Chiquita Brands Intl. Q2 2010 Earnings Conference Call Transcript

| About: Chiquita Brands (CQB)

Chiquita Brands International, (NYSE:CQB)

Q2 2010 Earnings Call

July 29, 2010 04:30 pm ET

Executives

Ed Loyd - Director of Corporate Communications and Investor Relations

Fernando Aguirre - Chairman and Chief Executive Officer

Mike Sims - Chief Financial Officer

Analysts

Jonathan Feeney - Janney Montgomery Scott

Scott Mushkin - Jeffries & Co.

Heather Jones - BB&T Capital Markets

Vincent Andrews - Morgan Stanley

Reza Vahabzadeh - Barclays Capital

Operator

Good day and welcome to Chiquita Brands International Second 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 Director of Corporate Communications and Investor Relations Mr. Ed Loyd; please go ahead.

Ed Loyd

Thank you operator. Welcome to Chiquita Brands International second quarter 2010 Earnings Conference Call. On the call today are; Fernando Aguirre, Chairman and Chief Executive Officer; Mike Sims, Chief Financial Officer.

After today’s prepared remarks, we will take questions if 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’s Investor Relations Department at 513-784-6366.

Please note, our press release includes; reconciliation to US GAAP, any non-GAAP financial measures that 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, and good afternoon and thank you for joining us today. We welcome the opportunity to provide more insight on our results of the second quarter of 2010, update our expectations for the year and highlight the progress we are making to strengthen our business for the long term. Turning briefly to our second quarter results, we achieved $64 million of comparable income. Overall business trends in the quarter were generally consistent with our expectations as our North American geography continued to perform well.

In the second quarter, we grew the North American banana business, and in salads, we were able to sustain our recent profitability gains even as we followed our plan to increase consumer marketing activities. In Europe, while banana volume was 5% lower for the quarter, consumer demand improved sequentially to approach more normal levels. While local pricing was down by 7%, pricing strengthened late in the quarter to levels comparable to the strong 2009 period as industry supplies decreased. Combined with the execution of our business improvement plans, as expected, we were able to return to profitability during the second quarter in Europe.

Looking forward, we continue to expect 2010 to be another very profitable year for Chiquita, with full year comparable income of 80 to $90 million and in a second half that is better than 2009. All this estimate is lower than our earlier expectation, approximately ¾ of the adjustments reflects the negative impact of significantly lower average European exchange rates, which in recent weeks have averaged 13% below second half 2009 levels, and which had not been previously included in our forecast.

Let me provide some additional perspective on the significance of our comparable income estimates of 80 to $90 million this year. If we consider the last 10 years, 2010 will be among our best 3 years in terms of our performance; this is in large part due to the diversification strategy we have pursued that has improved the operations of our businesses to generate strong reliable cash flows. The quality of our earnings is better today and is not dependent upon one time items as it has been in recent years, in fact, let me take this one step further; the expected profitability in 2010 plus what we achieved in 2009 profits will be the best 2 years in a row of any time dating back to 1990 and 1991, almost 20 years ago.

Our overall performance continues to demonstrate that we are making progress in the diversification of our business by both category and geography, and we believe that the fundamental earnings power of our underlying business will help us make additional progress even in a continuing weak economic environment.

Let me explain the rationale for our view; first as anticipated and discussed over the last earnings call, we have seen industry banana supplies begin to tighten as we move into the second half of the year, which is helping to restore the balance of supply and demand; in addition, we have altered our contracting structure to carry less surplus seasonal fruits in the second half of the year than we had in 2009. We believe, this will significantly improve our fourth quarter cost profile.

Second, our business improvement plan in Europe is heading in the right direction to improve pricing, the captured cost reductions, and to increase distribution. While we recognize that we have much more work to do, we are optimistic we can achieve our goal to regain priored levels of profitability in the long term as we continue to leverage our premium brand position.

Third, having completed the formation of our European joint venture with Danone, we are excited about the long term potential to grow in healthy beverages in Europe much faster and more efficiently and expect to improve profitability in a meaningful way. Both pricing in North American bananas remained stable and its achieving our profitability targets, also in our salads business we have created an operating structure for profitability that will consistently deliver results whether or not the broader category remains sluggish.

We also continue to realize success in building the Fresh Express brand with consumers and believe that our increased consumer marketing will help further this success. We are also working to expand our distribution channels in order to reach consumers with Chiquita and Fresh Express branded products whatever they choose to shop.

Taken together, these factors should allow us to overcome the head-wins that we experienced in our business during the first half of the year. For the remainder of the year and beyond, we remain committed to continuing to drive inefficiencies out of our business and maintaining our disciplined pricing practices.

Our diversified portfolio continues to balance both revenue and profits streams to create more consistent annual earnings growth and unlock the underlying value of our business. Additionally, the quality of our products, world class fruit safety standards, customer service, innovation, corporate responsibility and our strong brands remain the competitive advantages that set us apart in the industry.

