MICHAEL MITCHELL (Director of Corporate Communications, Chiquita Brands International): Welcome to Chiquita Brands International's second quarter 2007 earnings conference call. On the call today are Fernando Aguirre, chairman and chief executive officer; Jeff Zalla, chief financial officer and; Bob Kistinger, president and chief operating officer at Chiquita Fresh Group.
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 web site at www.chiquita.com or 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 reports on Form 10-Q. Now, I would like to turn the call over to Fernando Aguirre. FERNANDO AGUIRRE (Chairman and CEO, Chiquita Brands International): Thank you, Mike. Good afternoon and welcome. I'm pleased to have this opportunity to discuss with you our second quarter 2007 financial and operating results. While we were disappointed with our second quarter results overall, we continue to work through the ongoing challenges that the company is facing and made solid progress in several important areas that I would like to highlight. - In particular, we paid down more than $200 million of debt in the quarter after completing the sale and leaseback of 12 refrigerated cargo vessels in June. In addition, this strategic transaction created an alliance with expert refrigerated shipping operators, better positioned us to grow our business over time without owned capital commitments, and locked in attractive operating lease rates for several years to come. - Furthermore, in our Banana segment, net sales, operating income and margins improved slightly year-over-year, as we expanded volumes in North America and in trading markets such as Turkey. In our core European markets, we benefited from a stronger euro, and local prices and volumes decreased only modestly, as we continued our strategy to maintain our premium position and focus more on profit than on market share. - In our Salads and Healthy Snacks segment, we continued to outperform all other brands in retail value-added salads, despite soft overall category performance. In fact, while our retail sales were roughly flat year-over-year, all other brands' sales fell by approximately 9 percent during the quarter. Moreover, despite significant pricing pressure in the market, we have maintained relatively stable net revenue per case year-over-year. - And in our Other Produce segment, our Chilean business improved year-over-year, and we expect further improvements in future quarters as a result of decisive restructuring actions we have taken, including our exit from leased farm operations in the first quarter of this year. We continue to downsize our owned Chilean operations, and have shifted our focus to buying a narrower range of strategic products from growers on terms that allow us to reduce risk and earn attractive, sustainable margins. In addition, Atlanta AG, our German distribution unit, continued to underperform, mostly as a result of year-on-year volume declines. In sum, while we made progress in the second quarter, we continue to be challenged by the industry and regulatory dynamics in Europe, category softness in U.S. value-added salads, various cost increases, and the restructuring underway in our Other Produce operations. Despite those challenges, we expect to begin delivering modest year-over-year improvements in our operating results, starting in the third quarter. I will provide more information on other strategic actions we are taking to build a high-performance organization and deliver innovative, higher-margin products. But first, let me turn the call over to Jeff, who will provide more details of our financial and operating results for the second quarter. Jeff? JEFF ZALLA (Chief Financial Officer, Chiquita Brands International):
Thank you, Fernando. The following are some key highlights of our performance in the second quarter:
We believe that our cash level, operating cash flow and borrowing capacity provide sufficient liquidity to fund our working capital needs, capital expenditures and debt service requirements. And importantly, we remain in full compliance with the financial maintenance covenants in our bank debt. However, we continue to examine options to replace or restructure our current bank debt facility to provide further financial flexibility to execute our long-term growth strategy.
In our Banana segment, year-over-year sales rose 3 percent in the second quarter to $528 million, and operating income rose 10 percent to $44 million. Segment operating results benefited most significantly from favorable currency exchange, the absence of sourcing and logistics costs in the year-ago quarter from the after-effects of tropical storms, and cost savings in our supply chain and tropical production divisions. These benefits were partly offset by lower local pricing and volumes in core European markets as well as higher costs for purchased fruit, ship charters, fuel and other items. The year-over-year variances are detailed in today's press release, but let me provide some additional detail on price and volume trends in our primary markets.
