North American geography continued to perform well in the first quarter as the banana business sustained its recent profitability gains and salads continue to deliver year-over-year profit improvements even as we accelerated our innovation and consumer marketing activity.

However, as we previously announced, industry wide European banana sales were negatively impacted by the harshest winter weather in 30 years and depressed economic conditions which have effected European Commerce overall. These factors lead to lower consumer demand in European bananas with our volume declining by 13% and together with an increase in industry supply lead to lower local pricing, which was down by 11%.

In addition, we have also seen pricing pressure from retailers looking to extract price in anticipation of a lower European tariff later this year. All these unusual conditions lead to a narrow first quarter loss, our overall performance continues to demonstrate that we are making progress in diversifying our business overall.

Three years ago, this type of unexpected event in Europe would have derailed our ability to achieve profitability for the year. Today, however, we are able to use the continued cash flow generated from our other business segments to mitigate softness in one particular segment. This is a significant business model change for Chiquita that makes us more resilient and predictable in the future.

Let me be clear about what it means for us in 2010. Based on our diversification of cash flows by geography in business and despite some of the challenges we faced in the first quarter, we continue to expect full year comparable income of $110 million to $120 million this year, which will be higher than a year ago on our best result since 2005. Let me explain the rationale for our confidence to maintain our prior guidance.

First, we started a five-point plan weeks ago in Europe to improve pricing, execute significant cost improvements throughout our supply chain, permanently capture the majority of the pending European union tariff reductions, reduce our selling and administrative costs particularly in plant marketing spend and increase distribution.

The objective is to revitalize our European business and return its profitability to previous levels. Just as we have done with our North American businesses in recent years, we are making the difficult decisions and taking the necessary steps in Europe to ensure we achieve sustainable improvement.

Second, pricing in North American bananas continues to remain stable and is achieving our profitability targets. Moreover, in our salads business, we have created a sustainable operating structure for profitability that will consistently deliver results whether or not the broader category remains sluggish.

Third, we expect that industry banana supplies will tighten as we move into the second half of the year. Productively in Latin America as well in the Philippines is tightening due to the normal productivity cycle and droughts in certain countries which will lower yield of good quality bananas. In addition, we have also altered our contracting structure to carry less surplus seasonal fruit in the second half of the year than we had in 2009.

Fourth, as a result of the Danone joint venture, we will expand on dry profitability in European healthy beverages much faster and more efficiently. Since we launched Just Fruit in a Bottle four years ago, we have created one of the leading brands of fruit smoothie in Europe.

Our partnership with the Danone establishes an alliance between two companies who's values and product portfolios represent a rich legacy of bringing branded innovative healthy foods to consumers around the world. Further, it's a significant validation of our strategy to have attracted a partner like Danone, a world class organization with many strengths particularly research and development in nutrition.

Lastly, we now have greater visibility into the implementation of the European tariff agreements and expect that it will take place during the second half of this year. In that case, we expect that our banana import costs to Europe would be materially lower than what they are today.

Taken together, these factors should allow us to over come the early head winds that we experience in our European business. We continue to drive inefficiencies out of our business and will always follow our discipline pricing practices which are in the fabric of our DNA.

Our diversified portfolio continues to balance both revenue and profit streams to create more consistent annual earnings growth. In short, we can appropriately adapt our tactics to create shareholder value without compromising our business strategy. Going forward, we continue to be squarely focused on pursuing profitable growth opportunities by extending our strong brands to leverage consumer trends expanding geographies and distribution channels and exploring new higher margin products.

This superior quality of our products, our world class food safety standards, our customer service, our innovation program and our strong brands remain the competitive advantages that make us unique in the industry. We are also encouraged by our continuing migration to a more consumer centric organization.

Our advertising and consumer messaging campaigns are in full force across North America. These investments will help to reinforce our category leadership and strengthen our long-term competitive position by extending consumer loyalty and preference for our high quality branded product. We are very disciplined in managing these marketing funds and will continue to invest as long as our programs deliver the plan financial returns.

When we determine that consumers will not reward our investment, we will pull back our spending. For instance, as part of our five-point plan in Europe, we have already reduced significantly our marketing budget in that region based on the current market softness.

On the other hand in North America the date that we have multiple test markets is very encouraging. We are moving forward with our investments in this country. Data indicates our television advertising drove significant incremental product volume versus markets where we were not on air.

Let me share some specifics, in the past six months, the previously existing velocity advantage of our fresh express salad has widened by almost 300% over other national brands. This means that in stores where consumers find Fresh Express, they are more likely to purchase our product which helps drive additional sales and profitability for our customers and our business.

The Fresh Express brand also continues enjoy an almost two to one velocity advantage over similar private label products in the same store. These are very meaningful advantages and as long as we increase sales, we will continue to invest in consumer marketing.

