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Chiquita Brands International, Inc. (NYSE:CQB)

Q3 2010 Earnings Conference Call

November 2, 2010 4:30 PM ET

Executives

Ed Loyd – Director of Corporate Communications and Investor Relations

Fernando Aguirre – Chairman and CEO

Mike Sims – CFO

Analysts

Heather Jones – BB&T Capital Markets

Reza Vahabzadeh – Barclays Capital

Vincent Andrews – Morgan Stanley

Jonathan Feeney – Janney Montgomery Scott

Scott Mushkin – Jeffries & Co

Bryan Hunt – Wells Fargo

Operator

Good day and welcome to Chiquita Brands International Third Quarter 2010 Financial Results Conference Call. Today’s conference is being recorded. You’ll have the opportunity to ask questions following the presentation. (Operator Instructions).

At this time for opening remarks and introductions, I would like to turn the conference over to Ed Loyd, Director of Corporate Communications and Investor Relations. Please go ahead.

Ed Loyd

Welcome to Chiquita Brands International’s third 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’s Investor Relations Department at 513-784-6366.

Please note, our press release includes; reconciliation to US GAAP of any non-GAAP financial measures that we mention today.

Before we begin, let me remind you that this call may contain forward-looking statements concerning operating performance or industry development and any such statements are intended to 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 Reports on Form 10-Q.

Now, I’d 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 insight on our third quarter results, discuss our expectations for the full year and highlight the progress we’re making to strengthen our business for the long term.

Let me start with our results for the third quarter, which has historically been the weakest performing quarter for the banana business. Overall, we reported a comparable loss of $7 million. Underlying business trends in the quarter were generally consistent with our expectations. However, the market headwinds were greater than we anticipated in areas beyond our control.

During the quarter, our North American business continued to be profitable. Steady pricing in the third quarter led to strong salad profit margins of a percentage of sales, although we were disappointed by lower than expected volumes, which continued to reflect retailer conversion to private label late last year and the beginning of this year. These results also included the completion of our planned incremental consumer marketing activities for the year.

In Europe, pricing in local currency averaged 6% higher for the quarter versus last year. However, this positive momentum slowed late in the quarter due to increased supplies from subsidized European and ACB sources that negatively affected pricing in the market. Combined with a lower average Euro exchange rate and higher sourcing and logistics costs, these factors led to a third quarter loss in Europe compared to the very strong results we saw in 2009.

Despite these conditions, we continue to be optimistic about the prospects of our business going forward. Looking ahead, we continue to expect 2010 to be the third profitable year in a row for Chiquita, despite one of the most challenging operating environments in Europe, and an increase in private label salad volume in North America.

We have executed a number of strategies that have helped us to continue to make progress in building Chiquita’s earnings power, even in a weak economic environment. We continue to diversify our business, reduce overheads, drive down borrowing costs, and expand our brands beyond our basic commodity business. Our ability to generate companywide profits when one of our segment is underperforming, in this case Europe, is in large part due to this strategy.

Let me share a few more insights about Europe and its impact on our full-year expectations. Recently we have seen banana supplies from Latin America tighten, while volumes exported from the subsidized European Union and ACB sources increased, which has the best pricing in Europe. European pricing is a key component in our outlook for the year, and the current pricing environment in Europe is well below our previous expectations. While we still expect to realize a significant improvement in our fourth quarter results compared to 2009, we have adjusted our full-year comparable income expectations through a range of $50 million to $60 million.

Despite our reduced expectations versus our original plans, we continue to manage the business with a focus on the long term, but we are very mindful of the need to also manage the short-term challenges. Let me explain.

First, we recently announced a leadership change to support the successful execution of our plants to revitalize our European business. Effective January 1st, Brian Kocher, will lead our European business. He brings a great track record from North America where he led the successful transformation of both, our banana and salad businesses, that have enabled us to significantly improve our profitability.

Brian helped to improve the fundamentals of our pricing model and the way we deliver exceptional quality service to our customers. We expect that under Brian’s leadership, we can regain our prior levels of profitability and maximize our premium brand position in Europe.

Second, we continued to maintain a tight focus on cost improvements in our business. We have delivered net cost improvements of $20 million through network and cost efficiencies in salads, including $5 million during the third quarter. In our banana operations, although we have seen industry inflation, we have also altered our contracting structure to carry less surplus seasonal fruit this year, which was a $20 million cost in last year’s fourth quarter, which we do not expect to incur this year.