In North America, we continued to sustain volume growth compared to 2006, when supply had been limited early in the year due to storm damage late in the prior year. We increased volume year-over-year by 5 percent in the second quarter and 6 percent year-to-date. Overall pricing was flat. Base contract pricing continued to increase modestly, but those gains were offset by lower week-to-week market pricing on noncontract volumes and lower fuel surcharges, compared to the year-ago period. In July, North American pricing is up 3 percent year-over-year, and we would expect this more favorable trend to continue through the third quarter, as surcharges will be higher, due to recent increases in market fuel prices. Local pricing in our core European markets was down 3 percent year-over-year in both the second quarter and year-to-date. While industry volume growth and very competitive pricing remains a challenge, we are currently seeing higher, more stable pricing at the bottom end of the market than we did last summer. In fact, for the month of July, local pricing was up about 16 percent year-over-year, and we are entering August with local prices slightly above year-ago levels, so we do not expect this year's third quarter in Europe to suffer as much from excess supply and hot weather as we experienced last year. In addition, we remain focused on our strategy to protect our price premium and not chase market share at the expense of profits, despite higher industry imports. As a result, volume in our core European markets decreased by 4 percent year-over-year during the quarter and was flat for the first six months of the year. Let me turn to our Salads and Healthy Snacks segment where our second quarter net sales increased 2 percent from the year ago quarter to $333 million. Operating income was $13 million compared to $19 million a year ago. Fresh Express remains the only brand in the U.S. value-added salad category to achieve higher year-on-year volumes. And operating results benefited from cost savings related to improved production scheduling and logistics. But we are confronting pressures from lower consumer demand, competitive price promotions, and higher costs including those related to food safety, which will continue to impact our segment results for the balance of the year. As Fernando noted earlier, the value-added salads category in North America remains soft in the aftermath of an E. coli outbreak last September. While many consumers have returned to the category, continuing media coverage of various food safety incidents — including those in other categories, such as meat — have caused concerns to linger, particularly for light users, who have not yet come back to the category. As a result, the category is rebounding more slowly than expected, and retail sales for the industry remain about 5 percent lower than a year ago. To stimulate consumer confidence in the category, we are continuing to invest in product innovation, marketing and merchandising efforts with our customers, as well as food safety. For example, in just the last 12 months we've continued to invest in our industry-leading food-safety practices by enhancing agricultural practices, preventive measures, and equipment. This effort has included more stringent field requirements and more inspections at key stages throughout the process. In our Other Produce segment, net sales increased 1 percent to $393 million. The quarterly operating loss was $1 million compared to operating income of $3 million the second quarter 2006. Segment operating results declined year-over-year primarily from lower profitability in our German distribution business due to a reduction in volume of certain nonbanana products. To improve the performance at Atlanta, we are rebuilding these volumes for next season and optimizing the ripening capacity between our Chiquita Fresh Europe and Atlanta facilities. At the same time, we realized a year-over-year benefit during the second quarter of $3 million at Chiquita Chile due to more favorable pricing. We continue to restructure our Chilean operations to improve its financial performance and reduce our risk profile. We expect these actions to result in charges of approximately $2 million in this year's third quarter, $1 million in the fourth quarter, and $3 million next year as we complete implementation of our restructuring plan.
Now let me turn to a discussion of the company's outlook and to various performance and risk assumptions for the remainder of the year, which is summarized in the outlook section of today's press release. I would like to add perspective on several of these items.
In summary, although the first half of 2007 has produced weaker-than-expected results, we are confident in the company's long-term growth and profit potential -- and we are making tangible progress in enhancing our risk profile, driving costs out of the business and improving our overall business results. We expect our second half results to show steady but modest improvement in both sales and earnings compared to last year's results — and by this I mean improvements principally in operating income, aside from the goodwill impairment charge in last year's third quarter and the legal settlement in last year's fourth quarter. That said, we are still in the midst of a turnaround, responding to structural shifts in the EU banana market, slow category growth in packaged salads in North America, and rising industry costs. Rest assured that we will continue to update you in coming quarters as we continue to tackle these challenges head-on. Now, let me return the call to Fernando. AGUIRRE: Thanks, Jeff. As we outlined at our Investor Day in May, our top strategic priority is to achieve sustainable, profitable growth. To reach our profitable growth objective, we are focused on delivering innovative, higher margin products and on building a high-performance organization. Let me address some examples of progress in these areas.
