Chiquita Brands International, Inc. Q1 2008 Earnings Call Transcript

May.19.08 | About: Chiquita Brands (CQB)

Chiquita Brands International, Inc. (NYSE:CQB)

Q1 2008 Earnings Call Transcript

May 1, 2008 4:30 am ET

Executives

Ed Loyd – Manager of IR

Fernando Aguirre – Chairman and CEO

Jeffrey Zalla – SVP and CFO

Analysts

John San Marco [ph] – Wachovia Securities

Reza Vahabzadeh – Lehman Brothers

Dean Haskell – Haskell Consulting

Heather Jones – BB&T Capital Markets

Meredith Fowler – Wachovia Securities

Rahul Shah [ph] – KBC Investment Management [ph]

Don Espey – Shah Capital Management

Operator

Good day and welcome to the Chiquita Brands International first quarter investor conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Manager of Investor Relations, Mr. Ed Loyd. Please go ahead, sir.

Ed Loyd

Thank you and welcome to Chiquita Brands International's first quarter 2008 earnings conference call. On the call today are Fernando Aguirre, Chairman and Chief Executive Officer; and Jeff Zalla, Chief Financial Officer. After today's prepared remarks, we will take questions as time allows. If you have not received a copy of today's press release, you will find it on the company's website at www.chiquita.com, or you may contact Chiquita's investor relations line at 513-784-6366.

Before we begin, let me remind you that this call may contain forward-looking statements concerning operating performance or industry development. Factors that could cause results to differ materially are described in the Safe Harbor section 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'd like to turn the call over to Fernando Aguirre.

Fernando Aguirre

Thank you, Ed. Good afternoon and welcome. I am pleased to have this opportunity to discuss with you our first-quarter 2008 financial and operating results. On today's call I will provide highlights of our first-quarter 2008 business performance and then Jeff Zalla, our Chief Financial Officer, will review our financial and operating results in more detail. I will then return to discuss our main priorities and key goals for the remainder of the year.

Before I summarize how well we executed our strategy during the first quarter, I'd like to remind everyone why we believe we have the right strategy. As you have heard us say many times, our vision is to become the global leader in healthy, fresh foods. When consumers are asked about their food shopping criteria, the five most important factors are taste, convenience, health, environment, and food safety. This puts us at the sweet spot of meeting consumer needs. Consumers already know that our products are healthy and taste great. Our company has also been recognized as the standard of excellence in food safety and social responsibility, and we will continue reminding consumers of that fact. To win more consumers in a profitable manner, we simply need to do two things. First is to continue innovating toward more value-added products, and second is to make our products more convenient and available. Our long-term strategy is that simple, which is why we are focused in 2008 on our key priorities of improving our execution and investing in long-term growth opportunities.

Let me also add a comment regarding the relationship between the economy and our business. Our products are as basic as they come. Historically, bananas and salads have not been affected by the volatility of the economy. Consumers typically do not adjust their purchases of our products based on the economy. In general, our products are amongst the most affordable in the grocery store. In the United States, for example, prices for these staples have not changed in more than a decade until recently when stores increased their retail prices by 10% to 15% for the first time in many years. In fact, even in bad economic times, our business benefits from many consumers who decide to eat meals prepared at home rather than at a restaurant. The primary concern for us is the escalation of industry and product supply costs, but as you will hear from us today we have been very proactive and disciplined in managing costs and driving profitability. Our excellent first-quarter results are the best evidence of our employees' capabilities to execute despite a challenging environment.

Now to review a few of our accomplishments for the first quarter. We significantly increased sales and net income for the first quarter versus a year ago. This is the third quarter in a row that we have improved our operating performance year over year. Although we have continued to see increases in the cost of key inputs, especially fuel and fuel-related items as well as purchased fruit, we more than overcame these challenges in the quarter through increased banana pricing in North America and Europe, strengthening in the Euro, savings from our restructuring program, and further recovery in value-added salads. Our ability to sustain a significant price premium in the banana market during a period of significant industry-wide supply constraints is a testament to the strength of the Chiquita brand. We also demonstrated our resolve to improve profitability by responding aggressively to the extraordinary circumstances we face related to the industry-wide volume constraints and cost increases. In March, we successfully implemented in North America a temporary surcharge to help offset increased sourcing costs. In Europe, we increased profitability in the quarter through much higher pricing, although on lower volumes.

We continue to make progress, executing the business restructuring we began last October. We have already started to see tangible benefits to our business from cost savings, our simplified organizational structure, our integrated sales teams, and a much more focused innovation effort. In addition, we are confident that our ongoing integration of one plant and two distribution centers, as well as the Verdelli integration, will deliver our expected cost savings while providing significantly better coverage in the Northeast of the United States, where our salad business was under-represented.