Third, we formed a joint venture with Danone earlier this year and are excited about the long-term potential to grow in healthy beverages in Europe, much faster and more efficiently and expect to improve long-term profitability in a meaningful way. During the past month, the joint venture began and we launched the Just Fruit in a Bottle product under a new consumer tested name Chiquita C-Optima.

While revitalizing Europe remains our top priority, we must also grow volume in our North American salad business to achieve its full earning’s potential. As our current results illustrate, we have created an operating structure for our salads business that will consistently deliver solid results whether or not the broader category remains sluggish and despite lower volume.

Importantly, we know the formula for winning with our national brands in the long term, supported by the best quality, service, and consumer marketing in the category, Fresh Express salads are a proven profit center for retail customers. Fresh Express can generate stronger profitability for our customers versus private label propositions with higher velocity, lower weight and better net margins. And Fresh Express has always led the category in new products.

We recently announced an exciting development in the fresh produce industry which perhaps is the biggest innovation in the category since the declaration of prepackaged salads. As part of our continuous advancements in prevention based foods safety and after years of intensive research, we introduced Fresh Rinse, a revolutionary fresh produce wash technology that dramatically improves food safety and quality. This is a quantum leap forward in reducing microorganisms on leafy greens by more than nine times versus the traditional chlorine-based washes.

We believe Fresh Rinse sets a new standard in food safety for the industry. As part of our ongoing commitment to public health, we plan to make the technology available for license to the industry to help make the whole category better for consumers. However, once, we fully convert our system by the first quarter of next year, there will be two kinds of salads, Fresh Rinse salads and everybody else. This is where we can drive a sustainable advantage particularly against private label offerings that are unable to match the technological and velocity advantages of Fresh Express.

While there is much to do to realize the full earnings potential of each of our segments and the road ahead will include challenges that we cannot predict today, we are committed to executing our strategies with discipline.

In summary, we are in a strong financial position. We diversify profits and a healthy balance and expect to deliver another year of profitability in 2010. We believe that our business has more key fundamentals in place that will provide more opportunities for profitable growth than at any time in recent history and allows to thrive and win in both the short and long term.

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

Mike Sims

Thank you, Fernando. As Fernando noted today, we reported a third quarter loss on a comparable basis of $7 million or $0.14 per share and a US GAAP net loss of $8 million or $0.19 per share. This reflected net sales for the quarter of $730 million, gross profit of $100 million or 13.6% in sales, and operating income of $6 million.

All of our operating segments, bananas, salads and healthy snacks, and other produce were profitable even on lower volumes and top line revenue, while at the same time we continued to invest in strengthening our brand.

During the quarter, we completing our planned incremental consumer marketing investments, which increased quarterly spending by $6 million versus 2009. While our results are lower than last year’s historically strong third quarter performance, they are generally reflective of the trends we discussed on our last conference call with three notable exceptions.

First, from an operating perspective, banana pricing softened late in the quarter. Second, retail sales volume was slightly lower than we had expected due to further erosion to private label distribution and promotion support. And, third, we took a $3 million non-operating charge related to the certain contingencies in Europe.

Let me provide some additional color on our results. In bananas, third quarter sales decreased 9% to $431 million on lower volume and dollar equivalent pricing. Comparable operating income declined to $3 million as the effects of higher industry costs and the comparatively weaker Euro exchange rate, more than offset the benefits of stronger, average local currency pricing and lower duty costs.

The main drivers of banana costs were higher bunker field and purchase fruit prices, as well as currency evaluation in Costa Rica. Bunker field costs were approximately $10 million higher during the quarter. Cost to procure fruit from independent growers increased approximately 5% year-on-year, resulting in roughly $6 million impact of margins.

Taken together with the impact of increases into own production, driven by less favorable exchange rates in Costa Rica and other inflationary factors, our total cost to source bananas were around $8 million higher than the third quarter of last year. Partly offsetting these increases was a $6 million benefit from the EUR28 per ton reduction in the EU tariff.

North America banana volumes fell 4% versus 2009, mainly due to the loss of distribution served in regional accounts. Banana pricing though increased 4%, mainly as a result of the contractual fuel surge charges. Base pricing on the annual fixed price contract was relatively unchanged versus last year.

