ED LOYD (Manager of Investor Relations & Corporate Communications, Chiquita Brands International): Welcome to Chiquita Brands International's fourth quarter and full-year 2007 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.
Thank you, Fernando. The following are some key highlights of our performance in the fourth quarter.
Now I'd like to turn to our segment results.
In our Banana segment, year-over-year sales rose 2 percent in the fourth quarter to $503 million, and operating income rose 96 percent to $33 million. Segment operating results benefited most significantly from the favorable impact of European currency and improved local banana pricing in both Europe and North America. These benefits were partly offset by higher industry costs for purchased fruit, fuel, ship charters and paper. 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.
QUESTIONS AND ANSWERS Dean Haskell (Morgan Joseph): Thank you very much and good afternoon everyone. Couple of questions. How many stores were you distributed into at the end of 2007 (Chiquita To Go) and your goal for the end of 2008? And a related question is will you put expanded products through this channel in '08? Aguirre: At the end of 2007 we were around 13,000 convenience stores. We have set our goal to increase that quite significantly for this year and we believe that reaching more than 18,000 is quite achievable. We are still evaluating our specific plans for that. Haskell: And in expanded products? Aguirre: We started with Chiquita To Go and clearly our objective is to continue using our brands to extend to higher margin categories. Some will go into the convenience distribution channel, but clearly we're also focusing a lot on how we improve distribution of those products into the grocery outlets as well. Haskell: As a heavy user of your salads, I would really love to have a Ziploc bag. I have to cut them up and use clothespins to close the top of the other half that I haven't eaten yet. Aguirre: Thanks for that consumer comment. We appreciate it Jonathan Feeney (Wachovia Securities): Is there any thought, considering the timing of this refinancing here, setting up for acquisitions in 2008? I know, Jeff, your priority is debt repayment, but you did go ahead and do Verdelli Farms, when your priority is debt repayment. It seems like with all of the progress you've made, it feels better, the cash flow feels better right now. Are acquisitions at all a priority right now? And if so, where would you be looking? Aguirre: Well, Jonathan, that's a good question, and as you know, in the past, we've not speculated with any future opportunities, particularly in the area of acquisitions. What we have said is that we continue to place priority on reducing debt, and will continue to do that until we get to the goals that we've set for ourselves. We will always look at potential opportunities, based on the acquisition criteria that we've talked about before, which amongst other things, it would have to be a good fit with our brands. It would have to have high profit potential. It would have to generate good and strong cash flow, and have a strong leadership position and the culture fit with our businesses. But frankly, today our main priority financially speaking is to reduce debt and so we won't turn our backs to opportunities, but I don't see anything major in the near future for us. We really want to focus our attention on executing our restructure and on continuing to reduce debt and we'll just go from there. Feeney: Thanks. And just one other question. We are hearing reports about one of your competitors operating in the salad business at fairly low capacity utilization, is there anything unusual going on competitively there that might be interfering with what would otherwise be a pretty strong price realization environment? Aguirre: We don't see anything that would point to capacity utilization, no Heather Jones (BB&T Capital Markets): I have a few questions. One, and I apologize if I missed this, but I didn't catch it, what was banana pricing -- how did it perform during January and February? Zalla: Banana pricing was up strongly in January in North America. It was up 7 percent again. In core Europe similarly, Heather, it was strong. It was up 1 percent on a local basis, local currency and 15 percent on a dollar basis. Jones: Okay, and from what I understand, EU pricing has strengthened considerably in February. Is that consistent with what you all are seeing? Zalla: We are seeing an increase. It had dipped somewhat in the fourth quarter. It came up strongly in recent weeks, pricing at the bottom of the market is back to levels about equal to the same week a year ago. Jones: Wondering, as far as the cost increases, it seems these are significant -- on a blended basis, significantly higher than the numbers you put out a few weeks ago, and I was wondering if you could comment on that, what drove the increase? Zalla: What we've done today is break out in more component pieces what the total impact of the costs are. So we had signaled to investors in the press release is that we expected a cost increase that could be more than $120 million for the year. Indeed we see that. That's the result of three pieces--higher industry cost in the range of $90 million to $95 million, higher other product supply costs in the range of $60 million to $70 million, offset by internal cost savings initiatives totaling $30 million. Jones: So when you put $120 million in the press release a couple of weeks ago, that included the effect of those cost savings? Zalla: Yes Jones: Okay. Now, your $60 million