Chiquita Brands International's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Chiquita Brands (CQB)

Chiquita Brands International, Inc. (NYSE:CQB)

Q3 2012 Earnings Conference Call

November 7, 2012 16:30 ET

Executives

Steve Himes - Director, Investor Relations

Ed Lonergan - President and Chief Executive Officer

Brian Kocher - Chief Financial Officer

Analysts

Reza Vahabzadeh - Barclays

Heather Jones - BB&T Capital Markets

Jonathan Feeney - Janney

Carla Casella - JPMorgan

Bryan Hunt - Wells Fargo Securities

Karru Martinson - Deutsche Bank

Operator

Good day and welcome to the Chiquita Brands Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Steve Himes, Director of Investor Relations. Please go ahead, sir.

Steve Himes - Director, Investor Relations

Thank you, Amber, and welcome everyone to Chiquita Brands International's third quarter 2012 earnings conference call. On the call today are Ed Lonergan, President and Chief Executive Officer and Brian Kocher, Chief Financial Officer.

After today's prepared remarks we will take questions as time allows. A copy of today's press release is available on the Company's website at www.chiquita.com, and you may also contact Chiquita's Investor Relations department at 980-636-5637 to receive a copy. Our press release includes reconciliations to U.S. GAAP of any non-GAAP financial measures that we mention today.

The call contains forward-looking statements, regarding operating performance or industry developments, and any such statements are intended to fall within the Safe Harbor provided under the securities laws. Factors that could cause the results to differ materially are described in the forward-looking statements section of today's press release and in Chiquita's SEC filings, including its annual report on Form 10-K, and quarterly reports on Form10-Q.

And now, I'd like to turn the call over to Ed.

Ed Lonergan - President and Chief Executive Officer

Thank you, Steve. Good afternoon and thank you all for joining us today. I'd like to begin my first earnings call with Chiquita by sharing some of the reasons why I am excited to join the company and about our future as a leading player in this industry.

Chiquita serves a noble purpose in this world. Consumers enjoy our fresh fruits and salad products, and importantly, those products are good for them as well. In a world, where consumer products companies are scrambling to develop products that taste good and are healthy, we already possessed those attributes in our core. Additionally, Chiquita has a culture of corporate responsibility and a commitment to sustainability that is motivating to our customers and to our employees.

The opportunity is even more attractive when these products and this employee group are associated with one of the world's most recognizable brands with more than 100 years of history. As for Chiquita today, I like where the company is heading. We have made some difficult, but necessary decisions this year to better position our core portfolio to winning a competitive marketplace. I firmly believe that company's core businesses of fresh fruits and salads possess strong earnings potential and as well that the recent SG&A and efficiency choices are the right path to unlock this value. This decision to focus on our core enables us to allocate resources to cost reduction and innovation on our valuable scale businesses and to eliminate projects and initiatives that are less likely to deliver shareholder value in the near-term.

The strategic decisions in the restructuring activities described on the second quarter call will improve the competitiveness of our core and allow the company to increase revenues and reduce costs, which in turn will enhance margins and improve cash flow. It's important for you to know that I fully support the company’s announced intention to use increased cash flow to reduce our debt. In short, I joined the company, because I am passionate about the opportunities to deliver healthy products to consumers and drive an undervalued company to achieve its potential.

Now, let's take a few minutes to review the strategy shared on our last call and the progress we have made toward our vision. The company's performance in 2012 is not indicative of the earnings potential of our business. As discussed, we have implemented a strategy that we believe will create a sustainable enterprise and enhance shareholder value. As we said on the last call, you can expect our business to make strategic decisions to accomplish the following.

First and foremost, we've planned to increase revenue and profitability in our core bananas and salads business with particular focus on creating value for consumers and our retail partners. Second, we will drive our costs in our value chain – drive out costs in our value chain so as to be more competitive in our core markets. Third, we will align our overhead structure to industry benchmarks. Fourth, we will continue to evaluate and address non-core unprofitable businesses and minimize investment and diversification and innovation outside the core. And lastly, we will limit our consumer marketing investments to those portfolio products, vehicles, and geographies, where we can demonstrate a verifiable business return.

We are confident this strategy will enable Chiquita over the next two to three years to achieve the target operating margins discussed on our last earnings call. That is 4% operating margin in bananas and 7% to 8% operating margin in salads. It's also worth repeating that while we will certainly continue to refine the strategy as we move forward, I completely support the decisions that have been made in the recent past and believe our choices create a vibrant future for Chiquita brands.