In Europe, demand in core European markets followed a normal pattern of summer season weakness, at the same time we curtailed our import activities by roughly 800,000 boxes and also traded less fruit in noncore markets as a result of the structural reduction in supply that we executed late in 2009.

As we had previously projected, core European local currency pricing did improve somewhat in comparison to prior year levels, averaging almost 6% better than in the third quarter of 2009.

However, we were disappointed to see a recent resurgence of export growth from the subsidized EU-ACP growing regions at levels exceeding typical demands observed in their traditional import market. These excessive imports flowed into the broader European markets, dampening general market pricing momentum in late September, and through much of October.

With the Euro continuing to trade at significantly lower levels than in the 2009 quarter, averaging $1.28 compared to $1.42 in 2009, net pricing on a US dollar basis was 5.4% lower than last year’s levels. Pricing in the Mediterranean and Middle East was also lower by nearly 4%.

In our salads and healthy snacks division, third quarter net sales decreased by 13% to $251 million from the year-ago quarter, and operating income was lower by $16 million at $18 million. During the quarter, we realized 2% higher pricing on a retail volume decline of roughly 2.8 million cases or approximately 18%.

Most of the volume change was driven by the knock-on effect of key account conversions to private label earlier this year. While Fresh Express’s velocity advantage continues to widen versus other competitors, retail salad volume on maintained accounts was roughly flat in contrast to the low single digit unit volume growth we had expected and have been achieving for most of the year.

Even so, this performance led the overall category in which unit sales volume declined versus year-ago levels by roughly 1% during the past 13 weeks. Despite lower quarterly sales, we were able to sustain solid margins for salads and healthy snacks. Excluding the Just Fruit in a Bottle business, operating margins were approximately 8% for the third quarter compared to 10% during the 2009 period.

During the quarter, we delivered $7 million of additional cost improvements and our distribution network, manufacturing processes and overhead more than compensating for $4 million of higher industry input cost and bringing year-to-date net cost reductions to $20 million.

Now let’s talk about what these developments are likely to mean for the remainder of the year. We continue to expect our fourth quarter results will be better than last year’s, but not as much as we had earlier estimated.

As Fernando mentioned, while we were in focused on improving results for the remainder of this year and beyond, we are adjusting our expectations for full-year comparable income to between $50 million and $60 million, assuming that the Euro exchange rate averages around $1.37 for the balance of the year.

Let me provide a little more detail.

First, in the European banana business, market conditions continued to be sluggish during most of October with local market pricing declining sequentially to the levels below last year’s. Our Chiquita pricing was more stable, but did not achieve the levels of improvement we had previously anticipated. Although market conditions and the currency exchange have recently begun to modestly improve, absent a major industry supply disruption, it is difficult to proceed enough pricing improvements during the rest of this year to achieve our earlier revenue targets.

Second, North American banana contract pricing remains stable, and volume from new accounts we recently signed will generate profitable top line growth.

Third, we should start to see a lessening in the affect of private label conversions in salads that started late in 2009, meaning that year-on-year volume comparisons should be less negative than we have seen so far this year. Taken together with the ongoing effect of previously executed network manufacturing and overhead improvements, we believe the salads and healthy snacks business is still too likely to achieve full-year margins of approximately 8%.

Fourth, we’ve locked in a significant amount of other cost savings that will defray some of the increases in fuel and fruit costs, we’ve been experiencing versus 2009. Among these, we will realize a $7 million cost saving from the reduction in EU tariff. We will have significantly less surplus fruit as a result of the restructuring of a banana purchase contract portfolio at the beginning of the year, which will save $20 million of costs versus the fourth quarter of 2009. And as previously mentioned, our 2010 incremental marketing investment program is complete and overall fourth quarter spending will be less than in 2009.

Finally, we will continue to realize profit improvements from the joint venture with Danone. As you may recall, operating losses were $9 million during the fourth quarter of 2009 in Just Fruit in a Bottle business.

In summary, we remain focused on revitalizing profitability in Europe, and in the meantime, expect to deliver better fourth quarter results than last year by sustaining the strength and performance in our North American bananas and salads businesses, executing cost savings, and reducing losses from Just Fruit in a Bottle. Additionally, our cash flow and liquidity are strong, and we will continue to manage our balance sheet conservatively to maximize the options we have to create futures growth in sales and earnings, including further debt reduction.