As we have said before, research has proven that companies that invest in consumer marketing and innovation win when coming out of tough economic cycles. Recent Nielsen research confirms that categories with strong marketing and high levels of innovation have the lowest percentage of private label products and maintain low private label share.

Innovation, quality and consumer marketing are the keys to category growth and are the greatest defense against private label expansion. We will continue to be careful and disciplined with our innovation and marketing investments that give us the best chance to succeed in the long run.

In summary, we remain confident that 2010 will be more profitable than last year and one of our best years in the last decade. Chiquita has more tools and flexibility to withstand tough times, economic challenges and even slow or no category growth.

We have a healthy balance sheet with strong levels of cash on hand. Profits are much more diversified and balanced than ever before. Improvements in North American bananas and salads are sustainable. We have more levers to pull in cost and in investments that we can dial up or down depending on business needs.

Net, we are in a much better position than at anytime in recent memory. Even though the first quarter was challenging in Europe, we are able to adapt our tactics to overcome these headwinds rather than discard or completely change our strategy. We are executing our strategy with excellence taking the decisive steps across our business and operations to deliver increased shareholder value.

We are very confident that 2010 will be one of our best years. Now, I will ask Mike to provide more detail on the financial results for the first quarter as well as the outlook for the balance of the year. Mike?

Mike Sims

Thank you, Fernando. Today, we reported a first quarter loss on a comparable basis of $4 million or $0.09 cents per share, compared to income of $22 million or $0.49 per share a year ago. Based on the European price and volume matrix, we provided last month, these results are reflective of our expectations at that time.

Net sales were $808 million or 4% lower than in the first quarter of 2009. Gross profits was $102 million or 12.6% of sales compared to $131 million or 15.6% of sales in the first quarter of 2009. Comparable operating income was $8 million compared to $35 million a year ago.

Let me go into the details of operating performance by business segment. For bananas, first quarter sales decreased 2% to $477 million and comparable operating income was $4 million compared to $40 million a year ago. The key factors affecting performance for the quarter were as follows. Overall operating costs for bananas were slightly lower as higher purchase fruit costs and bunker field pricing only partially eroded the benefit of flood recovery in owned farm production that affected early 2009 results.

In North America, banana volume was essentially flat versus 2009 while pricing increased 4% mainly as a result of contractual fuel surcharges. As a result, we were able to sustain the operating margins improvements in North America that we achieved in previous years.

Industry wide European banana sales were negatively affected by the harshest winter in 30 years, depressed economic conditions, price pressure from some customers seeking to extract value in anticipation of the lower EU tariff and a small increase in the aggregate industry imports through our core markets.

As a consequence, pricing was negatively impacted by softer consumer demand and economic environment. In our core European markets, banana pricing was 11% lower on a local currency bases and 6% lower on a U.S. dollar basis for the first quarter of 2009.

Pricing in the Mediterranean and the Middle East was impacted more significantly averaging more than 12% lower. As we reported in late March, European weekly pricing did not follow the normal seasonal improvement trend.

Beginning in mid February and March, prices increased week to week, though at a much slower pace than the normal trend, leading to a wider pricing gap year-on-year as the quarter progressed. Soft consumer demand and rationalization of the lower priced contracts in 2009 of sales and the certain unprofitable markets also lead to a 13% decrease in unit volume during the quarter.

Net net the impact of lower pricing and volume in Europe drove the entire reduction in our operating income for the quarter. In our salads and healthy snacks segment, first quarter net sales decreased by 8% from the year ago quarter to $259 million. As a result of lower retail volume, mostly due to private label growth and our prior year decision to reduce food service volumes that generated losses for insufficient profits.

First quarter comparable operating income for salads and healthy snacks totaled $20 million compared to the $13 million in the year ago period. Profitability increased by more than 50% versus the same quarter last year even as we invested approximately $4 million more in consumer marketing and innovation and anticipated retail volume declines due to the private label activity.

Continued cost reductions such as a more efficient distribution network and improved manufacturing processes and year-over-year pricing gains more than offset incremental investments and volume reductions and drove the profit improvement. Overall, retail volume was down 11%. However, absent the customer shift to private label, our retail would have grown by almost 3% even as the category was relatively flat.

As Fernando mentioned earlier, we announced the formation of a joint venture with Danone to further build our fresh fruit beverage business more efficiently and profitability. After the transaction closes which we expect to occur during the next several weeks following completion of certain pre-closing conditions including government approvals, the Just Fruit in a Bottle business will be de-consolidated and we will report our share as a results using the equity method.

We expect to report a one-time gain of $35 million on a transaction. In exhibit B of today's press release. We have provided additional historic information on sales and operating results for Just Fruit in the Bottle. As you will note, excluding Just Fruit in a Bottle results our salad and healthy snack segment reported an increase in operating margin which includes our marketing investments to 8.8% for the first quarter compared to 5.8% during the 2009 period.