Finally, 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, they provide you with some of the data regarding some of our consumer marketing initiatives in North America.

We have seen that our Chiquita banana TV campaign is helping to drive volume in preference versus competition. For the first time in a decade, our brand preference increased by 4% and very importantly unit sales have increased up to 10% in each of the 40 target television markets. This is contributing to the growth we are beginning to see in North American bananas today. We are also seeing similar improvements in our Fresh Express marketing activities that drive increased sales velocity and advantages versus competition.

Fresh Express brand awareness which have been flat since 2007 has increased by 11%. Meanwhile, our sales velocity has improved versus last year by more than 5% against competitive brands while private labeled velocity has declined anywhere between 7 to 10%. This means that Fresh Express has an 18% velocity advantage versus private label, this becomes a compelling data point to demonstrate that first express can generate stronger profitability for our customers versus private labeled propositions as we have higher velocity and lower weight.

In summary, we remain confident that 2010 will be one of our best profitable years in the last decade; we are in a much better financial position than at any time in recent memory with more diversified profits and a much healthier balance sheet. When taken together with our long term momentum and growth strategy, this becomes a very compelling investment opportunity. This is why I made an additional personal investment in Chiquita stock in June, when I purchased 40,000 more shares. I am a strong believer in our company and our strategies and I am very excited about our future prospects so I am literally putting my money where my mouth is.

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

Mike Sims Chief Financial Officer

Thank you Fernando. Today we reported second quarter income on a comparable basis of $64 million for $1.40 per share, that’s compared to income of $95 million or $2.08 per share in the year ago quarter. On a US GAAP basis, net income was $95 million or $2.06 per share, versus 89 million or $1.95 per share a year ago.

Net sales were 916 million or 4% lower in the second quarter of 2009. Gross profit was 178 million or 19.5% of sales compared to $206 million or 21.7% of sales in the second quarter of 2009.

Comparable operating income was 74 million compared to $113 million a year ago. In the banana business, the second quarter sales decreased 2% to $574 million and comparable operating income was $64 million versus 96 million a year ago, on higher operating cost, and lower prices in Europe.

Let me elaborate on the key factors affecting performance for the quarter. Overall operating cost for bananas increased mainly due to higher bunker fuel and purchase through prices versus a year ago levels, a bunker fuel price return cost were on average 57% higher versus a year ago, or an increase of $188 per metric tonne against our worldwide annual consumption of roughly 325,000 metric tonnes, this represented a gross cost increase of approximately $14 million during the quarter, of which approximately 1/3 was recovered through fuel surcharges in North America.

Partially offsetting these cost increases was the benefit of €28 per tonne reduction in the EU terror which became effective on June 9th. In addition to capturing ongoing terror savings, we have begun to receive portions of the reimbursement of $12 million which is receivable going back to last December.

In North America, our Chiquita banana volume grew by 3% versus 2009, banana pricing increased 6%, mainly as a result of contractual fuel surcharges and market related pricing improvements on non-fixed price contracts that reflected tighter industry supply conditions. As a result, we were able to sustain the operating margin improvements in North America we achieved in the previous years before considering the continued incremental long term investments in consumer marketing.

In Europe, as expected, demand in our traditional Western and Southern European core markets recovered following the unusual weakness of the first quarter. In fact, the majority of our traditional Western European market volumes actually increased by low single digits year-on-year during May and June. However, it is important to note that pricing the month of June, typically as seasonally weak period, actually strengthened to match the record levels we saw in June 2009 as we observed overall tightening of industry supplies.

Banana pricing was 7% lower on a local currency basis and 11% lower on the US dollar basis during the 2010 quarterly period.

Pricing in the Mediterranean and Middle-East markets were lower by 4%. Overall banana industry has tightened as the quarter progressed but temporary disruptions in Guatemala and Ecuador adding to reduction in the EU and the ACP exports.

At the same time, the Euro weakened significantly versus the first quarter and 2009 levels averaging $1.28 compared to $1.35 in 2009; we were able to offset a significant portion of the impact on our net Euro revenues due to currency option hedging, but the weakening of the Euro was likely to continue to negatively affect our performance.

In our saladsand healthy snack segment, second quarter net sales decreased by 6% to 188 million from the year ago quarter and operating income was flat at $30 million compared to the year ago period. During the quarter, we realized 1% higher pricing and approximately 12% lower retail seller’s volume, driven mostly by private labeled growth international accounts. During the period, we continued to invest more in consumer marketing to drive long term growth, sending approximately 4 million more in the second quarter 2010 than the year ago period. In fact, our retail sales business would actually have grown by about 1% absent the shift to private label.

With the benefit of ongoing cost improvements, especially in our distribution network, manufacturing processes and overhead structure, we were able to sustain strong operating margins for healthy salads and healthy snacks, which excluding the Just Fruit in a Bottle business and including our marketing investments, operating margins were 10.9% for the second quarter compared to 11.9% during the 2009 period. And like May, we’ve completed the previously announced joint venture agreement with Denone to more efficiently and profitably build our European fresh fruit beverage business and we’re reporting a onetime second quarter gain of approximately $32 million on the transaction. Just Fruit in a Bottle business has been deconsolidated and we will report our share of future results using the equity method.