Overall, we believe 2010 will be another year in which we continue to deliver profitability and strengthen the foundations of our business.

At this time, Fernando and I would like to open the call for questions. We’ll take as many questions as time allows. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from the Heather Jones with BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

Good evening.

Fernando Aguirre

Hi Heather.

Mike Sims

Hi Heather.

Heather Jones – BB&T Capital Markets

Hi. First on the Fresh Express business, that was more profitable than we had expected for the quarter and would imply if Q4 is roughly flat year-on-year that you would be low – I mean we’re arriving at a low – but north of 8% EBIT margin for the year. I mean, do you expect Q4 results from your salad business to be lower than Q4 of ‘09?

Mike Sims

No Heather, we expect the results should improve. But we are anticipating again the average – approximate margins for the year of around 8%.

Heather Jones – BB&T Capital Markets

Okay. And looking at your guidance, when you say that the quarter basically came in line with where you were expecting. But if you take your prior guidance, it would have assumed a very large Q4. And so I guess I am just wanting to know did I understand that correctly or if you could just provide more color on that?

Mike Sims

Sure Heather. The adjustments we’ve made in our estimates for the year are predominantly in the fourth quarter as a result of recent developments that we started seeing late at the end of September, and then really frankly – and European market pricing in the month of October.

As you may be aware, if you look at the some of the market indicators that are available, pricing had been on an inclined year-on-year and seasonally improving through September and took a reversal basically what we assess on the basis of some excessive imports coming from some of the non-Latin sources.

We’ve seen a recent uptick in that and we’re encouraged by the direction of that change. But at this stage, we’ll be moving pricing up from a lower base than we had originally anticipated.

Heather Jones – BB&T Capital Markets

Okay. Real quick on this storm that just hit the Caribbean; from what we – it’s rumored that there could be pretty substantial damage in Martinique, and we understand that they were one of the producing countries that has been disrupting the “non-traditional” markets. If the rumored damage of 40% to 50% are ultimately true, would you expect some significant improvement in your EU Markets?

Mike Sims

Look, we never cheer for people to have weather damage in their facilities, and yet I think if you look at the exports that have been coming out of the collective EU and ACP sources, we probably were seeing as many as 50,000 cartons a week in excess of what normal traditional demands in their home countries for those imports would be.

The kind of numbers you are talking about for Martinique alone could be up to a 100,000 cartons a week, and then of course, St. Vincent is also unfortunately damaged and probably lost as many as 25,000 cartons, and these are all rough estimates and unconfirmed.

Fernando Aguirre

Anything that – as you know Heather anything that happens through sourcing that will create some tightness in the market will definitely be helpful in Europe.

Heather Jones – BB&T Capital Markets

Right.

Fernando Aguirre

That is typically the first region that gets impacted positively, but we won’t know for another few weeks as to what was the real impact there.

Heather Jones – BB&T Capital Markets

Okay. As far as earlier today one of your competitors reported a numbers and they came out and definitively said that their volumes would be – their banana volumes will be down in 2011. Dole has been pretty vocal about its intentions to cut volumes next year. And so I was just wondering if you could give us some insight with the changes you made in EU management, and just if you could give us an early sense of what your tact maybe going into 2011 as far as total volume?

Fernando Aguirre

Yes, we did make the change in European management effective January 1. And although Brian has been there already to meet with people and start talking with Michel Lobe our current President there. We are not going to share right now any of our plans for 2011.

On the question of banana volumes we always look for opportunities to improve our efficiencies and we obviously are putting together a lot of plans and have been executing a lot of plans to reduce our costs and to remain very competitive. So I think you can expect us to be as aggressive as we’ve ever been to make sure that our operations are as efficient as anybody else’s or even more.

Heather Jones – BB&T Capital Markets

And then my final question is just again, Fresh Del Monte on this call today had talked about their being – I think the term they used was pressure in the US market for contracts here. And they say, they do not expect a dramatic price decline, but they did expect lower year-on-year contract pricing. I’m just wondering if you could speak to what you are seeing in those markets for the US in 2011.

Fernando Aguirre

Well, we won’t comment broadly on pricing. Obviously pricing for other competitive products, they make their own pricing positions and we make our own pricing positions, right?

Our mandate for our sales force both here as well as in Europe is to make sure that we are generating the types of profit margin targets that we want. And I can assure you that as far as we’re concerned, we haven’t reached the targets that we want, and we will continue executing plans to help us improve our margin.