As I've noted in the past, we believe that our focus on innovation in products, technology and marketing will allow us to advance our competitive position, expand distribution channels, extend product shelf life and develop new product varieties. Several of our recent product innovations made solid progress over the past quarter. For example, Chiquita to Go bananas are now available in more than 10,500 stores, a 25 percent increase in distribution over the past three months. As you know, due to proprietary packaging, these single bananas stay perfectly fresh up to seven days longer than traditional bananas. We expect to continue to expand distribution this year as we gain new customers and expand into more stores within existing customers.
Since being launched in Belgium last summer, Just Fruit in a Bottle, our healthy 100 percent fresh-fruit smoothie, continues to perform very well. This product marks our first entry into the fruit-based, value-added products market in Europe, and customers and consumers have responded very positively. For example, in Belgium, Just-Fruit-in-a-Bottle has achieved 85 percent retail distribution and a 6.5 percent market share in the chilled juices category, and was voted by Belgian retailers as the best innovation in the produce sector in 2007. As a result of this early success, we are expanding distribution and adding new flavors, including a new juice mix that capitalizes on the antioxidant health benefits of pomegranates. In March, we started shipments to customers in Germany, and we are planning to expand into the Netherlands this fall. We expect to generate start-up losses during the first year of each new market entry, as we support product launches with media, establish the product and grow the category. Therefore, while Just Fruit in a Bottle is extremely promising, we expect to incur start-up expenses for this business in the coming quarters, at rates that may well exceed the $2 million investment we made during the second quarter. We are confident that the long-term prospects for Just Fruit in a Bottle will more than justify these investments.
At Fresh Express, product innovation continues to drive growth and outpace competitors. Even while the category has declined, we have been able to hold prices relatively stable, modestly increase volume, and increase velocity of sales versus our competition through product differentiation. For example, we have successfully re-launched our Garden salads nationally to add nutritional value and attract first-time consumers to the category. In addition, we are currently testing two single-serve, full-meal salads, including a line called Gourmet Café, in 550 stores in the Seattle, Denver, and Phoenix markets. We have been very pleased with the results to date, and are evaluating whether and how best to expand these higher-margin products nationally. Building on the success of our Chiquita Apple Bites, the No. 1 brand of sliced apples in U.S. grocery stores, during the second quarter, we successfully introduced four line extensions -- mini carrots, snap peas, grapes and apple-grapes. These higher-margin Healthy Snacking products are performing very well and improving profitability, as we leverage scale across a broader Healthy Snacking platform. These are several examples of how we're focusing our attention on delivering innovative, higher-margin products that better position us for the long-term as we diversify our company by product, channel and geography.
Building a high-performance organization involves a number of goals, including efforts to focus on our core competencies and to streamline our operations to improve profitability. A prime example of our focus on core competencies was the sale of our shipping assets during the quarter. Through this transaction, we are able to partner with expert global shippers in a manner that improves efficiency and maintains product and service quality, while positioning us for long-term growth. We will continue to explore other potential structural changes that could allow us to increase our return on invested capital, reduce the administrative costs of the business and enable us to focus even more on bringing value-added products to consumers in the market. Good examples of our efforts to streamline our operations include our continuing successful cost savings programs and our decisive actions to restructure our Chilean operations to concentrate on fewer strategic products, increase margins, decrease agricultural risk and reduce volatility. We have more work to do in this area, but these actions demonstrate our constant commitment to ensure that every aspect of our business delivers appropriate returns and enables us to achieve our long-term strategy and goals. In fact, to be more specific, we will continue to take actions to strengthen our balance sheet, improve our risk profile, focus our efforts on market initiatives, and diversify our company by product, channel and geography.