I’d like to close the discussion of second quarter results with a few comments on non operating costs. Net interest costs decreased by approximately $2 million in the quarter and we’ve reduced that by $11 million to 639 million, including the repurchase of an additional $6 million in senior notes.

Income tax from the second quarter was $3 million versus an expense of 5 million in 2009, and we expect full year income taxes to total less than $5 million.

Now let’s turn to our outlook for 2010. As we noted, following last quarter’s review, the impact of a major sustained adverse exchange rate fluctuation on our European banana profits was not anticipated and therefore not included in our prior expectations. Since that time, the euro exchange rate continued to drop and by early June had reached the lowest levels since the first quarter of 2006. Even after a recovery from that low, since the end of June, the euro has traded on average around $1.26 or 13% below its average during the second half of 2009 although we’ve mitigated part of this currency risk through hedging with put options. If the euro remains in the trading range of the past few weeks, it will be challenging for us to recover that loss of revenue during the remaining 5 months of 2010.

As such, or any unforeseen weather events, further currency fluctuation or other event risks, we believe it’s now prudent to adjust our expectations for full year comparable income to between 80 and $90 million, assuming that the euro exchange rate averages around $1.26 for the balance of the year.

As a reminder, these comparable results do not include $8 million of non cash interest on a convertible mode nor the $32 million gain on the sale and deconsolidation related to our joint venture with Denone for Just Fruit in a Bottle, which will be reported both in our US GAAP financial results.

We continue to expect that the quarterly flow of earnings throughout 2010 will prove to be different than in 2009. We expect second half results to be more favorable in comparison to the prior year particularly in the fourth quarter.

In summary, we are confident that we can achieve our adjusted annual earnings expectations and second half profitability improvements by executing our business plan to revitalize profitability in Europe, sustaining the strengthened performance in our North American bananas and salads businesses, realizing cost savings, including lower surplus fruit costs and terror freights savings and reducing losses for Just Fruit in a Bottle.

Let me provide a little bit more detail; first, we expect to realize better European local market pricing comparisons as the second half progresses. European market pricing strengthened late in the second quarter and this trend continued in July as our core European market pricing in local currency averaged roughly 10% higher than a year ago levels. Industry exports from several sources have recently trended downwards versus the year ago period and exports from the EU and ACP sources, which significantly contributed to increased fruit available this year are now showing double digit declines.

This data would indicate that even without further weather disruptions, overall industry volumes will be down in the third and potentially roughly flat in the fourth quarter compared to 2009. While we still have several weeks of the typically slow summer business in Europe ahead, we believe that the trends we see today are all supportive of and consistent with stronger year on year pricing comparisons as the year progresses.

Second, North American banana pricing remained stable and favorable the last year and we continue to see opportunities to profitably increase distribution.

Third, we’ve locked in a significant amount of future cost savings. Although we still expect to see additional increases in fuel and fruit costs versus 2009, we are continuing to drive cost reductions throughout the business and have already realized savings from our plans in several areas. We expect to continue to realize the cost benefits from the 28 euro per tonne initial reduction in EU terror, which became effective in June, and that represents savings of approximately $30 million during the second half of the year. In addition, we expect to have significantly low amounts of surplus fruit cost particularly in the fourth quarter as a result of the restructuring of the banana purchase contract portfolio at the beginning of the year.

In the fourth quarter of 2009, the cost of disposing a surplus fruit was approximately $20 million. In salad and healthy snacks, we will continue to drive profitability improvements throughout our business and expect to achieve full year operating margin of approximately 8%.

Finally, we will continue to realize profit improvements from the formation of the Just Fruit in a Bottle joint venture with Denone. As you may recall, we invested more than $10 million during the second quarter of 2009 in this business.

We expect 2010 will be another important year in which we continue to strengthen the foundations of our business, deliver profitability and bolster shareholder value for the future.

At this time, I would like to open the call for questions. We’ll take as many questions as time allows; operator

Question-and-Answer session

Operator

Thank you Mr. Sims. Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator instructions). First question will be from Jonathan Feeney with Janney Montgomery Scott; please go ahead.

Jonathan Feeney - Janney Montgomery Scott

Good afternoon guys, thank you. First question I had was we’re hearing a lot of things about, it seems competitive activity in the North American banana market and there are no contracts rolled off on a regular basis. I’m hearing that a major retailer has switched some suppliers around in the re-bidding process and I wonder if you could comment about the competitive environment in the US in bananas specifically, how it’s changed over the past 3 months and are you actively seeking to margin up North America or protect margin the US at the expense of perhaps losing some volume or is that same balance in your thought process as a company the same as it always was, balancing volume versus profits?