In early March, we signed strategic, long-term banana sourcing agreements with partners in Angola and Mozambique for the export of bananas from Africa to Europe without investing capital in owned assets. With commercial exports scheduled to start in 2010, these agreements will provide approximately 20% to 30% of our European banana volume without any tariff costs. These sourcing arrangements will allow us to remain very cost-competitive in the European market, regardless of the eventual outcome of challenges to the EU import tariff regime. We are also confident that the capabilities of our new local partners, combined with our own technical expertise, will ensure a reliable supply of high quality Chiquita branded fruit which will allow us to maintain our premium price in Europe.

We are very pleased with the outcome of the refinancing we completed in March. Despite difficult financing markets, we were able to complete our new bank facility with very attractive pricing and a six-year term. The strong support of our bank partners is a reflection of the financial discipline with which we continually manage the business, as well as their confidence in our long-term business strategy. I am confident that our strengthened balance sheet will enhance our ability to achieve sustainable profitable growth.

I will give an update on our 2008 priorities in a few moments, but now I'll ask Jeff to provide more detail on our financial and operating results. Jeff?

Jeff Zalla

Thank you, Fernando. The following are some key highlights of our performance in the first quarter. Net sales rose 7% to $1.3 billion. The company reported net income of $32 million, or $0.72 per diluted share, compared to a net loss of $3 million, or $0.08 per diluted share in the year-ago period. These results include $9 million or $0.20 per diluted share in charges from the write-off of deferred financing fees as a result of our successful refinancing, while the 2007 results included a charge of $5 million or $0.12 per share related to the exit from certain long-tem farm leases in Chile.

The company reported operating income of $57 million, compared to operating income of $18 million in the year-ago quarter. This improvement was principally due to higher banana pricing in our core markets, strengthening of the Euro, savings from the company's restructuring program, and continuing recovery in retail value-added salads. Operating cash flow declined to a negative $13 million, a decrease from the negative $6 million in the year-ago period, due to a significant increase in accounts receivable, resulting primarily from much higher banana pricing, especially in March, and a stronger Euro exchange rate.

Now I'd like to turn to our segment results. In our Banana Segment, year-over-year sales rose 12% in the first quarter to $584 million and operating income rose to $61 million from $33 million in the year-ago period. Segment operating results benefitted mostly from significantly higher local banana pricing in both Europe and North America as well as the favorable impact of the Euro. These benefits were partly offset by much higher industry costs, in particular for purchased fruit and fuel.

The year-over-year variances are detailed in today's press release, but let me provide some additional perspective on recent price and volume trends in our primary markets. In North America, year-over-year pricing increased 18% in the first quarter, due to increases in base contract prices and our fuel-related surcharge, as well as the implementation of a temporary price surcharge to mitigate higher purchased fruit costs due to substantially constrained industry-wide volume. Volume in the quarter was down 1%. The month of April showed even higher pricing and volume that was slightly above year ago. In our core European markets, pricing was up 11% on a local basis and 26% on a dollar basis in the first quarter. Volume decreased by 14% year over year due to both tight industry volume conditions and our continued greater focus on maintaining our premium product quality and price differentiation rather than market share. Our volume of Chiquita-branded bananas was down about in line with the total market while our volume of second-label bananas was down more sharply. In the month of April, both pricing and volume trends improved compared to the first quarter. However, we have begun to see lower pricing during the last several weeks, following the normal seasonal trend.

Let me turn to our Salads and Healthy Snacks Segment. Net sales increased by 12% from the year-ago quarter to $327 million. Operating income was $7 million compared to $1 million a year ago. Operating results benefitted because the costs of a freeze a year ago did not repeat, and we achieved higher pricing and volume in retail value-added salads. These benefits were partially offset by higher industry and other product supply costs. Net price per case in value-added salads rose 2% in the first quarter. Including Verdelli, our increase in total volume was approximately 11%. On a comparable basis, excluding Verdelli, our value-added salad volume in the period increased 4%, reflecting the continuing recovery of the category. In April, pricing trends were similar and volume grew at a slower rate.

In our Other Produce Segment, net sales decreased 5% to $360 million. The quarterly operating loss was $1 million compared to an operating loss of $3 million a year ago. The improvement was primarily due to the absence of $5 million of exit costs from Chile a year ago, partially offset by higher spending to expand Just Fruit in a Bottle in Europe.