to $80 million in restructuring savings. Could you give us some sense of your confidence in reaching the high end of that? You mentioned that the consolidation of your processing distribution's on track and I guess what do you need to happen to reach $80 million as opposed to $60 million? Zalla: We're highly confident of hitting the target, which has been $60 to $80 million since the announcement. We've taken all of the people-related actions that underpin the savings, on track for the plant and facility closures to occur by the end of Q1 and then there are other operating changes and other cost savings initiatives that we need to realize in the balance of the year. So I'm not going to speculate on where within the range we'll fall. We're highly confident of receiving the target that we've set out. Jones: So I mean the, that $20 million range. Is it dependent upon a capacity utilization target and the remaining facilities? What will cause you to get the $20 million extra as opposed to the low end? Zalla: Heather, it's the combination of cost reduction initiatives that we have that are in a general and administration areas of the company, where there is some uncertainty. So I'm not going to update the numbers, but clearly we'll be within the target. Jones: My final question's on Ecuador. Recently the spot prices there have been really high. I would presume that's factored into your cost guidance? Zalla: It's factored in. As a company, we ship less fruit out of Ecuador than some of our primary competitors. Last year it was about 11 percent of total volume. This year we are seeing very high spot prices and we are seeing a reluctance on the part of growers to contract at fixed prices, so we have some higher exposure as a result of high spot market prices. We've seen some levels that have climbed to levels that we think are unsustainable. We don't expect those to prevail for the long-term. Nonetheless, there is significant pressure on supply, both because of local weather conditions in Ecuador and also strong demand, including from new markets, like Russia, for example. Jones: With relation to Russia, have you all increased your shipments to Russia, or is that consistent with prior years? Zalla: It's consistent with prior years, meaning we are not there on a regular basis. And at the moment, we and the industry are facing tight supply, so that's part of the reason that our volume is down slightly in North America and somewhat in Europe. But we expect that the supply availability will normalize in coming months. Bryan Hunt (Wachovia): Yes, just a few housekeeping items and then some real questions. I was wondering if you could tell us what your bagged salad and banana market share was in North America in Q4 according to IRI. Zalla: In Q4, it was 46 percent for the 13 weeks ended February 3. That's the latest IRI data that we have. In bananas, we have market share measured on a different basis, which is by volume, and our shares remained relatively flat over the last couple of years. So we have strong share in the top 25 accounts, but in the overall market, we're closer to 30 percent. Meaning a higher share in the top 25 accounts and less exposure to the wholesale market. Hunt: All right, great. Looking at your cost reduction initiative, you've made significant changes in personnel, as well as operations showing one face to the customer. I mean it's obvious from the outside looking in what type of leverage you can get on those type of moves. However, could you tell us about, or have there been any instances in which you have conflicts of personalities and end up losing some share, or losing some of your top 25 customers because of this change in operation and your change in personnel? Zalla: We have not seen any changes, any major changes of any key customers, in any of our regions, in any of our regional markets. So, no, we have seen no changes whatsoever, as a matter of fact, due to any of our talent changes. Hunt: Okay, and then next, Jeff, with regards to your comments about supply availability to normalize on bananas in the upcoming months, a little over, or approximately a year ago, we had a tropical storm that wiped out roughly 10 percent of the market supply, have you seen any creep of that supply coming back online, or does the supply that was impacted by tropical storm, I believe it was Dean, has all that just remained off line? Zalla: Well, tropical storm Dean, which flowed through the Caribbean in September did have an immediate impact. It was about 6 percent to 8 percent of the total volume going into Europe, not into all markets. That volume has not yet come back. We would expect it to come back sometime in the middle of 2008. But we have seen a redistribution of volume from other trading markets into the EU. So we got a bump in prices in October in Europe and then that price effect diminished quickly as volume was redistributed. We haven't seen significant disruptions in Latin America, although adverse weather conditions in Ecuador and in Northern-Central America have made the supplies tighter in recent weeks. Hunt: All right. And my last question is, do you have access or have you increased access to ACP countries for sourcing into Europe over the last year? And if so, where? Zalla: We have not made any changes to ACP sourcing. We source very very small amounts from the Ivory Coast and that has not changed. Reza Vahabzadeh (Lehman Brothers): Just on the fourth quarter housekeeping financial question, Jeff, what was the use of working capital in the fourth quarter since your net debt moved up sequentially? Or the cash