Heather Jones – BB&T Capital Markets

Okay. All right, thank you. And I watched Undercover Boss and it was very good. It was a heartwarming ending. So anyway, thank you.

Operator

And from Barclays Capital, we’ll take a question from Reza Vahabzadeh.

Reza Vahabzadeh – Barclays Capital

Good afternoon.

Mike Sims

Hi Reza.

Reza Vahabzadeh – Barclays Capital

Just on the private label trends in packet salad, do you have any visibility as to when that trend is going to peak and branded products or maybe your products can store to growth and maybe regain some distribution.

Fernando Aguirre

Well, rather than predicting when that peak will happen frankly, what I’ll tell you Reza is that, what we’re very focused on is on the introduction of Fresh Rinse, our new technology that we introduced on the PMA a couple of weeks ago. And our expectation and our plan is to have the majority of our volume converted to Fresh Rinse by the end of this calendar year and we’ll have all of our volume done by the first quarter.

And as we have said, we do believe this is a significant improvement from the current wash rinse essentially the entire industry uses, and we expect to take some advantages out of that from a consumer standpoint, from a food safety standpoint and also from a customer standpoint. I do believe that will be and is a critical piece of our plan to start regaining some of our volume and some of the shares that we’ve lost to private label.

I think that by definition and by design, private label products simply cannot make the same type of profitability for the customers and certainly not even for the manufacturers that make them. And the fact that this is a technologically advanced product and one that will deliver very significant, very specific improvements over others, unless private labels starts licensing our product and buying it from us, there is going to be a significantly higher advantage for us in the future than exist today.

So I expect that to be a very, very important reason why people will start guessing and second guessing themselves from converting to private label and asking for opportunities to test and to confirm whether the Fresh Rinse product is better than anything that’s available out there.

Reza Vahabzadeh – Barclays Capital

Right.

Fernando Aguirre

As I said in my script, we do believe that there will be Fresh Rinse salads and everybody else, and everybody else will be at a disadvantage.

Reza Vahabzadeh – Barclays Capital

Right. And then as far as gross margins that [inaudible] salad offers versus private label for your typical retailer, I mean what’s the difference in growth margin enjoyed by the retailer?

Fernando Aguirre

We won’t quote very specific differences in gross margins, particularly when it comes to retailer. They are the ones who know their gross margins and if they care to comment about what they make, that’s a big –

Reza Vahabzadeh – Barclays Capital

But there’s still a significant gap.

Fernando Aguirre

Well, there is a significant difference in, for example, velocity as well as shrink. The fact of the matter is that it’s been proven, we have data and we share that data with our customers that, our Fresh Express salad typically has less shrink than everybody else and particularly private label and our Fresh Express salad has higher velocity, and we constantly share that data with them.

And the good thing about all of this frankly is that typically particularly the large customers, those that do enjoy the benefits of looking at data, typically use the data to make the decision. So I have confidence that as they continue to see what happens particularly with a Fresh Rinse product, I believe that customers will again start looking at the private label data points and decide that they’re making now less money than they were making a year ago when they were selling more Fresh Express.

Reza Vahabzadeh – Barclays Capital

Got it. And then couple of financial housekeeping items, Mike. The use of cash and cash flow going forward given your cash position as of at the end of third quarter, any fresh end of thoughts in that?

Mike Sims

No, I think our priorities remain the same Reza, we still are working towards some deleveraging. We’d like to get a little bit closer to the coverage ratio, clearly we were about talking about $40 million to $50 million of extra payments to get there. So the three to one we’ve talking about before probably with current earnings be a further away from that number but that’s our primary focus right now in use of cash.

Reza Vahabzadeh – Barclays Capital

Right and how much more do you have to go in that $40 million to $50 million?

Mike Sims

That would be incremental to the mandatory maturities that we’ve already have. So that’s on top of we pay out in regular maturities.

Reza Vahabzadeh – Barclays Capital

And then total debt as of the end of third quarter, if you mark the convert it to face value would be how much?

Mike Sims

A little over $700 million.

Reza Vahabzadeh – Barclays Capital

Little over $700 million. Got it, thank you much.

Mike Sims

You’re welcome.

Operator

Next we’ll hear from Vincent Andrews with Morgan Stanley.