Fernando Aguirre

In general Jonathan, we obviously look for opportunities to optimize our profitability but clearly what you probably have picked up is the retailers do switch in their contracts on an annual basis; they look for opportunities to [heapofall] guessing to a certain extent. They also look for opportunities to optimize their profits and their volumes. As we’ve reported, our volume has gone up in the last several months versus a year ago. We have seen some of the normal practices to that retailer’s make to switch business around but in general terms, the practices over the last many years have been that they’d like to have competitive market places, they’d like to have several of the suppliers to distribute in their different DCs. We have gained a few distribution points year to date so for 2010, net, we have gained some distribution banana contracts in the US so from our standpoint, really I’m not seeing anything unusual and we have gained some distribution points. I put that as really the bottom line for us.

Jonathan Feeney - Janney Montgomery Scott

Thank you. And you made some comment on the incremental investment you've made in the Salad business. And I guess what I'd like to know is have you changed the balance of that investment? I think you were talking about somewhere I think 13 or $15 million this quarter year-over-year was remaining under the sort of guidance you'd given us before. You said you made an increased investment. Did you make that level investment? And how is that sort of paying off in the market place, whatever investments you have made in advertising, marketing, promotions, whatever it is?

Mike Sims

John, it’s Mike. Listen, we’ve been investing so far as expected and as we had discussed in the past, with the one exception that our guidance have been continuing to try to optimize the way they invest and they’ve been able to opportunistically improve the cost basis of some of the investments that they’ve made. But we have continued to invest overall in the business. The majority of the incremental 20 million that we talked about through the second quarter and there’s a little bit more going the rest of the year. We’re still working according to our original plans. Obviously as we’ve said before, we’ll continue to monitor the results from those investments and fine tune them to the extent they achieve our objectives. We’ll continue to make them and to the extent they don’t, we’ll continue to look at it, but this is a long term investment for the health of the ongoing growth of the business as well.

Jonathan Feeney - Janney Montgomery Scott

And could you comment at all about the -- I mean, is there any sign -- you said it's long term. Maybe that's the answer. But are there any signs that you're sort of getting pick up where you're making those investments whether it's in print ads or local ads or coupons or whatever?

Fernando Aguirre

We won’t give details specifically, Jonathan, on each of the marketing pieces but we’re always looking to optimize our plans. We’re always measuring. We already included some data points here in the prepared remarks but clearly, we are seeing some very, very interesting results in brand awareness, increases that we haven’t seen in 10 years. Velocity numbers that we reported as well against private label; all of those are the exact types of objectives that we were looking for and that branded companies are investing in marketing in this day and age mostly because of things like private labeled threats and so we are very, very comfortable with the results we’re getting and we will optimize. The nice thing also about the market today is that you can move around with more flexibility than you could 5 years ago simply because there aren’t that many people or there are fewer people investing and there’s a lot more opportunity at reduced cost and are more efficient costs and investments in the markets today than they were 5 years ago. It’s the result of the economy. But we have our people, are tracking that very closely, we’re tracking that very closely and on a monthly basis, we get results and we’re measuring those results in each one of the markets where we’re investing our money.

Jonathan Feeney - Janney Montgomery Scott

Thanks. Just one final question. I think Mike's favorite one. Building a considerable cash balance here. I think you have a $150 million revolver that's undrawn that sort of finances your seasonal working capital needs. So I guess I'm sort of wondering, I know first priority for cash flow has been and probably continues to be debt repayment. And when would you act on debt repayment and at which time -- you bought some senior notes before, is that order you'd go in, and to the extent is there a point where you're yet prepared to comment as to when buying back stock could become a possibility?

Mike Sims

I’ll start in reverse, no, I’m not going to comment on when stock buy backs would become a possibility but --

Jonathan Feeney - Janney Montgomery Scott

I know you like it when I ask

Mike Sims

I love it when you ask.

Jonathan Feeney - Janney Montgomery Scott

That’s why I do.

Mike Sims

You summarized liquidity pretty well, I just clarified. On the revolver, we do use some of that availability, but most of it we use the [Braille season]. Right now we’re still a little bit away from the debt reduction target we talked about.

If you look at the net of cash basis, we’re probably somewhere between 32 and 34 versus our 3 times target so as we said before, on top of the ongoing amortization, we probably would need to do another 40 to 50 million of buy backs to see that goal based on revised estimates for overall earnings and therefore EBITDA. So that one remained to be our focus.

It’s no secret though, we’re going to still manage the balance sheet conservatively as we have done. The economy has continued to be still a little bit uncertain and we’re not alone in this, I’m along with -- like people I’d like to call $2.7 trillion that a lot of corporates have a lot of cash at their balance sheet as well, right? so I think we’re going to continue to focus on debt reduction as a key priority and move towards achieving that goal and we’ll continue to make some cash cushion in the near term.

Jonathan Feeney - Janney Montgomery Scott

Now, obviously just to clarify, you said 40, $50 million. That's on a net basis, right?