Now, turning to our outlook for 2008, overall, we continue to expect to generate significant improvements in sales and operating income, especially in the first half of the year, primarily due to contract and market price increases as well as our restructuring plan and internal cost savings initiative. We continue to estimate our capital expenditures for the full year to be between $60 million and $75 million compared to $64 million for 2007. Our fuel hedging positions, which provide about 65% coverage through January 2010, would generate a $30 million gain in 2008 based on current forward rates, an improvement of $18 million compared to 2007. In the first quarter, we realized a gain of $6 million on fuel hedging. To mitigate foreign currency risk, we hedge our net Euro cash flow exposure. For 2008, we are about 70% hedged with options that provide downside protection at an average rate of $1.40 per Euro, and that would limit our upside above an average rate of $1.56 per Euro. Based on current Euro forward rates, we estimate hedging costs at approximately $16 million for 2008, an improvement of $3 million compared to 2007. For the first quarter, our Euro-hedging costs were approximately $5 million.

Let me now turn to our outlook on costs for the year. The largest impact comes from higher industry costs. These include changes in purchased raw products, fuel, fertilizer, paper, and charter rates. For these items we are taking our total estimate up to approximately $150 million to $165 million for the full year, of which about $50 million flowed through our first quarter results. This new full-year estimate is an increase from our February estimate, which was $90 million to $95 million. About half of these full-year increases come from purchased raw products, primarily bananas. Our current estimate includes both much higher spot prices in Ecuador and higher contract prices in other countries. About 40% of our estimated year-on-year increase is fuel cost, as measured in relation to current market forward rates, which are also at near-record levels. And finally, roughly 10% of our estimated increase comes from fertilizers, paper, and charter rates. Our current estimate includes much higher fertilizer prices, which have risen dramatically in recent months.

The next major category is other product supply costs, including owned banana production, salad manufacturing, and logistics. Most increases in this category relate to labor and materials costs. We are also seeing increases in other equipment, port, discharge, and other logistics costs in bananas. Our estimate for cost increases in this category remains the same, at approximately $60 million to $70 million for the full year, of which almost $30 million flow through our first quarter results. Despite the magnitude of these cost increases for the year, let me reiterate our expectation that for the full year, we will more than overcome these higher costs, primarily through significant year-over-year improvements in pricing, including fuel surcharges, especially in bananas, Euro exchange rates, fuel-hedging gains, internal cost savings initiatives, and the benefits of our restructuring program.

Regarding our cost savings initiatives, we remain on track to achieve gross internal cost savings of $30 million in 2008. In addition, we are pleased with the implementation to date of the business restructuring we announced in October 2007. We realized restructuring savings of approximately $18 million during the first quarter. As a result, we are taking up the lower end of the range of our annual savings estimate and now expect to deliver $65 million to $80 million for the full year 2008.

Turning to our recent refinancing. In the first quarter we successfully strengthened our capital structure, which has lowered the company's interest payments, extended debt maturities, and added significant covenant flexibility. In February, we issued $200 million of 4.25% convertible senior notes, due in 2016. In March, we entered into a new six-year senior secured credit facility consisting of a $150 million revolving credit facility and a $200 million term loan. The net proceeds of both of the convertible notes and the new term loan were used primarily to fully repay amounts outstanding under the prior revolving credit facility and term loan C. Thus we ended the first quarter with ample cash and liquidity, substantial covenant flexibility, and no significant debt maturities for the next six years. We are pleased to have significantly strengthened our financial position and to have our new capital structure in place. As a result of the refinancing and our ship sale last year, we anticipate gross interest expense to be $67 million to $72 million for the full year, or a decrease of $15 million to $20 million compared to 2007. This estimate for gross interest expense does not include the first-quarter charge of $9 million for the write-off of deferred financing fees. At least until we reach our long-term target ratio of 40% total debt to capital, debt reduction will continue to be a key priority.

In summary, we made excellent progress in the first quarter and are well positioned to overcome significant increases in industry and other product supply costs as we deliver on our targeted restructuring savings and benefit from improving fundamental trends in our business. Now let me return the call to Fernando.

Fernando Aguirre

Thank you, Jeff. As Jeff discussed, I want to emphasize that we do expect to generate significant improvements in 2008 versus year ago, particularly in the first half of the year. It is reasonable to expect a lower level of pricing gains as industry supplies return to more normal levels, and like most other companies, we will continue to be challenged by significant increases in commodity costs. That being said, we will continue to focus on improving execution and investing in long-term growth opportunities. We believe that this will allow us to continue to manage the business in a way that drives profitability in this environment of rising costs. In addition, this will position us well to generate sustainable, profitable growth over the long term.

I mentioned earlier in my remarks a number of items that demonstrate our focus on improving execution, including the success of the business restructuring and the new long-term, strategic sourcing arrangements we secured in Africa. We're also focusing on investing in long-term opportunities that would grow the brand. Our goal is to make innovative, higher-margin products more convenient and available to customers and consumers. We continue to invest in a financially responsible manner in promising opportunities to extend our brands, which will in turn expand consumption of our products. For example, we have now launched Just Fruit in a Bottle into new markets in Austria, Denmark, and Sweden, bringing our distribution of this product to six European countries since its introduction in Belgium in the summer of 2006. To date, we have met or exceeded our expectations for distribution, volume, market share, and pricing in each market. Along with geographic expansion, we are also broadening the range of the Just Fruit in a Bottle product line with the introduction of an exciting new flavor, bringing our total to five flavors, all of which are performing well in the marketplace.