So, now let me provide a brief update of the progress made since our last earnings call. Where to play decisions aligned to our new strategy have been made, and a difficult restructuring has been executed with speed. Most importantly, our new strategy is already paying commercial dividends. In our North American bananas business, we have won new business we have won 2013 contracts equivalent to high-single digit volume gains versus our 2012 base. Much of this distribution is earned from returning customers that value our brand and appreciate our new strategic direction. The new volumes in light of our value chain efficiency actions are at accretive terms that will ultimately help Chiquita to achieve our target margin for bananas. We view these wins as validation of our banana strategy.

In salads our decision to play in a broader market space including private label is also beginning to pay off. With the recent signature customer win and opportunities to come, we will begin delivering significant private label salad volume in Q1. This new signature win alone is equivalent to low-single digit volume growth on our 2012 salads base. Volume growth is the most important driver of margin expansion in our Salad segment and as with bananas the value chain efficiencies we deliver will translate to progress versus our operating margin goals.

The restructuring itself is mostly completed. We’ve already taken actions that will enable us to realize over 75% of the annual savings that were announced in August. These savings will total at least $60 million annually and specifically to-date all major employee-related SG&A decisions have been implemented. Many value chain efficiency actions have been deployed and will begin to deliver in Q1 2013. And we are in process of reviewing every portfolio, spend area and innovation stream with an eye toward ensuring resources are properly allocated to deliver gains on those businesses and activities most likely to create sustainable shareholder value for Chiquita.

We have announced the exit of unprofitable businesses, such as our North American deciduous business, primarily comprised of grapes. And we have eliminated the costs associated with managing these businesses. While these businesses accounted for $40 million of net sales, they represented a negative contribution of $2 million for the bottom line and there was no clear path to profitability in the foreseeable future. In sum, the strategic choices are clear and sensible. The required actions to get the industry competitive SG&A and efficiency levels have been implemented with speed and our team is excited to be playing to win in the marketplace. I should also say that having talked to most key customers and suppliers in my first month with the company they also are excited to see Chiquita refocusing on our core and driving efficiencies in our business. They clearly value our team and our brands and they are excited to work with us to grow revenue.

Now, let me turn it over to Brian to review the quarter.

Brian Kocher - Chief Financial Officer

Thank you, Ed. And on behalf of Chiquita employees worldwide, we are happy to have you on board. Our third quarter result actually exceeded our expectations and excluding certain unique items would have demonstrated even further progress against our long-term earnings profile. After a recap of the reported results, I will discuss a number of those unique items.

Third quarter 2012 net income on a comparable basis was a loss of $22 million or $0.47 per diluted share versus a loss of $16 million or $0.35 per diluted share in 2011. U.S. GAAP results for the third quarter 2012 were a net loss of $67 million or $1.45 per diluted share versus a net loss of $29 million or $0.63 per diluted share in 2011. The adjustments between our comparable results and GAAP results are included in the table in the press release and I will touch on some of the larger ones in a few minutes.

Looking at the Bananas segment, sales were 1.6% lower at $446 million. The comparable operating loss of $2 million was impacted by the weakening euro, lower pricing in North America banana and slightly higher delivered fruit cost. Local pricing gains in Europe partially offset these impacts. Remember as a note when comparing year-over-year financial performance that Chiquita reconfigured its European shipping operations in September of 2011. As a result accounting practices required us to accelerate approximately $12 million of what otherwise would have been 2012 and 2013 fuel hedging gains into the third quarter of 2011.

North American banana pricing was 2% lower on essentially the same unit volumes. In Europe local prices were 8% higher than in 2011. However, similar to the second quarter of this year the increase was not enough to offset the large decline in the value of the euro. The euro decline alone negatively impacted our year-over-year operating income comparisons by some $10 million. Volumes in Europe were 8% lower as we chose to forego sales, where we could not achieve our targeted returns.

Lastly, in order to complete the picture on our Bananas segment, our third quarter banana results were dampened by a $7 million reserve for bad debts against the Middle Eastern customer receivable. Excluding this reserve and the year-over-year impact of the euro, Chiquita's banana results would have actually doubled versus the comparable results of the third quarter of 2011.

In our Salads and Healthy Snacks segment, second quarter net sales were steady at $240 million. Retail sales volume for the quarter were about 4% below 2011 levels, however, increased sales volume in both our food service and healthy snack businesses offset the revenue effect of lower salad volume. As another key indicator, salad volumes at existing customers or continuous customers continue to benefit from increasing retail sales velocities driven by improved product quality. Again, considering the private label contract business that will start shipping in 2013 and all other things remaining equal, retail sales volumes for next quarter would grow around 4%. Average pricing of retail sales for the quarter decreased approximately 3% from the third quarter of 2011.