I'd like to close the discussion of first quarter results with a few comments on non-operating cost. Net interest cost decreased by approximately $2 million in the quarter as we continue to focus on debt reduction and improving liquidity. At the end of the quarter our debt was reduced to $648 million and we had $85 million in cash and $128 million in borrowing capacity under our revolving credit facility.

Unlike recent years, we did not draw on the revolver for the first quarter for seasonal working capital needs, instead using a portion of excess cash. In 2009, revolver borrowing peaked to $38 million during the first quarter. Income tax for the first quarter was $1 million versus a net tax benefit of $5 million in 2009 which related to the sale of the company’s Ivory Coast operations and resolutions of tax contingencies in several foreign jurisdictions. We expect full year income taxes to total between $4 million and $6 million.

Turning to our outlook for 2009, we still expect to extend or track record of annual earnings improvements for a fourth consecutive year. Barring any unforeseen weather, major currency fluctuation or other event risk, we are now targeting revenue growth of 1% to 3% and continue to expect comparable income for the full year 2010 of $110 million to $120 million compared to $103 million in 2009.

It is important to know that these comparable results do not include $8 million of non-cash interest expense on our convertible notes and the estimated $35 million gain on sale and de-consolidation related to our joint venture with Danone with Just Fruit in a Bottle which will be reported in the U.S. GAAP financial results. I would like to underscore that are original target for this year assumed that the quarterly flow of earnings throughout 2010 would be different than in 2009. The first half results lower than the record levels achieved in 2009 and second half results better.

This contemplated a slower start in Europe and higher investments in consumer marketing earlier in the year with various other improvements throughout the business contributing to better balance of year performance. As we noted in our end of March update, although the first quarter results in Europe proved weaker than originally expected. We have several reasons to be confident that we can still achieve our full year goals.

First of all, we are aggressively executing a five-point plan to improve profitability in European bananas. This begins with pricing as we continue to be the premium player in the market. Although we do not expect European local market pricing to approach the record levels achieved in the second quarter of 2009, we do anticipate the tightening of overall industry supplies in the second semester as compared to the second half of 2009 will boast the pricing in balance of the year and mitigate future exchange rate risks that could reduce the pricing benefits. We have continued to execute hedging strategies that will provide protection at an average rate of $1.35 per euro roughly on 50% of our second half local currency flows and approximately 90% of our balance sheet risk.

Next, we are moving to reduce cost wherever it makes sense and have already begun implementing savings plans in several areas of the business. The most significant example is that we have already decided to scale back much of the originally planned marketing investments in Europe based on the current softness of the business and will continue to evaluate these investments as the year progresses.

Finally, we are today more confident that the EU tariff agreement which would lower the EU banana tariff from the present 176 euros per metric ton to 148 euros when implemented this year and to 114 euros over the next decade will move forward this year. The approval process is proceeding as expected and is scheduled to be approved by the European member states and signed by the parties in the next several weeks.

At that time, the tariff reimbursement process should begin and the tariff rate at the border should be provisionally reduced from 176 euros to 148 euros per ton. The tariff reductions will still need to be ratified by European Parliament before they are permanently enacted into E.U. law.

Based on the pricing dynamics we have seen so far with some customers consciously seeking to expect the value, we will need to actively capture a permanent savings a major portion of the rate reductions. While the changes that will bring to the competitive market dynamics remain to be seen, we believe that the ongoing tariff reduction is a cost reduction that should be retained by importers such as Chiquita.

As we have discussed in the past, the 28 euros per ton in initial on a direct cost basis represents approximately $30 million on an annualized basis. We expect the majority of this savings will be a positive for results in the second half of the year. In North America, both of our major businesses continue to deliver against our original plans.

Pricing in North America bananas remains stable and favorable to last year. We continue to see opportunities to profitably increase distribution. In salads and healthy snacks, we will continue to drive pricing increases and reduce operating costs throughout the year which will fund incremental consumer marketing investments and allow us to improve full year operating margin performance to approximately 8%.

As I mentioned earlier, we have decided to trim our current year marketing investments in Europe and therefore, now expect that our consolidated marketing investments would increase by roughly $20 million in 2010 with the higher investments still falling primarily in the first half of the year. While we firmly believe these investments will fuel future profitable growth, sustained margins and defend against private label expansion throughout 2010 and beyond, we are continuously measuring the effectiveness of these programs. So we have the flexibility to adjust, modify or accelerate investments in the second half of 2010.

In summary, we are confident that we can achieve our annual profitability goal through, first, execution of the five-point plan to revitalize profitability of our European business, which includes strengthening pricing, capturing a major portion of the benefit of the EU tariff reduction, reducing supply chain and SG&A cost and increasing distribution of our product.