Mike Sims

40 to 50 would be additional repurchases to get us to the goal.

Jonathan Feeney - Janney Montgomery Scott

Okay. But that's not just taking cash you have, that's generating another 40 or 50 and buying debt back.

Mike Sims

That could be out of the existing cash flow or the existing cash base in the ongoing free cash flow.

Jonathan Feeney - Janney Montgomery Scott

Okay, thank you very much.

Mike Sims

Thank you.

Operator

And the next question will be from Scott Mushkin with Jeffries; please go ahead

Scott Mushkin - Jeffries & Co.

Thanks, guys. And I like to see how well you're managing your business. I think that's great. But what I wanted to do is I wanted to poke a little bit more at the salads business because it seems to me if there's an Achilles heel in some of the data that we're looking at it is not salad profitability because that's quite nice but in the salad volumes. I mean, if we look at the Nielsen data, it's progressively getting worse and so I was just trying to understand in light of -- I hate to bring up a negative subject but some of the recalls and obviously the brand idea of better quality, how do we reverse? I heard you just talked about, Fernando, the marketing. But how -- I mean honestly it's just -- you're not seeing it. It just seems to keep getting worse. What should we look for as analysts that this is reversing, this trend that private label isn't really just going to become much much bigger over time and eventually you guys are going to have to do something to stop it?

Fernando Aguirre

Let me start from the end of your statements. We are doing something to stop it and that is, again, the specifics of the long term marketing investments we’ve referred to a number of times and we’ll continue to refer to a number of times because we do believe in marketing investment in innovation, in making sure that we are establishing differences in our products and telling the consumer and the customers about those differences. That’s really essentially a very basic approach to private label which has been proven over the years.

I’ll tell you a couple of other thoughts that we know, historically, and this has been demonstrated many times, both in this country as well as outside of the United States; private label will do well at the beginning but it does start to taper off and it starts declining over a little bit of time and typically…literally within the first year or year and a half or so, both private label, if you will, private label boost, and that’s why we have seen now we’re beginning to see that they’re tapering off. It also depends on what customers do and it is no secret, we all know that big customers have decided this country is the best and try private label in a more aggressive way than they ever have and because of the economy, and again, which incidentally is also another point that typically happens with private label in bad economies. Typically people try private labels and consumers try them but consumers go back to branded businesses because they typically know they’re better, typically private label manufacturers simply cannot afford to have the types of investments that the branded companies make in things like food safety, in things like marketing, in things like making sure your products are better quality than the others. They just simply can’t and it’s also a very known fact that private label manufacturers are very, very low margin businesses and if people want to be private label manufacturers and convert their factories into just a private label maker, it’s a known fact that those people don’t last because they end up typically being very, very low margin and all they need is a hiccup to go back drop and perhaps serious problems and so we haven’t programmed that is very tested and true but we are also not looking for a result overnight, and velocity advantages that we’re reporting in salads are the types of numbers we’re constantly sharing with our customers. They’re seeing data points that in fact come from, in many cases, their own books and their own readings and we’re reinforcing with them what they’re seeing and what they’re reporting to us, and we’re also reinforcing to them that in the end, they end up making more money with branded businesses than with private label makers.

So it is not an easy solution to have a complete program and it is also not a solution that happens overnight. My feeling, based on what I’ve seen so far is that it will start tapering off and I think to this degree that also the economy starts contributing and the economy starts getting a little better then that will also be [vowed] well for branded companies like ours. But it is not an overnight turnaround and I suspect we may see another few share points that private label gains, but clearly, again, it has been proven that they start tapering off and reducing over time.

Scott Mushkin - Jeffries & Co.

Thanks for that lengthy answer. Do you want to comment a little bit on the perception, and maybe it's just me, that recalls hurt a branded perception? And you guys have always prided yourself, and I say probably you still do, on the quality, and what your thoughts are on that type of press. And I guess any comments there?

Fernando Aguirre

Sure.

Scott Mushkin - Jeffries & Co.

Do you think that that's much to do about nothing and I'm making an issue or do you think it does hurt a little bit as you go to market as a branded product?

Fernando Aguirre

Well, I think -- today, I think we’re seeing in general ways, in many different industries, we are all as consumers, seeing more recall events because the information travels much faster today than ever before. Twitters and Facebooks and internet and so on works in a way today that anything happens today in the other side of the world and we hear about it within a minute or two. That never happened before so I think there is a fact void here that speaks to the fact that information flows a lot faster today than ever before.

I think you’re referring to very specifically the last few recalls in our industry, on one on which we announced for our own product. It was a very limited selection of an expired product of Romaine salads that was found in one single package of our Fresh Express Hearts of Romaine and we checked very thoroughly, we did in terms of they being very conservative. We won with the recall and we found both in talking to customers in recalling product, we found absolutely none of that product, which was expired, in any shelves and we heard of no consumers that reported having any product or reporting any illnesses out of that recall at all so we were extremely cautious and extremely conservative, which we always will be and nothing came out of that.