For the quarter, the Salads and Healthy Snacks segment delivered $1 million in operating income on a comparable basis versus the loss of $3 million a year ago. The results of operations for the quarter would have increased more, but we experienced approximately $5 million of cost associated with precautionary product recalls and related expenses. Certain one-time items have been excluded from comparable results, but are worth mentioning as they have had an impact on our third quarter GAAP results.

As we have previously described, both Chiquita's relocation to Charlotte and the restructuring that Ed just mentioned earlier in the call are mostly complete. In the third quarter, we incurred $6 million in charges, $4 million net of tax, related to the relocation from Cincinnati. We anticipate the remaining $2 million of costs related to the relocation will be recognized in immaterial amounts at various times through 2013. Related to the restructuring, our third quarter GAAP results include $16 million of charges, $12 million net of tax related to the restructuring activities.

Lastly, based on a change in strategy that occurred this quarter, the desire of both partners to focus on their core businesses and geographies and the related discontinuation of a key product by the Danone joint venture, Chiquita was required to evaluate the carrying amount of its joint venture investment with Danone. As a result of that analysis, including the current view of long-term prospects of the venture compared to the original outlook in previous trajectories, Chiquita recognized a $28 million impairment charge related to our investment in this venture.

Chiquita's future cash funding obligations to the JV are limited under the JV agreement. Today, despite the impairment charges, the JV carries on its activities and both partners continue to assess the future of our collaboration. As we turn to look towards the future, I would like to provide a little color on the balance of 2012, during which Chiquita will continue to face challenges from some of the headwinds that we have seen in the first three quarters of the year.

In the balance of the year, we will continue to face difficult year-over-year comparisons because of lower euro exchange rate and higher fuel cost net of hedging, although certain additional trends should be favorable for the company. The banana market is in a relatively balanced supply and demand state. As a result, we expect pricing in Europe to continue to show favorable year-over-year comparisons through the fourth quarter of 2012. Recent banana contract wins in North America will result in higher banana volumes for the fourth quarter than originally anticipated.

The euro-dollar exchange rate has improved from early in 2012 and provide some unexpected tailwinds versus our expectations in the middle of the year. We remain significantly hedged against our euro exposure for the balance of 2012 and in 2013. And Chiquita will continue to utilize cost effective structures to hedge its euro-based exposure for a period up to 12 to 18 months looking forward. Salad volumes are expected to be down 5% from 2011 levels for the full year, but incremental private label volume will drive retail volume growth starting in the first quarter of 2013. Many trends if they continue should benefit Chiquita into 2013.

In addition to customer wins that we already mentioned, we continue to have opportunities to increase volumes in bananas and salads. In salads in particular, we will see increasing volume as a result of our increased offerings including private label, organic, and additional salad products, such as whole head lettuce. The financial benefits of our restructuring should be fully utilized or realized in 2013. The annual savings are expected to be at least $60 million, some of which will be offset by increasing costs in our core business. The balanced nature of the supply and demand of bananas out of Latin America is likely to continue through the first half of 2013 and should support pricing.

Lastly, the consolidation of our Midwest salad facilities near Chicago, which is currently on track and on budget will be complete by the end of the summer, and we will begin to see operating cost savings from this project. Chiquita's focus in 2013 and beyond will be on our competitiveness in our core product lines. All the initiatives that we have discussed this afternoon are restructuring, are increasing volumes, pricing in a balanced supply situation, support our progress along the path of our long-term earnings targets.

Before we answer questions, I would like to turn the call back to Ed.

Ed Lonergan - President and Chief Executive Officer

Thanks, Brian. Before moving the call to questions, I'd like to reiterate a few points in closing. In summary, I am excited to be at Chiquita. I am confident the strategic choices and plans we are executing will drive value. While 2012 has been a difficult year, our third quarter was better than we expected and would have been better still if not for several unique Q3 events. We are making speedy progress against our restructuring plan, our expanded salad strategy, and our banana growth aspirations. Our team and our customers have embraced these choices which gives me comfort that we are on path to deliver our long-term financial targets.

So, with that update operator, we'd like to move back to the call for questions.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) We’ll go first to Reza Vahabzadeh with Barclays.

Reza Vahabzadeh – Barclays

Good afternoon.

Ed Lonergan

Hi Reza. How are you?

Brian Kocher

Hi.