Next, sustaining the strength and performance in our North American banana and salad businesses which has diversified our profitability streams throughout the year. Finally, realization of profit improvements from our Just Fruit in a Bottle joint venture with Danone enabling us to grow and drive profitability much faster and more efficiently.

And our balance sheet and capital structure provides flexibility to pursue long-term investments and growth opportunities. We expect 2010 will be another important year which we continue to strengthen our business, deliver year-over-year-over-year revenue and profitability growth and bolster shareholder value.

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

Thank you. Good afternoon everyone. I'm just trying to get a sense of how things evolved going into the close of the quarter and in particular, just because when we got your press release on 3/30, you talked about having results in the quarter being substantially lower year-over-year. I did not take that to mean there would be a loss in the quarter. So I'm just wondering if I either misinterpreted that or if something evolved between now and then, that was different than your expectations at that time?

Mike Sims

Vincent, I think the numbers are consistent with our expectations of the time and the impact that the price and volume changes would have had. Perhaps, the way to clarify to walk it across, if you think about what happened with the operating income in the bottom line, there was a swing in operating income some $27 million. If you think about the business that we have in the agra [ph] Europe and the price volume metrics and the $14 million or $15 million or so cases of product, that price increase we talked about of 10% is going to amount to something like a $34 million price point.

In addition, the 13% volume reduction we talked about less transparent on the volume impact, but million cases of product and gross margins on that would also be significant. So as I mentioned in the prepared remarks the kinds of price and volume swings year-on-year that we talked about at the end of March analysis basically account for the income swings between this year and last year.

Vincent Andrews – Morgan Stanley

Okay. And just the – in looking at the plan that you laid out in terms of making up what took place in one queue, you sort of talked about – I just want to make sure, I understand that – the marketing and the EU, you originally talked about a marketing of about $30 million during the year and now it's going to be $20 million, is that correct?

Mike Sims

Vincent, that was our indicated aggregate increase year-on-year in the marketing investments. In other words, incremental investments that we plan to make to grow the business for the long term. Originally, we were estimating around $30 million and big round numbers. We are suggesting now we are probably going to invest in the range of $20 million or so and that changes essentially coming out of the European business where right now the results in the marketplace are not rewarding as the investment in the near term.

Vincent Andrews – Morgan Stanley

I understand. And the last question and then I will pass it along. You did mention something about industry supply as it related to the EU. If you could expand on that a little more in terms of what you saw in the first quarter and obviously, you expect that to come out in the back half of the year both as a function of the cycle and as a function of droughts and so forth?

Mike Sims

Sure. What we saw we’re a couple of factors coming in. Obviously, we all talked about the return to the industry of the Costa Rican production that fell out from floods, that was completely expected. We also saw a rather significant at least short-term increase in subsidized sources out of the ACP and EU which probably in the first quarter averaged to on a percentage basis about 20% up year-on-year. That has a more acute effect on Europe than on the industry when you got short-term fluctuations like that because all of that fruit is concentrated in the European marketplace.

When we look at the supply curve looking out further out, we see several elements where the trend does appear looking in the second half to be turning based on the data that we have available to us. As you mentioned, we do see unfavorable weather conditions. Columbia in particular is showing lighter volume. Ecuador is not exporting as much fruit as they have been. External to the Latin sources, the Philippians is down significantly for those reasons. We also see some retrenchment based on the growing curves in the ACP sources and could see several percentage points down rolling into the third quarter again based on our internal estimates and the data available to us.

Secondarily and I think it's important to recall that as we moved out of the back end of last year, changed some of our sourcing structure, left some contracts – purchase fruit contracts in Central America that were not as favorable to our business. We were able to change the way our supply curves internally within Chiquita shaped to have less structural surplus in the second semester and particularly the fourth quarter. And so why is that important? Because we tend to need to move that structure surplus into French [ph] markets that are not as profitable, we see a definite direct savings in the latter part of the year for that fruit.

Vincent Andrews – Morgan Stanley

Okay. Thank you. That’s very helpful. I will pass it along.

Operator

We’ll go next to Jonathan Feeney with Janney Montgomery Scott.

Mark Blaine – Janney Montgomery Scott

Hi. This is Mark Blaine [ph] on for Jonathan.

Mike Sims

Hi.

Mark Blaine – Janney Montgomery Scott

One question, the EU tariff productions that you mentioned, are those now part of guidance?

Mike Sims

We are assuming that we are going to need, retrieve and capture whatever you want to talk about put in the P&L part of those savings. We did not earlier in the year include those because we quite frankly didn’t have the visibility that we have today about that. And we think that's a component of the overall go to market result that we will need to bring in to our profitability. We've paid the costs to date and that cost reduction in the pricing that we make with our customers is somewhat interrelated. We already had customers who to date have been seek and extracted. And you see that already as part of the pricing dynamic. Any recovery now that is more visible, we clearly intend to capture and make part of our results for the year.