Now again, I think in general terms, every industry is saying for reasons -- I explained part of the reasons but I think every industry is seeing now more recalls than we’ve ever seen before and we’re in the food industry and I think that in any food industry product, I think you will find that -- companies -- by the way I believe also the companies ought to be more conservative today than they were 5 years ago or 10 years ago.

Scott Mushkin - Jeffries & Co.

Okay. And then I'm going to do one more beating this dead horse. Shelf execution, is it where it need to be? And then when do you think we can see an improvement, like right now volume is continuing to fall. When do you think we start cycling the other way so shelf execution and volumes going not necessarily positive but less negative?

Fernando Aguirre

I can’t and won’t predict when the tide is going to turn, if you will, because I don’t know. I’d be going out of my league here to try to tell you exactly when that’s going to turn, but I do expect that as the economy is recovering little by little, I think it’s recovering slower than any of us anticipated, but I think that we’re seeing some signs of recovery and as we see that consumers start going back to branded products, we’re going to start seeing the turnaround there. But I can’t. Scott, again, it’d be totally arrogant on my part to tell you exactly when I’m going to see that turn around. I can’t tell you.

Scott Mushkin - Jeffries & Co.

And store execution where it needs to be?

Fernando Aguirre

Well, in store execution, we believe we’re actually doing better in the store execution today than we’ve ever done. We’ve learnt a lot about our salads business, it’s been now 5 years since we bought it and we do believe we’re executing better today than ever before and we are introducing new products, we are seeing very, very good branding execution. We’re seeing freshness measures in our products that are getting even better than last year and the year before that. It was even better too so we are very, very pleased with our store execution and I think, which by the way, I’d also believe that that is an area where private label doesn’t do as well as branded companies, because again, they don’t have the resources, they don’t have the money and they just start literally without defending anyone, but they’re literally just making product for customers. That’s all they’re doing. They’re not doing any of the other activities that branded companies do as we do.

Scott Mushkin - Jeffries & Co.

Thank you. Thanks for take my questions and the time

Fernando Aguirre

Thank you, Scott.

Operator

The next question will be from Heather Jones with BB&T Capital Markets

Heather Jones - BB&T Capital Markets

Good evening.

Fernando Aguirre

Hi Heather?

Heather Jones - BB&T Capital Markets

Hi. Congratulations on the quarter and thanks for all the details surrounding your outlook assumptions. First on Fresh Express, going to your velocity comments and the differences between Fresh Express' velocity and private label velocity, wondering what the -- because we're getting close to the one-year mark when these two large retailers moved a substantial piece of their business to private label. And just wondering what their response has been to this data. I mean, do you have any sense of do they plan to revert some of their stores back to Fresh Express or just -- if you could give us some sense as to that.

Fernando Aguirre

As you can imagine, they won’t tell us or anybody else their decision until they make it, and I think it’s a great question to ask them to see what they’re planning on doing. We keep going back to them, they’re good customers, they continue to be good customers of ours and we continue to do work with them to make sure they not only understand the data of what they’re measuring but also data that we’re generating but I don’t know whether they have any plans to revert or do something different. But we are -- you can bet that we are constantly talking with them and sharing information with them and trying to do the best thing we can to show them what the results might look like if they continue -- go back to growing the branded business.

Heather Jones - BB&T Capital Markets

And you mentioned to the last question you don't know when your volumes will turn positive. Were you referring to when branded will start turning positive in the category as relative to private label? Or just -- I'm specifically looking for when do you think Fresh Express volumes will turn positive? Because I believe earlier in the year you had projected meaningful declines for the first half but in the back half new business wins were supposed to kick in, bringing volumes, I thought to flattish by Q4. I’m just wondering if you could update us on that.

Fernando Aguirre

The data we do now is that if you exclude the 2 big customers that beside of the change to private label, we are seeing already some growth in our business by itself. Again, excluding those two large customers. They happen to be very large and therefore it’s very difficult to predict exactly when they have against our brand. We’ll start growing without those two customers. The business that we were generating with all those customers, but we do measure without them and without them, we are growing.

And I think that’s what’s Scott was referring to was the data that is published by Nielsen. It’s showing some volume declines there but clearly, we are growing without those two customers in the rest of the business and one of the things we are doing obviously is to look for opportunities to offset those distribution losses in new customers, in new distribution points, and we’ve gained some of the business there but obviously until we’ve gained all of it or more, we won’t see and you won’t see the total volume to increase as a total brand

Heather Jones - BB&T Capital Markets

Okay. And then on to the EU banana market, did you say that July was up 10% in local currency?

Mike Sims

Yeah, Heather, that was our pricing level, our net pricing on Chiquita branded products. If you look at the bottom of the market, I think it would be a little bit softer than that but that was the run rate on our business.

Heather Jones - BB&T Capital Markets

Because we understand that in like the last couple of weeks, I mean volumes remained tight but the market's softened somewhat due to the extreme heat. And I was just wondering if you could first speak to that. And then I have a follow up question on the volume situation at market.