As part of our efforts to extend our brand, we are continuously evaluating opportunities to co-brand Chiquita with other well-respected brands. For example, we recently signed an agreement with McDonald to provide them with Chiquita-branded fruit cups in the Netherlands, which could become a platform for further growth in Europe. Also, we successfully launched our premium Gourmet Cafe line of single-serve salads in the western United States at the end of last year, and we are now beginning the rollout in the East Coast. The Chiquita Fresh Express brands continue to be recognized as two of the strongest brands in the produce category in terms of quality, freshness, and world-class food safety standards. Last month, Fresh Express was featured by NBC Nightly News as an example of industry-leading food safety practices. Consumers trust Chiquita and Fresh Express-branded products, and we are committed to maintain our brand premiums and enhance our market leadership positions in 2008.

While we certainly have more work to do, we are very proud of where the company stands today. We believe that our greatest opportunity in 2008 is to continue building on the momentum we achieved last year, and make progress towards our long-term vision of becoming the global leader in healthy, fresh foods. Thanks to the hard work and dedication of our worldwide team, we are well positioned to take full advantage of the opportunities that lie ahead.

At this time, I'd like to open the call for questions. We will take as many questions as time allows. Operator?

Question-and-Answer Session

Operator

(Operator instructions) We'll go first to Jonathan Feeney from Wachovia.

John San Marco – Wachovia Securities

Good afternoon, this is actually John San Marco [ph] on behalf of Jonathan Feeney. Congratulations on a good quarter.

Fernando Aguirre

Thank you, John.

Jeff Zalla

Thanks, John.

John San Marco – Wachovia Securities

I would like to talk about Fresh Express first. It looks like it has sort of kept hang on to some of its momentum, even as we've gotten further and further past the anniversary of the major E. coli issues. Can you characterize how your competitors are behaving in the marketplace today versus three months ago or six months ago, really?

Fernando Aguirre

And by that you mean, John, behavior in the stores, or what are you –?

John San Marco – Wachovia Securities

I mean pricing, specifically. How disciplined are they being with pricing, or what's the promotional environment look like?

Fernando Aguirre

Yes. Well, that's very difficult to comment specifically on pricing, but what we can tell you is clearly the interest is on everyone to ensure that the category continues to recuperate. We have ourselves improved, both in terms of volume as well as pricing, and that's really been the focus of our attention and our analysis. And based on that analysis, we're quite pleased with the results we've gotten.

John San Marco – Wachovia Securities

And I guess it sounds like you're pleased. Do you think 18 months ago, if someone had told you this is where you would be after – I guess it's been about 18 months since the category as a whole was really struggling – do you still think you'd be pleased relative to those expectations from way back then?

Fernando Aguirre

Well, we'll never be satisfied until we go back to double-digit growth that as I'm sure you remember the last several years before the E. coli event, the category was growing at double-digit margins.

And we're not going to be satisfied totally until we get to those levels, and so the specifics of whether we would have known 18 months ago where we'd be today, well, no, I think everyone was expecting the E. coli event recuperation to happen faster, and as we've reported before several times, the slowness with which the category recuperated was certainly longer than anyone expected.

John San Marco – Wachovia Securities

Yes, I guess the good news is that the progress continues.

Fernando Aguirre

Right.

John San Marco – Wachovia Securities

Just as one more follow-up sort of on the subject, has the sort of gradual recovery process changed your view on the margin power of the business? If I recall – and please correct me if I'm wrong – the business is characterized as sort of a 10% EBITDA margin business under more normal conditions?

Fernando Aguirre

Right. Well, we – yes, the specifics on margins, we continue with our plan to improve our margins, and that obviously is mostly directly affected by the pricing, which as you saw in the results, we've made very good improvements there.

We will continue improving our northeast share of retail salads, particularly with the integration of the Verdelli acquisition. We continue to drive category growth through innovation. We've introduced a number of new SKUs and we will continue also improving our margins on food service.

Now you also have heard me talk about quite a bit before about the opportunity that this category has, and I just summarize by saying that we're focusing a lot of our attention on getting consumers to increase the usage frequency, which today roughly stands at about 12 bags per year, and to also improve the penetration of households, which today stands at about 70%.