Mark Blaine – Janney Montgomery Scott

Okay. Great. Are there any outlook – is there any outlook on royalty contribution from Just Fruit in a Bottle? And is that in guidance?

Mike Sims

Here is a right way to think about what we are thinking about JFIB and the joint venture. First of all, we are thinking about this from a longer term perspective. It is a great deal [ph] between the two companies to grow the business faster, more profitability, help us accelerate getting profitability in the countries where we have already entered even as faster and faster than the three-year target and the new countries that we are not in. The real value out of this transaction is on the come and giving us the long-term ability to increase the value of that business. In the near term, what you can expect when we do consolidate to the extent we had anticipated in investments in the business this year, we will be recognizing only half of them in our results.

And last year, we reported to you that we invested something like $20 million in the year more than half of that was in the second half. And so we would expect as we plan this year to not only have lower investments of some of our markets come to profitability, but also we would not be taking as many losses in. So the royalties today are not the significant component of it. It's the value of the business. Fernando, maybe it would make sense for you to talk a little bit about it.

Fernando Aguirre

Mark, Bear in mind, this is very early on. This is still very early on . This is the first time we talk about the major transactions with Danone but we have not closed it yet. We are in the process for closing it and so for us to provide any specific details for royalty for this year is very, very early. There's a lot of work going on, has been going on for some time now, but it's very early on for us to talk about it. We are obviously quite pleased with the deal, very strategic for us, very strategic for Danone and particularly since we are marrying [ph] essentially two companies with a lot of strengths that are complementary to each other. We are happy that they will be contributing with significant research and development capabilities particularly in nutrition.

Operator

We’ll go next to Heather Jones with BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

Hello. Good evening.

Mike Sims

Hi, Heather.

Heather Jones – BB&T Capital Markets

Hi. I have a few questions, first, on the banana pricing font, have you seen in a – Mediterranean pricing was worse than I was looking for and was wondering have seen any improvement to date in Q2? And that market given the shortfall out of Philippines?

Mike Sims

Heather, right now the outlook for the Mediterranean is not terribly clear right now. We are not selling a tremendous amount of fruit into there. The Middle East results and performance is quite satisfactory for us. I don’t think at this stage I have enough clarity and transparency on the Med – impacted that quantify how much it might be coming from the Philippine situation. We did see the pricing in the Med and the European countries as I mentioned continue to move up into the beginning of the second quarter. As I mentioned before, would expect that second quarter pricing because pricing was extremely high last year comparatively speaking, the comparisons will not be – difficult to be favorable in the second quarter. We are anticipating much more of the pricing solidification that happened as we move on into the latter part of the year.

Heather Jones – BB&T Capital Markets

Your Med and Middle Eastern pricing was down, I think, 12% for Q1?

Mike Sims

That's right.

Heather Jones – BB&T Capital Markets

How is that combined pricing trending year-on-year today in Q2?

Mike Sims

I don't have the average date in front of me right now. This is early in the quarter, Heather.

Heather Jones – BB&T Capital Markets

Okay.

Mike Sims

Again, most of the pricing comparison was driven from the Meds and the Middle East prices that remain pretty stable.

Heather Jones – BB&T Capital Markets

Okay. Okay. So that the weakness in Q1 was primarily Med driven?

Mike Sims

That's right.

Heather Jones – BB&T Capital Markets

Okay. As far as the EU, it has moved up subsequently but the year-on-year comparisons based on our data have become more difficult and to your point, the comparisons become even more difficult. So unless something changes dramatically, it seems like you're looking at a much worse year-on-year price comparison in Q2 than in Q1. And I'm wondering if you – I mean, you mention the harsh weather. It's now April and it's actually gotten worse. I was wondering if you could – the data we have seen points to an overall volume increase of only about 4% for Q1. And just wondering if you could point – try to give me an understanding of why the pricing is so weak there and more color on what you expect specifically for Q2?

Mike Sims

Sure. I'll do the best I can. I think it's a mixed story that as you mentioned, there were significant volume increases in the first quarter, not sure, if we are looking at the same data. But the trend on those imports has continued into the early part of the. the second quarter. But as we look a little bit further out in the projections, that's where we are seeing the supply curve move and change a bit moving later into the quarter and into the third quarter. In the near term, you are right. The comparisons are challenging but we are not extrapolating that completely at.

We are starting to see signs in the market, in fact, where stocks have been clearing, where things are roughest in Eastern Europe and in the Russian markets seem to be solidifying. Our pricing in most of our core markets does not directly follow some of the external references you might see. And so, thus far, I think what's really important to note, our volume comparisons are looking a lot better and the demand used a little bit stronger for us. So we are seeing a lot closer comparisons on the actual sale outputs and the unit volumes than we saw earlier in the year.