Mike Sims

I think that’s accurate, that’s what we will have seen. That’s not uncharacteristic of what you might expect in summer holiday season in Europe. There’s always the potential for a dip. But we haven’t seen anything approaching the very deep declines that we’d often see in July and my colleagues are coming back from holiday now and they say it’s cooling off over there.

Heather Jones - BB&T Capital Markets

Yes. So it's still at record highs -- so pricing is still at record highs in local currency?

Mike Sims

I haven’t gone back and checked the history lessons. I know that when we look at June, they certainly matched up to the levels that we saw in ’09 which were also record high levels for our business and July remained high so I would have to guess that they’re relatively high. We’ll have to see as we start to move through August and September but we do feel pretty confident that there should be a bit strong pricing on then and the industry supply are tending to be down overall and relatively or normal level in comparison to prior year.

Heather Jones - BB&T Capital Markets

Okay. And earlier this year, right around the time that the market was extraordinarily bad over there, a couple of your competitors had talked about pulling back on volumes into the EU market and subsequently we understand that they did. And there's some discussions about maybe doing structural reductions into that market on a more sustained basis. And I was wondering what you're seeing as far as that goes and then what Chiquita's strategy is regarding later this year, going into 2011. Because earlier in the call, you talked about increasing your distribution, but I thought your tone had been earlier in the year possibly reducing shipments into Europe. But I may have misunderstood. So if you could just speak to that

Mike Sims

Listen Heather, first of all, I don’t want to really get into commenting on details what our competitors are doing but our approach has been to continue to focus on the profitable customer base that we have in Europe and then we’ll fine tune and prune volumes periodically where we’re not finding ourselves making the right kinds of returns, and for example, as we moved through the second quarter, we intend to see the mango up, we’re able to serve our profitable customers but at some cases, we did pull back and some of the markets will pull back on non Chequita labeled fruit, which may have been profitable in the past is not right now for us. So I don’t think we’ve fundamentally changed our strategy.

When we talk about increasing distribution, we’re not out trying to compete on that business by offering cut rate prices or anything else. We’re trying to offer a value proposition to the customers and we were able to successfully gain a customer that we’ve been courting for probably a decade and that’s the kind of thing that we’re talking about; trying to bring the Chequita long term branded proposition and the overall service offering together to those folks and we’ll continue to pick those opportunities to get the door open with folks that we’ve been trying to do business with.

Heather Jones - BB&T Capital Markets

Okay. And finally, can you update us on your African sourcing strategy? You walked away from a contract in Latin America late last year. And you're now I believe the largest customer for Ecuadorian fruit. So I was just wondering if you could update us on the strategy in Africa.

Mike Sims

Like any other new entry in the sourcing, it’s always a long term proposition and in fact [indiscernible] big opportunities to service Europe with tariff-advantaged fruit that -- offer the benefits of being near market places and so on. And we’re continuing to explore these opportunities in the region although it is correct that we made a decision mutually with the partners that were examining entering lower West Africa that we decided not to move ahead on the project because the economics wasn’t attractive as we’ve had both originally thought it might be. So we remain committed to the strategy for the long term and we’re going to continue to evaluate the opportunities over there but --

Fernando Aguirre

On that Heather, just that we’re clear, the Angolan project is the one that we decided to cancel, but the Mozambique project is going very much as we had expected. We are shipping already some fruit and we are expecting to start shipping in 2011 for the marketplace. But we’re doing a number of tests because there’s a significant number of issues with infrastructure, shipping etcetera that are things that we must test before we get fruit that is of the right quality for our customers in Africa but our expectation is that during 2011 we’ll start seeing some of that fruit in the marketplace.

Heather Jones - BB&T Capital Markets

Okay. Thank you. Congratulations again on the quarter.

Fernando Aguirre

Thanks, Heather.

Operator

The next question will be from Vincent Andrews with Morgan Stanley; please go ahead

Vincent Andrews - Morgan Stanley

Thank you. Good afternoon, everyone

Fernando Aguirre

Hi

Vincent Andrews - Morgan Stanley

Could you just give us a sense with the -- in banana, the supply that's come out, some of it as other callers have referenced is structural and some of it is weather-related. And within the history of weather-related supply disruptions there have been some cases where the supply has come back fairly quickly and there have been some cases where it either hasn't come back at all or it's been slow to come back. So could you sort of just explore those issues relative to what's taken place sort of over the last quarter and give us a sense? It doesn't sound like your own supply is all that impacted, but it does sound like you had some incremental costs in the quarter. So just kind of flesh that out for us as well.