Reza Vahabzadeh – Barclays

Good. Thank you. Can you talk about the timing of when you would expect to achieve the EBIT margin targets that you outlined and do they require certain levels from – as far as euro is concerned, the fuel costs and other metrics. And then my second question is you talked about the pricing decline in North America bananas as well as North American salad, can you comment on that what’s driving those factors? Thank you.

Ed Lonergan

Let me take – this is Ed, let me take a couple of minutes on the first question and I’ll ask Brian to tackle the question on pricing in bananas. In terms of our glide path to our EBITDA margins, the restructuring that we put in place both to get our SG&A structure right and to get our efficiencies right in the value chain as we noted will begin to take effect in 2013. We’ve said that within the next 24 to 36 months we would see margins approaching the 4% target in bananas and 7% to 8% in salads and I think it will be a glide path. Certainly we expect to see the immediate benefits of the restructuring, but then we have additional work to do on productivity across our enterprise that will get us to the long-term goal and that’s partially driven by volume and partially driven by ensuring that we maintain strong focus on our cost structure. So, I think that 24 to 36 months that we’ve called out is an accurate number and that you can build into model. So, let me ask Brian to tackle the bananas question.

Brian Kocher

Yeah we talked a little bit about this in the second quarter Reza. You remember in the first half of this year there were some year-over-year negative pricing variances associated with the force majeure surcharge in 2011 that did not repeat in 2012. In addition, we’ve seen up until this time you’ll remember some of last year and the first sort of the middle part of this year second quarter we actually had an excess of supply or demand. And you would have heard us talking in the middle of 2011 about supply that exceeds demand and we saw that impact pricing a little bit particularly in North America. As supply balances a little bit better with demand, we’ve had an opportunity to recognize some price in Europe, you will see that in our both our second quarter and third quarter results. But as North America is an annual contract type market it takes a little while for that supply imbalance to filter through to contract renewals. So, pricing for the quarter on bananas in North America was down 2% that’s essentially the cause. As we move through the renewal cycle we’ll have an opportunity to adjust pricing in anyone of those renewal periods.

From the salad side – on the salad side it certainly has a little bit to do with mix. We’ve had a change in mix of customers. We’ve also had some timing associated with some trade spend, so in our world when you do some promotions that’s actually a reduction of revenue for the quarter and it ends up in price, so there is a little bit of timing into that. But it’s been both a change in customer mix as we’ve had some distribution that came off in the first half of the year as we’ve added distribution here in the second half that will start to take effect in the first quarter and then the timing of the trade promotions we’ve seen a little bit of pricing degradation in salads.

Reza Vahabzadeh – Barclays

Got it. Thank you both.

Ed Lonergan

Sure

Operator

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

Heather Jones – BB&T Capital Markets

Hello.

Ed Lonergan

Hi Heather.

Brian Kocher

Hi Heather.

Heather Jones – BB&T Capital Markets

Hi and welcome Ed.

Ed Lonergan

Thank you.

Heather Jones – BB&T Capital Markets

I had a number of questions, first is real quickly that $7 million bad debt reversal and the $5 million product recall cost I assume you included that in your adjusted numbers, so that would take your EBIT number from a negative 17 to a negative 5?

Brian Kocher

Yeah, actually, let me just be crystal clear in both of those. Those were both included as an expense in comparable income.

Heather Jones – BB&T Capital Markets

Right, right, okay.

Brian Kocher

Right. So, our comparable net income of minus $22 million would have been $12 million better.

Heather Jones – BB&T Capital Markets

Okay. Going to next year, the $60 million cost savings, which I understand doesn't include the savings from the Midwest consolidation, you mentioned that some of that would be offset by higher expenses and clearly there is not perfect visibility into that, but can you give us a sense on how much, what you are anticipating, how much the offset will be from higher expenses?

Brian Kocher

No. I really can. I know there are different industry input costs. Fuel is higher. Now, we are hedged, but fuel is higher than it was a couple of months ago. And if you look at the fuel curves headed out, it will be higher. That also means that will impact agrochemicals in paper and plastics. So, there are some offsets. I don't necessarily know at this point in time how much that is in terms of visibility, nor would we probably be in a position that we could communicate it. However, we did want to make sure we provided some visibility that next year's results will include some impact of increased volume both on the banana and the salad sides. It will include the results of an increased or the restructuring and the savings that we can generate there, but we will also face a little bit of pressure in some of the commodity input costs.

Ed Lonergan

Yeah, Heather, this is Ed. I would just add one small thing and that is I don’t consider the commitments we have made on restructuring is static number. So, as we refine our strategic choices over the course of the year, we’ll continue to look for efficiency improvements in our value chain and then the way we go to market and we’ll keep you posted as the quarters unfold.