Heather Jones – BB&T Capital Markets

So I am seeing pricing down North to than 20% and your saying your pricing that your seeing right now is actually much better than that?

Mike Sims

Remember that – we don’t remember that. We are a premium price product. Our contracts don't necessary follow exactly what it is that you are looking at. The numbers you sound like you are referring to are the hard discount prices in Germany. And that's not necessarily indicative of the way we sell our product across Europe. We are in 27 member states. We've got transactions and deals with customers and consumers that are priced mostly on a basis of Chiquita's value proposition and are service delivery and the premium that we can deliver for ourselves on the basis of that.

Heather Jones – BB&T Capital Markets

Well, I understand your premium product but could you give us a sense of where you are directionally then? So that data is showing North of 20%. So I mean what are you seeing for you EU business?

Mike Sims

We are not seeing – in the early part of the quarter, we are not seeing anything, approaching that and on a quarterly basis, we could not see double-digit price changes.

Heather Jones – BB&T Capital Markets

So you don't believe Q2 will be down as much as Q1 was down?

Mike Sims

It is too early to tell, right now. But based on right now and based on what we are doing in terms of our pricing actions and discussions we are having with our customers, no I don't except to see that right now.

Heather Jones – BB&T Capital Markets

Okay. On Fresh Express, the profit performance on healthy snacks – healthy snacks, the profit performance was better than I was looking for especially given the volume declines. Was wondering do private label business and the food service business you walked away – not the private label business, but the business that went to private label. Was that business just lower margins so you had a positive mix shift or is it just an acceleration in your cost savings? What drove that performance?

Mike Sims

First of all, Heather, We are not in the private – we are a branded food products company. We are not in a private label business so to the extent people wanted to sell their private label product and switched that's a transaction that we would except. But we have the flexibility, we built a system, we have got operators that have really learned how to turn the dials and switch the toggles within salad business to extract profitability and in a lot of different levels.

In fact, we think about the improvement of roughly 50% or $7 million. There are several elements to that. A very key driver for us was network efficiencies, the management of overhead costs, but mostly manufacturing and network efficiencies that our people in the business continue to drive so that we can be efficient in all different types of sales volume levels. When we look at the – I think the important story in the positive note within this thing, again, is that despite the fact that some volume did move over and our aggregate turnover was lower, we stepped back and looked a the base or adjusted book of business and the accounts that continued to selling the Fresh Express brand of product. Because of the velocity advantage that we deliver that Fernando talked about, our non-private label business grew to about a 3% of the part that we kept grew to about a 3%. That's on the back of what we do differently and what we provide to the customers and the consumers. I think that's the key story.

Heather Jones – BB&T Capital Markets

And as far as your – 11% just consolidate retail volumes plus what you walked away with in food service. What are your plans and outlook as far as volume gains? Because that is a pretty substantial drop and so is there new business coming on later this year? That is going to …

Fernando Aguirre

Yes. Sorry, Heather, this is Fernando. We have, in fact, already gained some new distribution points with a number of customers. The plans that we have are to offset the grey majority of the private label business that was moved away from us. A very important point again that Mike mentioned which is critical in our numbers that the business that remains with us continues to grow 3% roughly versus a year ago. And that shows that the growth will come not only from new distribution points but also from our existing business.

And then secondly, we have a significant number of innovation programs in play that will be executed during the year together with our consumer marketing program that is working very well and we are seeing the advantages that we mentioned. We are capturing now, I think it is premature today to say that we will upset all of the private label reductions but we certainly have plans to make up for the great majority of those losses.

Heather Jones – BB&T Capital Markets

Okay. And my final question is on guidance. First I just want to clarify when you say salads and healthy snacks, you consolidate them with Just Fruit in the Bottle all of that but the consolidated EBIT margin will be at least 8% this year?

Fernando Aguirre

That's the adjusted when you pull the Just Fruit in the Bottle elements out.

Heather Jones – BB&T Capital Markets

Okay. So even excluding what will be essentially your 50% interest?

Fernando Aguirre

I'm sorry? Getting a handout over here? That number would be if you take out, yes, that's right on the restated basis still pulling out that part of the segment results would be – that would be excluding that. Think of it as the Fresh Express business that includes the salad business and the other innovation or healthy snacking activities that are done.

Heather Jones – BB&T Capital Markets

Okay. So I just want to get a feel for, if you assume that, then and then taking your tax guidance et cetera in back final three quarters, your consolidated results need to be meaningfully above your Q2 through (inaudible) results last year. And you're looking at a lower euro, lower pricing at least in Q2 and it sounds like you are expecting higher pricing – I mean higher costs. So just trying to get a sense of how you're going to achieve that and wondering if your benefit from the tariff resolution, are you assuming the full year benefit so even though it doesn't flow through probably to the back half, it will be back dated? Are you assuming like a full year benefit on that?