I would also like to update you on some recent positive developments in the legal challenge to the current European banana tariff regime. Many of you may have read at the end of June that the United States joined Ecuador in requesting an arbitration panel under so-called Article 21.5 regulations, which are expedited World Trade Organization dispute procedures. A three-member arbitration panel has been formed and has initiated the adjudication process that should be completed toward the end of the year. In addition, Colombia and Panama have recently requested consultations with the European Commission under so-called 1966 trade dispute procedures, which may be used by developing countries to challenge illegal trade barriers of developed countries. It is encouraging that greater focus is being brought to this issue, particularly with the entry of the United States into the case. We believe these legal challenges will continue to exert pressure on the European Commission to negotiate substantial relief in the tariff rate in the near term, which would benefit all Latin American producers. We will continue to monitor these developments carefully, but do not currently anticipate that any potential adjustment to the tariff would become effective in 2007.
Before opening the call to questions, I would like to comment briefly on the articles you may have seen published in today's Wall Street Journal and Washington Post. Let me emphasize that the articles are consistent with information that we have previously disclosed. Once management and the board discovered in 2003 that a U.S. law had changed that placed a Colombian paramilitary group on a prohibited list, the company faced a difficult moral and legal dilemma. Either the company could stop making protection payments, complying with the law but putting the lives of Colombian workers in jeopardy; or the company could protect workers while possibly violating American law. Each alternative was unacceptable. So, the company voluntarily disclosed the facts and predicament to the Justice Department in a completely transparent way. Chiquita has cooperated and continues to cooperate with the Department of Justice, and in March, the company reached an agreement with the DOJ to settle this matter in a way that we believe is in the best interests of the company. We are committed to corporate responsibility and compliance. In fact, we have implemented various programs to instill a strong set of values, foster transparency and abide by laws in the United States and around the world. Our team is focused on managing the company for the future, while continuing to conduct business ethically and lawfully throughout the world.
In summary, while we are working aggressively to address the challenges we face, there is no quick, simple solution. However, I am convinced -- due to many factors, including the strength of our brands with consumers, our strong market positions and our diversified portfolio of high-quality products -- there is no other company in our industry that is better positioned than Chiquita to take advantage of consumer trends toward healthy, convenient, fresh foods. I remain very confident that we are taking the right steps to improve our business performance for long-term success. At this time, I'd like to open the call for questions. Joining us for this part of the call is Bob Kistinger, president and chief operating officer of the Chiquita Fresh Group. We'll take as many questions as time allows. Operator? QUESTIONS AND ANSWERS
Heather Jones (BB&T Capital Markets): Good evening. I have a few questions. Just wondering in the quarter, was there any impact as far as in costs from the ship sale? Zalla: There was a severance of $2 million, Heather, that was a direct impact of the sale transaction.
Jones: Okay. Was that in the banana segment?
Zalla: Yes, that's correct.
Jones: Okay. And with the exception of this legal payment, were there any other quote, unquote "one time" type items in the quarter?
Zalla: By legal cost, do you mean the U.S. antitrust settlement of $3 million?
Jones: Right. So with the exception of that and this $2 severance were there any other one-time items?
Zalla: No.
Jones: Okay. And then going into your higher industry costs as far as your outlook, is any of that reflective of this ship sale or is it just the surge in the Rotterdam that we've seen, et cetera?
Zalla: When we convey expectations for higher industry costs, that has nothing to do with the ship sale transaction. That's driven mostly by increases in expected fuel costs.
Jones: Okay. And I missed this -- I apologize -- but you mentioned something about $25 million of other cost increases for '07. Was this those ag programs and all?