used in working capital? Zalla: The use was $9 million, Reza, which was a $51 million improvement off of the fourth quarter of '06. Vahabzadeh: Okay. And the higher CapEx in 2008, you alluded to it, but what's causing the CapEx in '08 to be higher than last couple of years? Zalla: The principal difference, Reza, is that we have $12 million built into the plan for capital spending related to optimizing our processing and distribution network in the East Coast of the U.S. in salads following our acquisition of Verdelli Farms in October last year. Vahabzadeh: Okay, and this would be sort of a one-time event or a continuing CapEx? Zalla: Well, it would be one-time in terms of rebalancing our capacity but we continue to invest in the business. So as we grow volumes over time, we're going to continue to invest in strategic assets, including in salads. Vahabzadeh: Got it. Fernando, as you look at the banana business in the next -- in a couple of quarters or foreseeable future, directionally, how are you thinking about the banana business? Higher dollar basis pricing, stable, higher local pricing, but higher industry costs, would you think that overall banana business the report flat, higher or lower kind of EBIT margin? Aguirre: We expect it to be higher, the margins, based on what we have done on pricing over the last couple months. Some of our contracts, as you know in North America roughly 90 percent of our volume is under contract, and some of those contracts were negotiated in the last quarter of the year and essentially every one of them was negotiated with higher pricing. So I would expect the majority of it to be under higher pricing. In fact, to the best of my knowledge and my memory, if my memory serves me right, I don't believe we have renewed any contracts anywhere for less than a substantial price increase. So I would expect it to be better. Vahabzadeh: And as far as the two cost buckets that you have talked about, Jeff and Fernando, the industry costs and the higher product supply costs of $150 to $165 million, do you have very high visibility on how much of that is to be determined based on actual spot market costs, because the buckets are $90 to $95 million in one and $60 to $70 million on the other one, but these two costs have generally moved higher last couple of years. Zalla: You're correct, they have moved higher. We have been in the past relatively accurate in estimating the degree of cost impacts in the business. So we have a high degree of visibility into the cost, Reza, but some of them are quite subject to market volatility. So for example, every time we quote the increase in fuel, for example, $50 million within that industry cost figure, it's based on current market forward rates for fuel, which have risen dramatically year on year. So there will be a change in some of those amounts, but we have relatively high confidence in them. Vahabzadeh: Okay, but there is still some costs that I suppose you are on the spot market for? Zalla: Sure. Happy to do that. We take it in pieces. Labor is close to $20 million of the amount, a little more than half of that in salads and the rest in bananas. Materials, roughly $10 million. Those are materials like plastics and agrochemicals and fungicides, principally in the banana segment. There are also about $25 million of costs that are driven by what I would refer to as market factors, things like local exchange rates or indexes to local inflation or contract renewal provision, some cases tariffs, like Panama Canal rates. So those market factors by our estimation would account to about $25 million. Then we have about $15 million of other equipment, port and logistics costs in bananas, both in sources in the markets. So these are the kinds of costs that we're aggressively trying to counter with internal cost savings initiatives that we have targeted at $30 million for this year. Vahabzadeh: Fernando, on the packaged salad business, do you foresee the category continuing to rebound and do you see any kind of head winds in terms of your EBIT in that business in the next couple quarters? Aguirre: Yes, we see the category continuing to rebound. The question is whether it will come back to the double-digit growth that we also in the last several years. We saw nice rebounds at the end of last year and we expect it to continue, but again, the critical question is whether or not it is going to be double-digit growth. On the head winds, as Jeff sorted out, the several head winds that we see are related to costs and we are very aggressively tackling opportunities for us to reduce those, but other than that, we really will be focusing a lot on what we talked about, expanding our brands and expanding the consumption of our products. One of the items that I always like to talk about is the average consumer usage frequency of packaged salad bags in the United States. Today, it is only about once a month. So if we can get the typical consumer to use more than one bag per month of salads and if we can also increase the penetration of households from today's about 70 percent of penetration of households that have prepackaged salads, we can get that up to 90 percent, and 90 percent is based on salad dressings in 90 percent of the households, we could increase the category significantly. We've decided that we really want to focus a lot of our attention on both the consumption of salads, as well as the distribution and penetration of households. Zafar Nazim (JP Morgan): Thank you. A couple of questions. First, on price increases in North America in the banana segment, just wondering going