Heather Jones – BB&T Capital Markets

I mean, do you foresee any chance that we are sitting here on the Q3 call of next year, and less than half of that $60 million has fallen to the bottom line because of cost. I mean, I guess I am trying to get a sense of volume and pricing move around, but something that's under your control like the cost savings, do you fully anticipate at least half of that that's going to fall to the bottom line in 2013?

Brian Kocher

We have complete confidence that, that would happen.

Heather Jones – BB&T Capital Markets

Okay.

Brian Kocher

Now, what – let me just update, we have complete confidence that, that would happen.

Heather Jones – BB&T Capital Markets

Okay. Moving on to other, you have exited your Chilean deciduous business, you have exited avocados and yet that generated a $4 million loss for the quarter. When I look at year-to-date results, it's a little over $11 million loss that compares to a loss of $6 million last year, an income of $4 million the prior year. So, I mean, that's a pretty large swing that's not a core business. So, and you adding your original comments talked about focusing on the core bananas and salads, and I guess, I am trying to figure out what else is left there that could rise up and bite us in other quarters or should we expect that to be just a basically breakeven line item from here on out?

Ed Lonergan

What’s left is primarily pineapples which are sourced similarly to bananas and in which we have skills and capabilities that we think can make that an interesting business going forward, but I think your assumption is a good one. At worst case, we would not want to be in the business if it didn’t at least deliver some value.

Heather Jones – BB&T Capital Markets

And is that a commission type business or do you take a lot of price risk on that business?

Brian Kocher

We have a mixture Heather.

Heather Jones – BB&T Capital Markets

Okay. And then my final question for the quarter is your corporate expense wasn't down that much year-on-year, which giving out cost-cutting mode that you are in right now, I would have thought it would be down. Well, how should we be thinking about that going into Q4 and 2013?

Brian Kocher

You mean the segment that's specifically for the corporate piece?

Heather Jones – BB&T Capital Markets

Yeah, you are showing $12 million versus and I think last year it was $12.7 million.

Brian Kocher

Right. Well, I think I’d like to turn that around a little bit I mean in any one quarter there might be some unique items that impact the comparability. But if you look at the nine months period for this year, it’s down $12 million year-over-year for nine months. And we will continue trying to drive efficiency where we can.

Heather Jones – BB&T Capital Markets

So, looking to Q4 should I expect that to be more flat with last year given that it was lower in the first half or do you think Q4 will be down year-on-year?

Brian Kocher

Q4 will be somewhere around flat again there might be a couple of adjustments that come through at year end that impact that. But I would not I mean if you look at our overall SG&A, SG&A is down overall almost $40 million for the nine months ended September 30th.

Heather Jones – BB&T Capital Markets

Okay.

Brian Kocher

And if you look at corporate expenses, its down 25% - $12 million, 25% for the nine months ended September 30th. And I think that gets back to Ed’s comment about our focus on making sure that our job in saving costs will never be finished will never mark okay we’re done its over. We’ll continue driving at this, we’ll continue trying to improve efficiencies and eliminate waste where we can.

Heather Jones – BB&T Capital Markets

Okay awesome to hear. Thank you.

Ed Lonergan

Thanks Heather.

Operator

And we’ll go next to Jonathan Feeney with Janney.

Jonathan Feeney – Janney

Good evening guys. Thank you.

Ed Lonergan

Hi Jon, welcome.

Jonathan Feeney – Janney

Welcome Ed. First question I had was what – will you mention a target margin for salads its 7% to 8% that’s credibly ambitious and I wonder what level of expense, global advertising spend, do you anticipate in that business. Does this transition, in other words, does this transition to private label meaning that you are not going to be supporting that business with advertising anywhere near the level over the past?

Brian Kocher

Jon, I think that’s fair to say I mean we came out in the second quarter that we wanted to focus our advertising, our consumer advertising in areas and geographies that it would make the more sense to us and for our business that really means in Europe where we have brand premium and can support the brand premium. We’ve talked specifically in North America about reducing the consumer advertising. We still will have trade advertising where it really pays off. But I think yes it does mean that we will not have the consumer advertising that we have had in the past couple of years and we will focus on driving efficiencies in the value chain delivering the service that we can deliver in both our branded and private label customers and supporting the category through some of our more traditional trade programs and necessarily some consumer marketing.