Vincent Andrews – Morgan Stanley

Hi thanks and good afternoon everyone. Couple of questions first, I know you sort of addressed this earlier but when you said your US volume you expect it to be up. I’m just curious in terms of where that’s coming from, is that coming from new points of distribution is that coming from greater share at existing points of distribution.

Fernando Aguirre

You’re talking about bananas?

Vincent Andrews – Morgan Stanley

Yes.

Fernando Aguirre

Yes, we’ve got a particular specific account volume that will be coming into the system that we added during the third quarter.

Vincent Andrews – Morgan Stanley

And what drove that just was service level and so forth or?

Fernando Aguirre

Quality of service and brand support.

Vincent Andrews – Morgan Stanley

Okay, and then just sort of a question I guess just could go to bananas and salad. And I just want to make sure I understand what you were laying out in terms of the value proposition of private label in salad and then ultimately we are hearing that some retailers are looking to do more direct importation of bananas, as well and I just – I understand you’re saying that your data shows that that is not the right thing for them to be doing from a profit dollar perspective. But what is and maybe this is – it’s really just a better question for them, but when they push back against you what is the argument that they are making to lessen that they have – that they sort of are going to have to learn?

Fernando Aguirre

The main argument that usually need is in investment, they needed (inaudible) and see what would happen and now there are several of them are asking questions around their higher strengths. They are asking questions around the fact that the quality may not be as good and so they’re trying to figure that out. What I think as we said I think that’s a good question to ask them.

Vincent Andrews – Morgan Stanley

Okay, so it’s not anything that’s predicated in prior experience, it’s a trial to see what happens and deal with it from there?

Fernando Aguirre

Yes.

Vincent Andrews – Morgan Stanley

Okay, thanks very much.

Fernando Aguirre

Yes.

Operator

Next we’ll go to Jonathan Feeney with Janney.

Jonathan Feeney – Janney Montgomery Scott

Good evening, thanks very much. Just one question, can we – for Mike especially clearly the stock is going to be under some pressure here, clearly some folks are disappointed around some of the cyclical trends in the banana business. Can you talk a little bit about your capital allocation plans, now that you’ve steadily paid down debt and appear to have some – is the share repurchases, is there a level where share repurchase becomes more attractive versus incremental acquisitions?

Mike Sims

John, we talk about that with our Board regularly about the choices that we have available to us in allocating the capital. We have managed the balance sheet conservatively given the variability in business and priorities to get the debt down and reduce some of the variability in the earnings. And again that remains the same priority. But we don’t have a specific target on the share price, that’s something that we’d really need to know have that discussion with the Board and don’t have a plan for repurchase right now.

Jonathan Feeney – Janney Montgomery Scott

Okay, thanks very much.

Operator

Next we’ll go to Scott Mushkin with Jeffries & Company.

Scott Mushkin – Jeffries & Co

Hey guys thanks for taking my question. I want to get back to the salad that we’re talking about before and little bit trying to understand, it seems like adore in conjunction with some big city markets has really programs to use their branded items at the top, more special bag salad and then with the maybe more common items used to private label, I’m talking to some of these retailers, they seemed pretty happy with that. So what’s just playing double that, what if more people decide, hey this is for me. What’s your guys response to that, I mean will you just let volumes continue to slip away or do you have a contingency plan if we see more of these program rolled out with other retailers so we don’t see volumes just continue to slip away because eventually volumes will matter and profitability will become problematic.

Fernando Aguirre

Yes, well Scott as I said before our primary plan is the Fresh Rinse technology that we’ve introduced and we have been working on that for several year and it is, we’ve decided to introduce it even before we were ready to convert all of our volume because we wanted to make sure customers started being familiar with it and it would give us an opportunity to start testing it with some of them. That’s our primary plan. What I can tell you is based on everything we have seen since that private label offensive started if you will, Fresh Express whatever the plan, whatever the opportunities that have been presented in the different stores, we continue to show data to them that shows that we have faster turnover, we have less shrinkage and we can generate and do generate more gross margins for the retailer.

And the fact of the matter is that so far even without this data by the way is without having use Fresh Rinse. And so for P&L purposes as far as we’re concerned and as far as the customer is concerned, there will be opportunities for them to generated either more profit dollars. Now and we’ve also talked about this before and I’ve said it time and again for those manufacturers who have decided to start producing private label, they’re now in a very, very tough situation because what prevents the people who are now doing private label to ask for the manufacturers to make even more private label for them and to exchange the branded business for the private label business. It’s a very difficult argument to have once you as a manufacturer agreed to make private label, because everyone of your customers will ask you to make private label.