Zalla: No. Recall, Heather, that in 2006, we had a similar $40 million gross cost savings program, which we achieved. And during 2006, we had other offsetting cost increases that totaled $17 million. We said at the start of this year we were targeting the same level of gross cost savings of $40 million, and we'd expect similar other offsetting cost increases to occur. Now we're refining that and giving it an estimate of $20 to $25 million in such costs, as comparable to the $17 from last year.
Jones: Okay, thanks. Then going to the packaged salad business, this $9 million of higher industry costs we've seen where iceberg has been pretty onerous, but romaine has been down significantly. I'm just wondering what we're missing. What really drove these kind of high costs?
Zalla: The issue is not about spot prices for lettuce, Heather, but about a slowdown in category growth. So in April, the category had been rebounding nicely and steadily. In April, volume slipped somewhat for the category. They're since recovering, but we had commitments in April for lettuce supplies through the month of May and June that caused us to incur greater costs, principally for that lettuce that we no longer needed in light of the lower category demand.
Jones: So you just based your commitments on what you thought was going to be better demand.
Zalla: Yes.
Jones: So you basically had to buy that but you didn't have to sell it, so you just got rid of it?
Zalla: That's correct. In April, we updated our forecast and recent performance has been in line with that forecast. We think the bulk of this issues behind us.
Jones: So going into Q3, Q4, we shouldn't see this kind of year-over-year deterioration?
Zalla: Certainly not to this degree. We expect total costs for raw product, that is, lettuce, to be roughly in line for the full year as we had first indicated in February.
Jones: Okay. And I don't know if I just misunderstood, but talking about modest year-over-year improvements in operating results in Q3, I mean, for lack of a better word, your Q3 last year was a disaster. Are you just looking for modest improvements from that, or how should we be thinking about Q3 because that was when you had a $13 million impact from dumping fruit. It just seems like it would be a really easy comp.
Zalla: We do expect improvement, you're right. Not only will there not be a goodwill impairment like we had from Atlanta $43 million, but we see positive trends from not having the significant trading market losses we had last year, with a hot summer. We'll continue to drive cost reductions. We have improvements in the Euro rate. We won't have the $9 million of direct costs we had from E. coli last year in the third quarter at the onset of this E. coli event. And we're seeing higher summer pricing now than we did a year ago. So on balance, those trends bode positively for Q3, but we do recognize there's some challenges. Industry costs continue to increase. Some other costs, as I outlined, will be higher. We'll spend somewhat more in brand support than a year ago. Our innovation investments will be at a somewhat higher rate than a year ago. And we'll have a couple million dollars of restructuring costs in Chile. So the net of those, we do expect improvement quarter-to-quarter but we don't give specific ranges of EBITDA guidance as you know.
Jones: And finally, did you say that going into August, local pricing in Europe is up -- I think you said slightly from last year.
Zalla: That's correct.
Jones: The pricing we track in recent weeks have shown actually a 40 percent increase, but there's been a significant drop off going into August.