Jonathan Feeney – Janney

That’s certainly makes sense to me but I wonder when you look to – as you cut spending I mean its certainly I know as spending kind of that business has become significantly already even before you get into that target margin. How do you – do you worry that the category itself suffers as a whole, because I imagine Dole is not putting lot of spending behind it, they are kind of your route group, relying on their brand halo and we know the category dynamics as a whole for bag salad up and pretty weak the past few years. As you’ve started, I guess as you were taking those steps down in spending have you seen the category you heard or do you think we have kind of washed through all that?

Brian Kocher

Jon, I would actually think of it a little bit different way. We’re still going to do maintain our trade programs. So we’re still going to do promotional material in store with our customers. We’re still going to try to drive awareness that we have done all along. What we are reducing is the more brand related consumer advertising dollars and investment and we’re doing that for a very simple reason it didn’t deliver the returns that we anticipated and it didn’t deliver the returns we needed to continue that investment. So, I would think of it a little bit differently is not that that is consumer – a reduction in consumer marketing is going to hurt the category because we’re still going to work with our trade partners on some programs regarding awareness and self presence. But we’re not going to spend in an area or invest in an area where we didn’t generate the returns we needed over the last couple of years. So, I don’t see it having an impact on the category or consumption in total.

Ed Lonergan

This is Ed.

Jonathan Feeney – Janney

Yeah, please.

Ed Lonergan

The other thing Jon, I think is in many cases in the United States, the retailers made the choice for the consumer, which branded product they will find on the shelf. And so the data we have says the trade spending against promotion to the consumer is critically important to growing volume and then the work we do on creating innovation that excites the consumer in the category is critical to volume. And so our focus is ensuring we have the right trade programs to deliver significant value to them that they can market the product to the consumer and then to significantly focus on our innovations that will drive interest from the consumer ranging from organics to our expansion in packaging to kits and shreds that were either launching or have launched in recent months.

Jonathan Feeney – Janney

Very helpful, thank you. Just a couple of more detailed questions on capital expenditure, I know this is an area where you've historically always provided explicit guidance, but it occurs to me that this focus is disciplined focus on some core market divesting things would lower your structural CapEx needs. Is that the case? And then can you give us an annual run-rate CapEx for 2013?

Ed Lonergan

Well, it already has if you remember earlier in this year, we had guidance on CapEx that was somewhere in the $65 million range. Now, we have changed that to $55 million to $65 million. I think you will continue to see us challenge our capital allocation decisions and make sure that we are pushing as hard on wise choices in the capital area as we are on trying to driving out cost in our base business. So, I don’t have specific guidance to give you on CapEx for 2013 yet. I think we'll make sure that we have a chance do that when we address year end results, but you’ll see the same discipline that we are trying to drive throughout the value change. You’ll see that in our CapEx targets as well.

Jonathan Feeney – Janney

That’s great. Thank you. Just one last thing, forgive me if you already said this, if the euro didn’t move from today through December 31, 2013, which I really (indiscernible), but if it didn’t move from today what was the effect to be year-over-year?

Ed Lonergan

If it didn’t move today, so we were already through the nine months ended…

Jonathan Feeney – Janney

Through the nine, if it's simpler than just nine months over nine months…

Ed Lonergan

Through the nine months, we have already been impacted negatively by $38 million.

Jonathan Feeney – Janney

Right, okay. And so it’s an example that if the euro didn't move and forgetting about Q4 for a second at all periods, would you be looking at plus 38 in 2013 through the nine months?

Ed Lonergan

Yes. I mean it’s in the banana business, it’s in Europe. And so when you look at our segment results, I mean that almost in and of itself brings us back to our 2011 levels by just accounting for the euro, let me not quite, but obviously it's significant. And if you look specifically in Europe, their results would have tripled if the euro would have stayed the year-over-year. So, I think we are making a lot of progress on our base business transformation, on our value chain, on efficiency of operation it's just unfortunate that we have had kind of a euro. The euro trading this year that has masked all the progress we are making in our banana business.

Jonathan Feeney – Janney

Thanks. And I guess well you are making so much progress, I mean do you think that, what is your target for debt reduction? I am assuming all of this goes, it seems like there is some potential for significant improvement in cash flow here. How low that, that need to get before you buyback stock?

Ed Lonergan

Well, let me not answer that last question. I mean, we are probably not going to speculate on when we or if we put in a stock buyback program or anything else from that type of strategic perspective. But I will give you couple of frames of reference. One, reducing debt and de-leveraging in using our excess cash, the reduction of debt is the number one goal for our use of excess cash. I mean, we just want to be clear I think I’ve repeated it five times in the last call, Ed repeated it this call. I’ll repeat it again we’ll be happy to repeat it more times. The reduction of debt is our number one goal with excess cash flow.