forward, you expect further healthy price increases, but I was wondering can you give us some sense or color on how would we think about price increases as the year progresses? Should we expect more in the first half and then you start hitting tougher comparisons in the back half and therefore less of a price increase in the back half of the year? Zalla: Zafar, the recent experience has been prices increasing progressively through the quarters. So for example, in Q2 of '07, price was roughly flat. In Q3, it was plus 5 percent. In Q4, it was plus 7 percent and it was 7 percent in January. One component of that has been the increasing fuel surcharge, which is paid by our contract customers. So as the degree will depend in part on the surcharge, which took a significant step up in Q1 and fuel is near peak rates. At the same time, recall that roughly 90 percent of our volume in North America is under contract. Most of those contracts are one year in duration and they renew at different times during the year. Recent renewals have been at higher percentages and as we work through the portfolio renegotiation process, we should get increasing gains on base contract price increases year on year. Nazim: Is there a particular quarter in which more of your contracts differ than other quarters? Zalla: No, they are relatively evenly spread. Nazim: Okay, and so I mean you've got pretty good increases in North American pricing. Are you now starting to see any kind of resistance from retailers? I see some increase in retail price in bananas, but it's been fairly consistent for the past several months or so. So is there any resistance now from retailers, are they eating this price increase themselves? Zalla: Of course their pricing decisions are for their own account; we can't stipulate the prices at which they sell. However, bananas are relatively cheap compared to other fruits in the produce section, so clearly, we believe that consumers can and would be willing to pay more for bananas and certainly we continue to strive to earn a fair share of the total profit returns that are earned at retail in bananas. Nazim: And then, on cost increases. Are these fairly evenly spread out over the year, or more in the first half versus the second half, any color on that? Zalla: Again, Zafar, it's going to depend on a couple of things. Some of the factors like purchased fruit are higher earlier in the year, when we have greater exposure to the spot market. Some of them like fuel are going to depend on what market rates are. At the moment, the fuel curve is relatively flat and high throughout the year. So it depends. It's really not prudent to be any more precise than that at this time. Nazim: Okay, then one last question, can you give us the amount of cash taxes that you paid in '07 and what we should assume for '08? Zalla: We had a tax expense for the year of $3 million. We don't break it out between cash and, for example, release the valuation reserves on an accrual basis. And as you know, for us, the effective tax rate is rather difficult to predict with any precision, particularly after the implementation of FIN 48 at the start of 2007. Operator: Due to time constraints, our final question will come from Sal Kamalodine with B. Riley and Company Kamalodine: Hey, guys. I just had one quick follow-up on the channel, and I was curious as to whether you were considering transplanting the Chiquita To Go program into the QSR channel, where it looks like you've been pretty successful with the Chiquita Bites and it would seem like a natural place for you to sell the Chiquita To Go bananas. Is that something you're looking into? Aguirre: Well, as you know, we began testing that in some retail outlets such as Starbucks. I don't know if you would consider that to be necessarily QSR, but it's very similar and so, yes, the likelihood of those kinds of products to be there is high because that's exactly what we would like to do. So, yes, we tested it. It actually has done very well and so I would expect us to be in more places like that over the foreseeable future. Kamalodine: And the 18,000 retail outlets that you have quoted for the convenience stores, I assume that's excluding any sort of Starbucks/Subway type? Aguirre: It would include some of those places. Kamalodine: Are you in a position to comment on what kind of ramp or schedule you would expect for that channel, for the QSR channel? Aguirre: No, I won't speculate with specifics on that, but clearly based on what we've done in the last year and a half in the testing, clearly that's one channel we're looking at quite aggressively. But I prefer to not speculate with very specific numbers. Kamalodine: Sure. And then one final question, can you just comment on the grocery store market trials that were taking place with the packaged bananas and how that's tracking? Aguirre: Yes - that test met all the objectives we were looking at. We are now looking at all the specific consumer insights that we gained and we'll be making some decisions as to what else we ought to be doing with that type of package. And the learnings were quite rich and what we want to do, as a company, is to define the best products and the best packaging based on what the consumer response is and that's exactly what we're doing now. Understanding the results and the insights and then translating that to the best possible execution. Thank you very much for all your questions and for joining us today. We look forward to updating you all on our continued progress in the quarters ahead. Thanks again.
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