And if we can do – just increase frequency to about double from the 12 to call it 26 bags per year or about every other week, and the consumers could buy and consume one bag every other week, and if we can improve penetration from that 70% to 90%, which is equal to what salad dressing's penetration of household is today, then the category would go from roughly retail sales of about $3 billion to almost triple that to roughly $9 billion.

So the size of the price is fantastic, and this is still an underdeveloped category in our eyes, and we believe that with the programs that we have in our strategies, we'll continue fostering that growth. And as the market leader, very strong market leader in the U.S., we certainly expect to get at least fair share growth, and if we can capture even more, then we'll capture the majority of that growth. So we're quite enthusiastic by it, and continue to see the future as being extremely promising.

John San Marco – Wachovia Securities

Great, that's very helpful. And just switching gears for one last question to where most of the beat came from here on bananas, did – I want to just understand sort of what the impact of the dynamics around the fuel surcharge, and then quickly following that up with the banana-specific surcharge. Did you get a sense that any relationships with customers were impacted by that, or was the environment so broadly tight and your competitors were quickly doing the same kinds of things that there was zero impact on customer relationships?

Fernando Aguirre

Yes, from a customer standpoint, every customer accepted it, the surcharge, and I can't speak to what happened to our competition and their relationship with customers. But certainly from our standpoint, we were very transparent and very open with our customers, and they accepted it. And this has been a time when both the supply issues that affected the industry as well as the cost issues that affected the industry have forced us to implement that. And as I mentioned in my remarks, the fact of the matter is this is still a very reachable category, if you will. Fruit, bananas specifically, are very – the pricing in bananas are very acceptable, and we have not seen any pricing, as a consumer, we hadn't seen any pricing increases in the last 10 or 15 years. And when you see everything else around us, how oil and wheat and corn and everything else goes up, clearly bananas, the 10% or 15% that the grocer retailers decided to increasing price is very, very little compared to everything else around us.

John San Marco – Wachovia Securities

Great.

Jeff Zalla

And John, to your question about the fuel surcharge, it remains in place and highly effective. Basically the fuel surcharge varies every quarter based on a market index, and that's been in place since the fourth quarter of 2005 and works very well to mitigate a large portion of our fuel exposure.

John San Marco – Wachovia Securities

Got it. That's very helpful. Thank you, I'll leave it at that. Thank you.

Jeff Zalla

Thank you, John.

Operator

We'll go next to Reza Vahabzadeh from Lehman Brothers.

Reza Vahabzadeh – Lehman Brothers

Good afternoon.

Jeff Zalla

Hello, Reza.

Reza Vahabzadeh – Lehman Brothers

On the press release, you talk about expectations for I guess improvements in earnings in the second quarter as well. Does that mean that the drivers for the second quarter will be similar to the first quarter, or different drivers?

Jeff Zalla

That's essentially the same drivers, Reza. Pricing continues to be quite strong compared to year ago. Exchange continues to be very strong. The restructuring benefits have kicked in as expected. Our internal cost savings are on track. The fuel hedging gains are a reflection of current forward rates. They should remain about the same. The new capital structure is in place, so we're already getting the benefit of interest savings, and salads continue to recover.

So, those trends remain the same to the positive in the second quarter, as do some negative trends, and most particularly industry and product supply costs.

Reza Vahabzadeh – Lehman Brothers

Got it. And where does that leave us for the second half? I mean is there a possibility that the supply shortages in the first quarter will eventually catch up? Because your comments specifically mention improvements in the second quarter, but nothing about the second half. So I'm just wondering if you can provide any color for the second half.

Jeff Zalla

Right. Our strong confidence and significant improvement in operating income for the year is bolstered especially by confidence in the first half. In the second half of the year, as we commented in the prepared remarks, it's reasonable to expect there to be less in the way of pricing gains, as industry supply conditions return to a more normal pattern and we'd expect normal seasonal trends in pricing.

And in particular, as we think about third and fourth quarter, we wouldn't expect a repeat of the temporary price benefit we got a year ago from Hurricane Dean, for example, in September and October.

Reza Vahabzadeh – Lehman Brothers

Got it. But you don't expect a massive increase in banana supplies for some reason or another sometime in the second half?

Jeff Zalla

That's correct, we do not.

Reza Vahabzadeh – Lehman Brothers

Okay. And then as far as free cash flow for the year, obviously first quarter you got off to a soft start. But for the year, what type of a free cash flow would you anticipate being able to generate?

Jeff Zalla

Reza, what you characterize as a soft start for the year is actually a reflection of two very positive events, really driven by receivables.

Reza Vahabzadeh – Lehman Brothers

Right.

Jeff Zalla

Receivables are very high because of high exchange rates versus year ago, and dramatically higher pricing.

Reza Vahabzadeh – Lehman Brothers

Right.