Let me also give you just for a context and this is all information we’ve disclosed before. If we achieve the target margins that I mentioned and Ed repeated this period 4% on bananas, 7% to 8% on salads that translates roughly to about $175 million of EBITDA. At our current debt load now if it takes us 2 to 3 years to get there and we’ll be paying down debt in the meantime but our – at our current debt load and $175 million of EBITDA that would be right around three times cash flow. So, that just kind of gives you some context for where we’re headed. We – I’ve mentioned in the last call we won’t mention a specific coverage ratio target or debt level target, but we’ll keep pounding away until we get to that level and then see if we need to pound away more.

Jonathan Feeney – Janney

Okay, thank you. That’s very helpful.

Operator

And we’ll go next to Carla Casella with JPMorgan.

Carla Casella – JPMorgan

Hi, I have a couple of questions on the salad business how much of your ultimately using private label could be as a percentage of your sales of your salad sales?

Brian Kocher

Well of the category private label is 25%. Could it be a quarter of our business, I mean theoretically we’re a long way from there. I think what’s important for us right now is we go out and find and be competitive and win private label where it can most help us and where it can most provide efficiencies in the supply chain where we can most demonstrate our value to the customers. And we’re fortunate that we’ve had a signature win that will start delivering immediately volume improvements in the first quarter of 2013.

Carla Casella – JPMorgan

And it seems the win you have this year does it replace any of your branded business?

Ed Lonergan

No.

Brian Kocher

No.

Carla Casella – JPMorgan

Okay and then when you sign new volumes either in private label or in branded in bananas or salad, how sticky is that, is that something where you’re sure that for the year is it a six months, is it a multi-year?

Ed Lonergan

The contracts vary by region, but in North America where we are talking about in salads it’s just generally a one year minimum of a one year it might go as long as two and in bananas generally a year.

Carla Casella – JPMorgan

Okay, great. And then I know you just took a question on debt reduction, have you considered any refinancing plan for the high-yield notes at this point?

Brian Kocher

I’ll give you the same answer that I gave you last quarter. I think we constantly are trying to evaluate that one other things that we want to make sure we do is focus on our core business and drive cash flow in our core businesses. We do recognize that there is some let’s say interesting market dynamics for an issuer right now. And we’re evaluating that and what that means for us. So, that’s really the best that we can tell you right now.

Carla Casella – JPMorgan

Okay and then just one last question on the banana business, how much of your gains in volume are regaining contacts that you had in the past versus new volume?

Ed Lonergan

All – almost all of it is regaining volume we had in the past, so customers like where we are taking the business, like the competitiveness of our new strategy and have responded positively as a result. But there are generally customers that know us and like the brand.

Carla Casella – JPMorgan

Okay great and you said that economics of it is not less – no less favorable than in the past or more favorable I guess?

Ed Lonergan

Yeah, when you combine the efficiency actions that we’re taking in our value chain with the pricing that we are building in the contracts, that's accurate.

Carla Casella – JPMorgan

Great. Thank you.

Ed Lonergan

Sure.

Operator

We will go next to Bryan Hunt with Wells Fargo Securities.

Bryan Hunt – Wells Fargo Securities

Ed welcome.

Ed Lonergan

Thank you.

Bryan Hunt – Wells Fargo Securities

Good afternoon, Brian. And I want to thank Carla for leading into my question. I guess you did mention just kind of renewal rate which you just said that the new banana contracts you signed achieved the appropriate return metrics with the cost savings baked in. So, that implies that you have sold forward some of your cost initiatives or should we assume that all the costs that you've baked into these new contracts have already cost savings – cost savings have already been achieved. Could you kind of frame up what you've done here?

Ed Lonergan

Yeah, let's make sure that we are very clear. What we were trying to articulate is the combination of the pricing that we achieved in these new contracts in the supply chain and what we have been working on in the value chain is accretive to Chiquita. Note that, we just want to make sure it’s absolutely clear. This business is accretive to Chiquita. It makes us in a better state today than we were yesterday.

Bryan Hunt – Wells Fargo Securities

Got you.

Ed Lonergan

And that's the message that we are trying to get across. Now, we will continue to work on value chain initiatives that try to drive even more value for us as importers and deliver the value to the customer that we can deliver, but specifically on this new banana volume, we want to be very clear that it's accretive to our operations.