You have essentially no argument to held the many different customers that will come – retail customers that will come to you following the Wal-Mart decision to make private labels for them. It’s very, very tough to say no to the next person that comes and asks for you to make private label and its very well known that private label manufacturers have lower margins and to be a private label manufacturer you have to essentially go down to no support – no branding support, no marketing support, you got to take down significant cost from the cost structure to make any money. And so that’s obviously what some of our competitors have decided to do and that’s find by us. We are a branded company. We are a company that believes in creating brands and creating innovation and creating technology and creating advantages for consumers and customers. And we will continue to be that. And we’re just not going to get into private label manufacturing business.

Scott Mushkin – Jeffries & Co

That was a great explanation. And then just getting back to Fresh Rinse, so I understand that maybe I should already but I just want to make sure I’m clear, it’s a technology that’s going to for pathogens or sorry work and if you can extend shelf line, is there a case, I mean can you just run us down maybe in like 30 seconds like the, how about retailer, what’s this doing for him?

Mike Sims

Well that’s doing for you is providing a safer, fresher, better tasting product because that’s what that technology does for your product essentially. And it is proven. We have significant data to show. A wide variety of tests that have been conducted that proves those very three points. And we’re literally now in the process of presenting a meeting with our customers who show them that data.

We started at the PMA, we had a number of meetings there and we continue to have meetings to show them and we are – as we’re converting our lines and we are – and we will be at the end of the year with a great majority of our lines converted and by the first quarter, all of our volume will be done with Fresh Rinse. And Fresh Rinse is essentially the wash technology that we now will start using in our washing process in our facility.

Scott Mushkin – Jeffries & Co

So it’s better tasting and it’s safer, has it got a longer shelf life or no?

Mike Sims

There may be some benefits in shelf life. But right now we’re really focusing on fresher, taste, and safety.

Scott Mushkin – Jeffries & Co

Okay. I want to go to banana, as I’ve tracked your banana for a while now, but I do want to talk about bananas for one second in Europe. It seems like those issues are structural. You’re putting a lot of management changes in. And I’m just trying to understand and maybe you can give us an example what a management shift is going to do? Again, it seems Europe is structural rather than managerial and I was just trying to understand what we’ll get if shareholders from a management change if it is a structural problem?

Mike Sims

The – I don’t remember Scott if you were following us at that time, but we made a very similar leadership change three years ago in North America. And people would argue that change at that time needed to be more structural. Any time you need to have a significant change in your business, I’m a believer that you got to have a leadership change. And we did it three years ago in North America and it worked very well. And that change created a significant number of other shifts and strategy and execution of our strategy that allowed us to change the structural aspects of the business.

My expectation and my reason for making the change is because I do believe that we have a leader who have gone through the experience already North America and Bryan Cooker (ph).

And I do believe that he will allow us to make the types of changes in Europe that will result in both structural as well as organizational changes that will then help us revitalize our business. He was, again, if you may or may not recall this but at the time, the North American business was very, very in deep trouble and particularly the banana business.

And we are now much more diversified than we’ve ever been. There’s no way that we could have weathered the European storm had it not been for the diversification of our business and the fact that we have a couple of other units, the banana units of North America and technologies in North America that are profitable and are helping us weather the storm here.

Well, that’s my clear expectation and on the other hand, of course, we have a well-prepared leader that we can put in place in North America, and Joe Houston, a leader who’s been trained in bananas already in North America, who will spend time in Europe, training in Europe and getting more exposure to global management then now back in Dallas for almost two years.

And so he is one of our most rounded executives in our own business of bananas and salads. But we – this is all about succession and a significant part of my job is to do some casual planning for the company particularly at the higher levels. And this is very much what I have been planning on and talking with my Board for some time.

And we’ve decided this is the right time to make that change.

Scott Mushkin – Jeffries & Co

Okay, thanks, thanks for taking my question.

Fernando Aguirre

Sure, thank you.

Operator

And your final question will come from Bryan Hunt at Wells Fargo Securities.

Bryan Hunt – Wells Fargo

Thank you. I was wondering if you could, you know, talk about risk management in the 2011 and where you stand on your hedges for bunker fuel and the euro and the world of amount of euro exposure and bunker field you do have hedged?