Jeff Zalla

So as those sales from the first quarter come into cash, it'll bolster cash flow coming through in Q2, which is quite positive. And as you know, we don't give guidance for earnings for the year, but from a net cash flow perspective I can tell you that working capital, we'd expect, again, to be a force for the year.

Reza Vahabzadeh – Lehman Brothers

Got it. Are there acquisitions that you would consider making, given your stronger financial footing?

Fernando Aguirre

Reza, as we've said before, we typically don't comment on possibilities, but as we've stated several times, our number one priority continues to be to reduce our debt with any additional cash flow that we might generate. And secondly, there are opportunities – we'll look at them – mostly based on the very specific principles that we've stated before, which are number one, that we make sure that they fit with our brands, make sure that they do have high profit potential. Make sure that they could generate strong cash flow and that we could achieve some synergies. And if we find or if we see something that would help us deliver some of those or all of those criteria, then they would look at it. But today, based on everything else that we're executing, we really are focusing our attention on our program of innovation, and continue to make sure we're executing our plans right. And again, we will focus a lot of attention on reducing, continuing to reduce debt. Those are the main priorities. But never say never. If you get an opportunity, we'll always look at it.

Reza Vahabzadeh – Lehman Brothers

I hear you on that. And then on the press release, when it says the board has authorized management to pursue a plan to sell Atlanta, does that mean that you are just beginning the process now, or does that mean that you may have an offer on the table and that you are going forward to execute on that?

Fernando Aguirre

Well, what that means, Reza, we've made good progress recently and in late April, the company's board authorized us to pursue a plan to sell Atlanta's operations. Now there's no assurance that any sale will be completed, and we're just not going to announce any other further developments until the board has reached a decision. But obviously, the language now means that we've made some progress.

Reza Vahabzadeh – Lehman Brothers

Got it. Thank you much.

Jeff Zalla

Thank you, Reza.

Operator

We'll go next to Dean Haskell with Haskell Consulting.

Dean Haskell – Haskell Consulting

Thank you, my question was asked and answered on the Atlanta AG transaction. Thank you.

Jeff Zalla

Thank you, Dean.

Operator

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

Heather Jones – BB&T Capital Markets

Hi, congratulations.

Jeff Zalla

Thank you, Heather.

Fernando Aguirre

Hi, Heather.

Heather Jones – BB&T Capital Markets

I have a few questions. One, you gave qualitative comments on April pricing, I was wondering if you could give us more specific pricing for local EU and North America?

Jeff Zalla

Heather, this is just May 1st and we haven't closed. I can't give you precise percentages. But the pricing trends were even stronger in April than in Q1 in Europe, and in North America as well. And pricing was similar in Fresh Express, in the salads category.

Heather Jones – BB&T Capital Markets

Well, I guess another way to ask is your interim pricing report for January-February, and then what you reported for the quarter implies much improvement in March. Did April trend close to March?

Jeff Zalla

Better than March in Europe and in North America as well – in Europe because of market pricing and our focus on premium quality and differentiation in North America, because we hand more weeks of the temporary price surcharge.

Heather Jones – BB&T Capital Markets

Now from what I understand, the surcharge is still in place, and just wondering – I want to talk about the costs in just a moment, but given the higher cost environment, just wondering what you all's [ph] commitment is from a company-specific perspective, as far as Europe and North America to protect pricing, given these kind of cost increases. Because if you can't sustain meaningfully higher – I mean, this is an untenable position if significant pricing improvements aren't able to be sustained. And so just wondering, given the unprecedented cost environment, are you comfortable with retaining the temporary surcharge and secondly within Europe, with continuing the reduction of second-label fruit?

Jeff Zalla

Heather, to the first question, the temporary surcharge does remain in place in North America. In Europe, we've demonstrated our long and successful track record in differentiating the brand and selling at a significant premium in the market.

Of course, our resolve is to maximize profitability, and we are focused on that more so than market share. Clearly, we lost more volume in seconds. In part, that was because of tight volume conditions and it was also because that was much less profitable fruit.

Heather Jones – BB&T Capital Markets

All right.

Jeff Zalla

So, we will continue to strive in North America to earn a fair return on our investment and the risk in that business, and we'll continue to monitor industry supply conditions and work with our customers accordingly.

Heather Jones – BB&T Capital Markets

I mean, there has been some negative press reports out lately about the increases that you all have taken in North America, and I guess from my perspective is it fair to say that the industry is just now getting to the point with these surcharges that they're earning any kind of return? And to your point, it's been like a decade since the retailers raised prices.

Jeff Zalla

Well, we cannot speak to competitors' pricing or returns, but from our perspective, we've driven very significant improvement in earnings power of our North America banana business in the last three years, and the current outlook is to get close to returns that achieve our cost of capital. But from our perspective, we've still got improvement to drive.