Bryan Hunt – Wells Fargo Securities

Okay. Next, when you look at your penetration of head lettuce and private label lettuce with customers based on what you are saying is it just one significant win you had so far?

Ed Lonergan

Several is the right thing to say at the moment, but the signature win that we talked about is enough volume. So that it has a meaningful impact on year-on-year volume growth and that's where we get the low single-digits volume growth from.

Bryan Hunt – Wells Fargo Securities

And then based on the breath of your customers, I imagine you have conversations with all of them so far, I mean is there anyway you can gauge the interest or tell us what they are thinking with regards to their private label programs versus your offering?

Ed Lonergan

I think the key issue here is that private label contracts tend to be slightly offset from what we would normally see in say an annual bananas business. So, they mature at different times and they run to different lengths. And so with all of our key customers, we are having the discussion about our interest in the business and our ability to serve that business with quality and safety and range. And so we are picking them off as they come due, but at the moment, there is only been a few in which we have had an opportunity to participate in the RFQs.

Bryan Hunt – Wells Fargo Securities

And does your wash technology play into that discussion as well?

Ed Lonergan

It does, but it depends upon the product.

Brian Kocher

Yeah, it's only, remember Bryan it's on a couple of different products in the retail space.

Bryan Hunt – Wells Fargo Securities

Got you. And then lastly and Brian maybe to be crystal clear, when you look at the $7 million of bad debt expense and then the other $5 million expense on recall cost. Did that all flow through cost of goods?

Brian Kocher

No, no, $7 million would have flown through SG&A and $5 million through cost of goods.

Bryan Hunt – Wells Fargo Securities

I appreciate your time. Thank you very much.

Brian Kocher

Alright, Bryan. No problem.

Operator

And we'll go next to Karru Martinson with Deutsche Bank.

Karru Martinson – Deutsche Bank

Good afternoon. When we look at the cash on the balance sheet, what do you feel of the appropriate cash balance here to run the business?

Brian Kocher

We have had that question before. I mean, we'd really sort of look anywhere from $35 million to $50 million as the right level to manage this business on a day-to-day basis knowing that we have got some business in Europe, we have got some business in different territories and we have to have enough money to feed the machine on a regular basis, I think of cash balance somewhere in that north of 35 is right around 35 or north is good for us. We have had it higher depending on different times of the year, but if you look at core cash, we need to manage the day-to-day operations of the business. It's probably right around that $35 million.

Karru Martinson – Deutsche Bank

Okay. And when we look at packaged salads, I mean, there is obviously you guys are emphasizing the gains here on private label, we've heard from your competitors as well. I mean is this just a category of where the brand really doesn't matter to the consumer anymore?

Ed Lonergan

No, I wouldn't say that. As I had mentioned earlier, the retailers in the United States make part of this choice for the consumer. So, they tend to stock only one branded player either ourselves or one of our competitors. And in most cases now are stocking of private label. And there are branded consumers in those stores that prefer to pick the branded product up. So, today the two branded players have share outside ahead of the private label business on a national basis. And I would – I can’t give you a picture of the future there, but our objective is to continue to grow this business through innovation going forward.

Karru Martinson – Deutsche Bank

Okay. And when we look at kind of the recent hurricane and the storms that we had I mean has there been any impact that we should be kind of keeping in mind here for the current quarter in terms of whether shipping delays or deliveries or lost products?

Brian Kocher

Shipping delays and deliveries I think are manageable. We still probably haven’t seen the impact of the fact that people couldn’t go to stores in the Northeast for a week or so and we don’t have any specific calculation yet. But if I give you a frame of reference if you remember Hurricane Katrina and when that devastated Gulf Port and Louisiana at that time we had sort of a $2 million impact from some supply from – in fact that people weren’t going to the stores and so. And again I wanted to be clear I’m not trying to give you guidance on what the impact is for this event, but that I can think of a similar event in our history and that’s the order of magnitude of type of impact it had on us.

Karru Martinson – Deutsche Bank

Okay. Thank you very much.

Brian Kocher

You’re welcome.

Operator

That does conclude our question-and-answer session I would now like to turn the conference back over to Ed Lonergan for any additional or closing remarks.

Ed Lonergan - President and Chief Executive Officer

Okay, thanks and thank you very much for your questions and for joining us today. Hopefully you can appreciate that while 2012 has been a difficult year for us here at Chiquita, we’re optimistic about the next few years. And as I get settled I look forward to getting out meeting many of you over the next few months. We look forward to updating you on Chiquita’s continued progress throughout the balance of 2012. Thanks again. Have a great night.

Operator

It does conclude our conference. You may now disconnect.

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