Fernando Aguirre

Sure, I’ll start with fuel, Bryan. We are hedged in 2011 and about 75% of our exposure. That’s our typical targets for our growing hedge programs. And the hedge has been in place probably at about 10% below market prices today for 2011 fuel.

But we’re pretty solidly covered on that. We have not extensively hedged our position on currency at this stage. We have about 50% of the first quarter covered. But we have this program that we managed and managed to try to put the hedge in them with their optimal and price right. And while currency was at a low, this past summer, it didn’t make a lot of sense to locking brakes.

So we’re not locking yet. As the currency strengthens right now, we’ll continue to evaluate that better program, the one that we’ve striked additional hedge fund.

Bryan Hunt – Wells Fargo

Okay. And then one question on bananas and one on salads. First on bananas. I mean, you know, and it was mentioned that a retailer or a couple of retailers have begun bring fruit in themselves. One, how would you gauge their success at this point?

It sounds like you mentioned they’re evaluating shrink and other – it sounds like less than favorable factors of the program that they’ve adopted. Again, how would you evaluate their success at this time? And do you think they’re trying to expand it?

Fernando Aguirre

Yes, I think you’re mixing both things, Bryan. The shrink we’re talking about is typically in salads. That’s typically where we measure the shrink we boast.

Bryan Hunt – Wells Fargo

Okay.

Fernando Aguirre

And you were asking the question of bananas. And let me tell you, although frankly, that’s a great question for you to ask them.

Bryan Hunt – Wells Fargo

Okay.

Fernando Aguirre

They’re the ones that are going to measure their own success and make them efficient. But Mike will tell you is that there are a lot of complexities in our banana business. And there’s service. There’s the logistics.

There’s the quality of the fruits. There’s the dealing with storms, weather-related issues. I mean, this is one of the most complex businesses. And but we have seen in the past and this is from the last five or six years of experience is that sometimes when the retailers go direct or when the growers go direct, they learn very quickly that there are so many complexities in this business that takes time, attention and expertise and a heck of a lot of money.

We do it – tend to do it well. So I personally, if I were in their shoes, I certainly would be putting a lot of measures to find out the cost of logistics, find out the quality of the fruit, find out the type of service that they’re getting from the growers directly. They’re going directly, et cetera, as part of the measures.

But again, it’s a kind of thing that it’s a great question to ask them that they typically make a position because they believe they’re removing our cost from the middle. And if you will but they don’t realize that the middleman really does as many things as frankly, we do.

Bryan Hunt – Wells Fargo

And then switching and looking at Fresh Express and the release shift about it and your conversations about it today. Can you say one, emphatically, that there’s a freshest benefit you could taste the difference or it could be measured either in terms of eyesight.

And then second, you know, have any of your competitors actually investigated the adoption of Fresh Express at this point in time?

Fernando Aguirre

We did a lot of consumer testing. Yes, we can say empathically that we will, excuse me, and that we will…

Bryan Hunt – Wells Fargo

A lot of it is hooked up about it. I mean…

Fernando Aguirre

Yes, I was hitting up – these are fruits, sorry. We can say emphatically, based on consumer data and customer research that we’ve conducted now for many months with many customer, that these benefits extend. There, we’re showing that our customer have absolutely no questions about that.

Well, any competitors find out and ask about it, several people have asked. But we have told them that we need to make sure we finish getting our volume and our lines done which will take us another three or four months or so. And then once that happens and we will be able to provide to them all the data they would need to know what is the type of change they need to go to the lines, this is, by the way, not something that you just pour into the current wines and replace the current wines.

This takes investment. This takes capital. This takes technology. And so it is not an easy conversion overnight. This is something that will take time for anybody who wants it license it from.

Bryan Hunt – Wells Fargo

What type of CapEx are you talking about, you know, in each of your facilities?

Fernando Aguirre

It depends by how many lines you have. But and we wouldn’t disclose exactly what is the kind of CapEx what this one measure, interested us in customer, not all fresh drinks to get into it.

Bryan Hunt – Wells Fargo

Okay, well, I appreciate your time, Fernando. Thank you.

Fernando Aguirre

Okay, thank you very much. And that concludes the call and the time for questions. So thanks again for joining us. And we look forward to updating you on the progress of the quarters ahead. Thank you, operator.

Operator

Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.

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