Heather Jones – BB&T Capital Markets

So, you even get to your cost of capital?

Jeff Zalla

Correct.

Heather Jones – BB&T Capital Markets

Okay. Going to the Euro, I'm just curious why you haven't – I know you don't want to reposition it just with every move in the Euro, but given $1.40 to – it's been averaging around $1.55, $1.56 for some time, why you all haven't repositioned that?

Jeff Zalla

Well, we review it periodically, Heather, and it's always a risk assessment, a trade-off between additional premium dollars to reset the put option, and the benefit that we could achieve. So that's something I'm not going to speculate on, but that we review periodically and have a disciplined approach to managing.

Heather Jones – BB&T Capital Markets

Okay. And then my final question is wondering on the, I guess, roughly $25 million to $30 million of the new higher costs as related to fuel. Is that both bananas and Fresh Express?

Jeff Zalla

It is in both categories, although the bigger portion of it is in bananas.

Heather Jones – BB&T Capital Markets

And so is it – so you did raise your fuel surcharge for Q2 sequentially in bananas. Did the surcharge go up sequentially in Fresh Express as well?

Jeff Zalla

Yes, correct. Both programs are linked to third-party indices of fuel costs, and both adjust quarterly.

Heather Jones – BB&T Capital Markets

Okay, so even though it's not – I mean, part of this higher cost, the part that's related to fuel, will be offset and incremental pricing?

Jeff Zalla

That's correct.

Heather Jones – BB&T Capital Markets

Okay. And then finally on the fruit part that you noted in the higher costs, you mentioned Ecuador as well as other countries. I'm curious – I mean, I understand Ecuador is a spot market and that's volatile, et cetera, but your other countries – I mean, don't you normally know what your cost per box is going to be when you gave guidance in February? I mean from my understanding is that the other countries don't fluctuate that much.

Jeff Zalla

They typically tend not to, Heather, you're right. But this year, we've seen, for example, exit prices be raised. We've seen unprecedented increases in materials and labor costs, some of that driven by local inflation as well as currency. And so we have seen – and as well as competitive market activity, we've seen contract rates increase.

Heather Jones – BB&T Capital Markets

Intra-quarter, because I knew Costa Rica raised theirs, and that was towards the end of last year. I know Panama. But you're saying since February, people have raised prices intra-year, intra-contract?

Jeff Zalla

That's correct. And in part, Heather, in a response to extraordinarily tight industry supply conditions. So as we've said, we've needed to increase significantly our costs to secure volume in order to honor volume commitment to the customers in North America.

Heather Jones – BB&T Capital Markets

Okay. So this is not you all pursuing volume gains, it's just to supply contracts you have.

Jeff Zalla

That's exactly right.

Heather Jones – BB&T Capital Markets

Okay. Thank you very much.

Jeff Zalla

Sure, thank you, Heather.

Operator

We'll go next to Bryan Hunt with Wachovia.

Meredith Fowler – Wachovia Securities

Hi, this is actually Meredith Fowler for Bryan.

Fernando Aguirre

Hello.

Meredith Fowler – Wachovia Securities

Are you gaining market share in the bagged salad business, and can you provide the most recent market share data, if you have it available?

Jeff Zalla

Our market share in value-added salads is roughly flat at 47%. That doesn't change a lot in short-term intervals, and we clearly have been gaining in share over time. For example, we stood at 47% for full-year '07, that's up 7% from when we completed the acquisition in 2005.

Meredith Fowler – Wachovia Securities

And can you provide an update on the tariff regime?

Fernando Aguirre

Sure. So far, I'm sure you are familiar with the fact that there is arbitration that has been going on between – with the WTO between the Latin countries and the EU. Perhaps the most significant issue recently is that there are, in fact, negotiations going on as we speak between the Latin America governments and the EU, together with the WTO. And so those discussions are happening. Obviously, they won't disclose any agreements until they reach such agreement, but there has been already enough press reports to let everyone know that this is going on and the expectation is that everyone is trying their best to get to a reasonable agreement.

Now having said all that, our business plans continue to assume that the current tariff of EUR176 per metric ton remains in place forever. And if there's a break there and something happens, then we would adjust our plans accordingly, but for planning purposes, we've decided to keep it that way.

Meredith Fowler – Wachovia Securities

Great. And then I apologize if I missed this, but what is the capacity of the two new supply agreements you entered in Africa?

Fernando Aguirre

We would get roughly 20% to 30% of our volume in Europe from both of those arrangements, and of course we give a range because we are in the process of planting now, and we are in the process of getting the quality tested, et cetera, and that will take roughly anywhere between 1.5 year to 2 years. So, we don't expect to have anything coming out of those sources until 2010.