Fernando Aguirre

Let's go back to the basic building blocks, right. First of all, the base level that we talked about in the guidance issue, assume that we would have a stronger second semester that we would be bringing some of the marketing investment forward early in the year for example, that we would be eliminating that substantial non-structural surplus in the fourth quarter. Those are meaningful amounts of dollars that were in our starting point for the year.

We clearly are assuming that given what could be lower euro comparison the back half of the year and given the fact the price levels are not sustainable for a long term from a profitability stand point that we will be seeking to drive top level pricing improvements year-on-year in the second semester. Now, also need to be thinking about the fact that we have – we do expect to have sustained performance in our North American operations and these businesses have a more stable earnings flow that we are building on domestically.

Finally, let's go back to the five point plan. As we move forward into the coming weeks and months, we will be executing on that plan and will see the benefits begin to accumulate. Clearly, we are assuming that what I refer to as the majority or large significant portion of the capturing of the tariff value, that's going to come later in the year. We are at this stage assuming that's something that we will realize at some point during the second semester. But we may be fortunate to see one earlier. On the cost savings that we are talking about, the scale back in marketing and the SG&A savings and the other cost savings that we are going after in supply change would also be added in to the results as we move forward. So the answer is yes, at the end of the day, we will need to have a stronger performance versus ‘09 in the second half.

Heather Jones – BB&T Capital Markets

I just want to make sure that I understand. Does your guidance assume even though it may not be actually implemented until the back half, is your guidance assuming the full year benefit of the lower tariff, given the fact it will be back dated?

Fernando Aguirre

No. We are assuming – we don't know all the answers. If you think about what we need to do which is we need to catch up how much we were short in the first half. We need to deliver cost savings to get there and profit improvement plans et cetera and we want to capture this value. We are assuming that a significant portion of that we will realize in the second semester. We are not assuming that we will get 100% of it.

Heather Jones – BB&T Capital Markets

Okay. All right. Thank you very much.

Fernando Aguirre

You're welcome.

Operator

We’ll take our next question from Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh – Barclays Capital

Hello?

Mike Sims

Hi, Reza.

Reza Vahabzadeh – Barclays Capital

Hi. Just on the package salad side of the business, the sales obviously were weak year-over-year, but the EBITDA was strong on a year-over-year basis. Sales were basically the same, 1Q versus 4Q and yet again your EBIT was meaningfully higher. What accounts for that?

Mike Sims

The comparison sequentially or year-on-year? Can you clarify for me, Reza?

Reza Vahabzadeh – Barclays Capital

Both. The EBIT performance stands in contrast to the sales performance. I am just trying to see what was the driver for that?

Mike Sims

Well, to begin with sequentially, if we think about this as an overview, the quarterly performance in salads tends to be if you rank the quarters, second quarter strongest and first and third quarters are next and then fourth quarter performance tends to be within a year the least profitable mainly because volumes and demands are somewhat lower than during other times of the year.

And so you would see the sequential impact of the stronger demand for the products sequentially in the first quarter. If we think year-on-year, the way we drove the results versus last year is we got better pricing and we got – we reduced our costs to goods sold. And those numbers were well more than enough to compensate for the relative impact of unfavorable year on year volume comparisons. We just got a more nimble system and the guide seeded to drive the efficiency into our network and we are able leverage value add and the things we are value adding to continue to drive our prices up and that includes things like the fuel surcharges that cover inputs on commodity side et cetera. The cost plus the pricing are what help us compensate for both the investment that we made in marketing to drive the future and the volume decline.

Operator

Next, we will take Ed Aursh [ph] with Cantor Fitzgerald.

Ed Aursh – Cantor Fitzgerald

Afternoon.

Mike Sims

Hi, Ed.

Ed Aursh – Cantor Fitzgerald

Mike, I just wanted to check with you on how wide spread the retailer demands were in Europe in anticipation of the lower tariff reduction? I mean was that something that happened in a couple of cases or fairly wide widespread?

Mike Sims

All right. I can't give you an exact statistic. I can tell you that certainly it's all part of the bargaining game and it's a general pressure on the marketplace.

Fernando Aguirre

We saw very early on in the year. We saw pressure because the announcement was made in December and the announcement said that while it would be applied and agreed probably by the summer that there would be some sort of a rebate to going back to December. And so the retailers so that in effect has the importers can benefit eventually since January one. So for all practical purposes, all our customers started asking for, how are we going to make up for it? We do believe that has been part of the pressure on pricing that we have seen in the industry. So that's why we do say today and we have a plan in place and we talking to our customers about the need for us to capture that because in some cases, even, their retail pricing and the store level pricing did not come down. Despite the fact the industry pricing was softer in the first quarter, so what that says is that their margins are and have been a lot healthier this first quarter than the margins for the industry.