Mike Sims

We didn’t report any significant incremental cost as a result of the disruptions, assuming you may be referring to the damage and flooding in Guatemala, and that obviously is not at the stage, it doesn’t appear to be a structural type of an issue. We’ve seen all across Latin America in the quarter significant reductions and particularly in Ecuador with the Sigatoka problems that we experienced down there, which is part of the ongoing normal business cycle and is going to come and go. How soon that recovers and how soon, for example the volcanic ash that also contributes as a problem there, albeit itself remains to be seen. What we have seen is over the last several weeks in the protected sources which are very dramatic and significant contributor focused on Europe on the disruption of first quarter supply and demand. We’re talking about as much as 20% increases. Many of those sources have continued the trend first towards flattish as we got to the middle of the quarter and then actually have over the last several weeks -- the double digits down.

We’re not involved in the plantations and those sources but I can tell you that we have very strong diversification of our sourcing itself and so the impact of all these things on our business and our goal is to ship and prepare the product. We think it’s pretty balanced so that’s --

Vincent Andrews - Morgan Stanley

Okay. And just any update on -- obviously you have very active hedges on the Euro here. But as you look forward have you done anything new? Or are you saying anything about the recent volatility causing you to think about changing your behavior as it approaches -- as it comes to hedging either the Euro or to lesser extent bunker fuel?

Mike Sims

I’ll take them in reverse. In the bunker fuel program, we’ve got a rolling program and we’ve had pretty significant -- I think we’re 75% out into 2011, we’ve got 2012 decisions and in the 2013 [inaudible]. With respect to the currency, you’re actually right that the -- and those are no cost slow type programs.

Vincent Andrews - Morgan Stanley

Yep

Mike Sims

The currency is also a rolling program. In fact, the volatility of that type of instrument that we used the put option program is a real factor in the cost of the program. We right now are still maintaining roughly half of our second half position or exposure in Europe is covered with those kinds of purchased goods that will have a downside strike price of $1.32. So those positions would be, at today’s prices, half the money and would help mitigate any downside effect.

We’ll continue to look at the options to head into 2011. We’ll continue to look at the options to lock in it, but first of all, good strike prices at option places and premiums that are affordable, and that’s a rolling program and so we’ll put those on in the execution of existing program and I want to make sense for the payback on the --

Vincent Andrews - Morgan Stanley

Okay. Thank you very much. I'll pass it along.

Operator

Moving along, we’ll hear from Reza Vahabzadeh with Barclays Capital; please go ahead

Reza Vahabzadeh - Barclays Capital

Good afternoon.

Mike Sims

Hi Reza

Reza Vahabzadeh - Barclays Capital

On the salad business, volumes have obviously been soft but you've had enough cost efficiencies to offset that. Is that -- do you have enough cost savings through other levers to be able to offset potential volume decline in the second half? I'm just asking that directionally. I'm not looking for exact guidance

Mike Sims

Yes sure, Reza. We have a number of levers that we can always pull in the business. We have the ability within our network to utilize the plants in different ways or just shifts and so on. And we’ve proven in the past where we’ve had volume shifts in the business. We’ve got the ability to generate more profits on the lower volume by resizing the shape, making cost out of the distribution network and we still, today, have the ability to put more through put into the plants with lesser numbers of plants with lesser amount capacity.

Fernando Aguirre

Reza, if you look in general terms, if you look at our salads business today versus the time when we bought it, we are now generating better margins than we were when we first bought it, which had been the best time for that business, and a lot of what Mike just described was done in a very process oriented way, the plant work was done for efficiency, was very, very deep and very detailed and so yes, we do believe we have the capacity to continue delivering very healthy margins and despite the fact that we are now shipping lower volumes and at the same time, we are looking -- continue to look for a lot of very good opportunities to gain distribution points in both new customers as well as customers that buy today that will start enjoying the benefits of higher consumption from consumers that again we’re trying to do that who are our marketing program, and so there’s opportunities to also grow our volume, and we’re looking for those

Reza Vahabzadeh - Barclays Capital

Fair enough. And a couple of housekeeping items for you, Mike. Did you say that fuel X surcharges was about $9.5 million negative for you?

Mike Sims

You mean after net of the fuel surcharges?

Reza Vahabzadeh - Barclays Capital

Yeah.

Mike Sims

That was roughly about the second quarter

Reza Vahabzadeh - Barclays Capital

And in marketing, spending increase, was that -- did you say $10 million?

Mike Sims

Incrementally in the quarter, a little bit more than that

Reza Vahabzadeh - Barclays Capital

And you have $2 million or $3 million more to go.

Mike Sims

Depending on what we decide to do, that’s right -- out of the 20

Reza Vahabzadeh - Barclays Capital

Okay. And then cash on balance sheet at quarter end and then total debt on balance sheet including the converts?

Mike Sims

The cash and the balance sheet is 139 million, the debt worn balance sheet was 639 with 10 million for the balance of Euro of mandatory maturities on the term

Reza Vahabzadeh - Barclays Capital

Got it. Thank you much.

Mike Sims

Welcome

Operator

And that does conclude the question-and-answer session. At this time, I’ll turn the call back over to Fernando Aguirre.

Fernando Aguirre

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

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