Meredith Fowler – Wachovia Securities

And then lastly, do you have plans to reinstate a dividend if you continue to generate results similar to this quarter?

Fernando Aguirre

The board reviews its dividend policy on a regular basis, and we do not make any disclosure on those discussions until the board makes a decision. So we – but rest assured that the board is consistently reviewing those policies.

Meredith Fowler – Wachovia Securities

All right, thank you.

Operator

We'll go next to Rahul Shah [ph] with KBC Investment Management [ph].

Rahul Shah – KBC Investment Management

Hi, I just wanted to clarify something. You said that April pricing was stronger in Europe but then there was some softening in the last few weeks based on seasonality or whatever. So can you clarify that, given those [ph] four weeks after the first quarter?

Jeff Zalla

Sure. To clarify, when we measure the percent price change it's versus the same period of a year ago, but the percentage improvement in April was better than the percentage improvement in March. However, the banana business in Europe and in particular pricing is highly seasonal, and the last two weeks and pricing for next week indicates that we're following the normal seasonal downtrend for this period of the year.

Rahul Shah – KBC Investment Management

Got it. And is there any way at all to quantify the benefit from the reduced supply from Ecuador and Central America, or is that really hard to do?

Jeff Zalla

It's quite difficult to do because it affects many factors from both costs to get replacement volume as well as the price impact in the market. So it's tough to isolate a particular dollar amount to any particular cause.

Rahul Shah – KBC Investment Management

Got it. And what is your best guess in terms of when that reduced supply would come back?

Jeff Zalla

Well, it is hard to estimate. It's something that we continue to monitor quite regularly, and we would expect that volume that was taken out of the market last fall from Hurricane Dean would begin to come back, and particular volume from Martinique in the French West Indies has recently started to come back. So sometime by late summer or fall, that volume should be back.

As to the degree of impact on Ecuador and the rest of Central America from heavy rains and other adverse weather conditions, it's harder to predict.

Rahul Shah – KBC Investment Management

Got it. And then lastly, there are a few lawsuits related to the Colombia history, FARC and whatnot, and obviously you cannot comment on specifics, but instead can you give any color on timing in terms of how soon you think you could resolve some of those cases?

Fernando Aguirre

We believe we have very strong defenses, and the company will continue to defend itself very vigorously. And there it's really impossible to predict any changes. We have already won a couple of motions. One, for example, was to – an initial procedural motion to centralize the cases before a single judge. And unlike what was reported very recently in the last day or two in a few newspapers, this was actually a win for the company over the plaintiff's opposition.

The plaintiffs were opposing that motion and the company won it, and this is important because separate cases have been filed in a few courts by different plaintiff's lawyers, and it is to the defendant's advantage to have the cases heard together in one single court and that's what we did. We also have filed motions to dismiss two of the cases, and we do expect to file similar motions on the remaining cases very soon.

As a reminder, as we have said all along, every single action that was taken in Colombia was solely with the objective to protect the lives of our employees and their families, and we have been quite vocal about that now and most of the reports, unfortunately, inaccurately report that – but we will be very aggressive in defending ourselves, and we'll be quite vigorous with it and we'll continue with our legal strategy on that.

Rahul Shah – KBC Investment Management

All right, that was very helpful. Thank you for your time.

Fernando Aguirre

Thank you.

Jeff Zalla

Thank you.

Operator

And due to time constraints, we will take one more question. We'll go next to Don Espey from Shah Capital Management.

Don Espey – Shah Capital Management

Hi Jeff, hi Fernando, how are you?

Jeff Zalla

Good.

Fernando Aguirre

Hello, how about yourself?

Don Espey – Shah Capital Management

Great, thank you. Just wanted to ask you, is it fair to assume that Chiquita should attain over 5% net margin in 2009, based on the restructuring and the push towards higher margin products?

Jeff Zalla

Clearly, we believe we have the opportunity to expand EBIT margin. That's our focus and our drive. We have strong confidence in improving '08 performance versus '07. But as a company, we don't provide guidance in terms of earnings on the EBITDA or EBIT or EPS basis, so that's a question I'd prefer not to comment on directly.

Don Espey – Shah Capital Management

Okay. Thank you. Well, congratulations and good luck.

Jeff Zalla

Thank you very much.

Don Espey – Shah Capital Management

Thank you.

Operator

And due to time constraints we will take no more questions at this time.

I'd like to turn the conference back over to Mr. Fernando Aguirre. Please go ahead, sir.

Fernando Aguirre

Thank you, and thank you very much for your questions and for joining us today. We look forward to updating you on our continued progress in the quarters ahead. And as you all know, we hope that you can join us at our Investor Day in New York City on May 8th. So hopefully, we'll see you all there. And thank you once again.

Operator

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.

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