Ed Aursh – Cantor Fitzgerald

So to some extent, the negative of having to pass along some of the benefits has been felt, but not the positive of the actual reduction of your cost?

Fernando Aguirre

That's a very good way to summarize it, that's right.

Ed Aursh – Cantor Fitzgerald

All right. The second question, part of our five-point plan in Europe is geographic expansion or not geographic – distribution expansion. Could you just speak to what your thoughts are there for effecting that?

Fernando Aguirre

That's where we are referring to mostly about customers in countries where we exist today. We are not talking about expanding into countries where we do not sell. We – there are a number of opportunities in those countries where we have – where we typically are the market leaders, but in – there's significant variances in some countries. We have 60% shares in some countries and some we have 35% shares. Both we would be the market leader obviously in those where we have 30 some percent share, there's a lot more opportunity for us to capture some of those customers. That's where we are referring to as far as expansion in our distribution. It would be in existing geography not outside of those geography where we sell today.

Ed Aursh – Cantor Fitzgerald

You have almost no exposure to the U.K? Is that correct?

Fernando Aguirre

That is correct. We have reduced quite significantly there and so yeah our business area is quite small now and – France are the two countries where we made significant moves to essentially get out of the market. In the U.K., we still have some presence but it is very small.

Ed Aursh – Cantor Fitzgerald

Are there any conditions or you might re-enter the U.K? It seems like the instigator on the price wars hasn't been reporting terrific comp's there and might have given up on that strategy? So we might …?

Fernando Aguirre

We have people there, we have pricing stability there. There's always the opportunity to go back. We are going to be very disciplined in making sure that if we go to some of those customers where we're not selling to today, we got to reach our target profitability. If we don't, we don't go back to those.

Ed Aursh – Cantor Fitzgerald

Thank you.

Fernando Aguirre

Thank you.

Operator

Our final question will come from Scott Mushkin with Jefferies & Company.

Mike – Jefferies & Company

Good afternoon, everybody. This is actually Mike [ph]. I've got Scott on the line. His connection is pretty poor. So I'm going to step in here. The first question that we have is there a point or a level where the continued difficult conditions in Europe for European bananas actually becomes a risk to guidance or is this not something you see given the five-point plan that you outlined earlier?

Fernando Aguirre

Obviously, it's very difficult to predict exactly what's going to happen? But we’ve seen the news the last couple of days where countries in Europe are still anxious and there was more data about Spain in the last 24 hours and the Greek debt reduction is on that our playing a part. And so we want – we are not going to predict what's going to happen from the economic standpoint in Europe, but we certainly are much better prepared today. We are much more diversified today to weather a storm. And we feel the confidence as Mike explained that earlier, we feel the confidence to continue to maintain our guidance although as we've also stated, we are including a couple of factors that the marketing reductions and capturing some of the benefits of the prior reduction which we have not included before. That's – those are the few reasons why we are confident in maintaining guidance. What's going to happen in months from now – five months from now – we won't predict that. We will have to deal with those issues when we get there.

Mike – Jefferies & Company

Okay. Second question. Is there anything that would lead you to believe that actually normalized earnings coming out of European business in bananas has actually been reduced or are we just looking at unfortunately the very bad weather cycle that is affecting everybody that you guys will eventually cycle along with the other industry participants?

Fernando Aguirre

Well, we are seeing very soft pricing compared to several of the last several years. We are seeing, again, the weather was very different than anything that has happened in the last 30 years. So I think by all accounts today, we do believe it is unusual situation. So we do expect to – or if its get better, we also see that there's one major factor there called the European tariffs which are very different than they were prior to 2006. And those are changing or we are expecting those to change this year starting this year. That will be a very significant difference in the market. So we do believe it is an unusual situation. We do believe that it will start getting corrected. And as Mike explained earlier, we do believe that pricing will start to get better. But, again, it's obviously very, very difficult to predict exactly where Europe is going to end up from an economic standpoint.

Mike – Jefferies & Company

Okay. I think that will do it for us. I appreciate it. Thank you.

Fernando Aguirre

Thank you.

Operator

At this time, I will turn the conference back over to Fernando Aguirre with any additional closing remarks.

Fernando Aguirre

Thank you, Operator. Well, thank you very much for your questions and for joining us today. We obviously look forward for updating you on our continued progress in the quarters ahead. Thanks again.

Operator

And that does conclude today's call. We thank you all for your participation.

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Source: Chiquita Brands International, Inc. Q1 2010 Earnings Call Transcript
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