Bob Kistinger (President and COO, Chiquita Fresh Group): As Jeff pointed out, July was very strong from a local pricing standpoint. But if you recall last year, we experienced a combination of the extraordinarily hot weather and a heavy amount of competing fruits. That impact started in June. It carried all the way through July. And what we saw was beginning in about mid-August, the market changed. The weather changed; the market changed. So clearly August was not as bad as July last year. So we saw a significant improvement in July. I don't think we'll see that same magnitude of improvement in August, but it's starting out better. Jones: What about trading markets? How did they look in July? Kistinger: The trading markets this July were much improved over the trading markets last July for many of the same reasons, as well as the fact that there was -- the markets are just generally tight on fruits and there was less fruit flowing into the trading markets in the month of July. Jones: Thank you. Reza Vahabzadeh (Lehman Brothers): Good afternoon. Just to follow up on that last question regarding pricing, Bob, is the improvement in pricing you're seeing in Europe trading markets and core Europe, is that a function of supply or demand? And is it supply of bananas or other foods, if you can talk about that? Kistinger: Well, I think first and foremost, Reza, it would be demand. I think the demand has been much better in the month of July compared to last year. I attribute that again to a combination of the weather not being as hot as it was last year, especially in Northern Europe. And also a lack of competing fruits relative to last year. So we are seeing clearly stronger demand. At the same time, I have to tell you that supply is also different this year in July, and we're seeing it as well in the beginning of August. There doesn't seem to be as much fruit coming in from different locations such as the ACP countries. Vahabzadeh: So in the near term as far as banana pricing is concerned, how would you think about your outlook - cautiously optimistic? Kistinger: Well, you know we never give forecasts in terms of the outlook. But like I say, July was very strong. We're starting off August on a positive note. Demand seems to be continuing to be strong. And supply especially in the last couple of weeks -- seems to have tightened up. Vahabzadeh: That's fine. And then pricing as you mentioned, it was up in July in Europe. Were sourcing costs up as much as pricing was as well? Kistinger: Because of the tight supply situation, people were buying fruit on a spot basis in Ecuador. The cost for spot fruit in Ecuador would have been much higher this year, this time of the year, than it was last year. So that's another indication of the tight supply situation, to some degree. Vahabzadeh: Thank you for that. Kistinger: Actually, we weren't in a position where we had to overly commit for fruit like we did last year, as Jeff pointed out. Vahabzadeh: But that only applies to the spot market pricing in Ecuador? Kistinger: That's correct. Vahabzadeh: Fair enough. And then as it relates to the salad business, it seems like obviously you have spent a lot of money, Fernando and Jeff, on the salad business in terms of marketing and promotions. The category as you mentioned hasn't really come back as rapidly as you thought. Yet what I'm hearing from you is that you're actually increasing marketing spending, brand spending and innovation spending. Can you talk about, you know, further sacrifice of near-term profits in view of the last couple of quarters where salad profits were depressed? Aguirre: I think in general, Reza, we continue to believe that the category is a very strong category. We do believe we're extremely well positioned due to all the quoted numbers that we've stated that we are ahead of the market versus every other brand being below a year ago. But it takes time to build consumer confidence. You have to not only talk about your superior quality but also talk about your safety and food safety. We absolutely believe very strongly that we need to continue investing because that is the essence of this business. And we do believe, as we've stated also a number of times, that innovation is the future of the country and, as a result of that, you have to continue investing. So from that perspective, it is a long-term view and while it has been less than -- and I should say slower -- than what we had expected, the fact of the matter is that this is a category that has been growing at double-digit margins and we expect it to go back to that. Vahabzadeh: Right. When do you think the category as a whole will stabilize? Aguirre: I'm sorry, we will stay away from speculating specifically. We originally thought that it would end up being this summer or beginning of the third quarter, but right now it'll be very difficult to exactly predict when it will be all back to normal. You know, we're half of the category because of the 47 percent share that we hold. We're half of the category so a lot of what we do, obviously, will be reflected in the marketplace. But the other half of the category needs to also invest and do some of the same things we're doing for the full category to come back to quote, unquote, "normal".
Vahabzadeh: And lastly, you touched on the marketing -- I mean innovation spending for Fruit in a Bottle. I mean, can you give us a feel for the amount of spending that this is going to entail? I mean are we talking mid single digits kind of million dollars, or more than that? Zalla: It was, Reza, $2 million in the second quarter and we indicated that that could continue, and even at a higher rate in the coming quarter. But we're not going to give specific point estimates in terms of dollars or exact timing because that's competitively sensitive.
Aguirre: It also varies by country. Each country in Europe is so different. We are going into Germany, which is one of the largest countries, therefore one of the highest potential countries, but it also will demand more investment than Belgium and certainly than the Netherlands, which is a much smaller country. We are already into Germany and it's doing very well and we're already talking to customers in the Netherlands. But it will go higher, as Jeff stated, and we'll just shy away from telling you exactly how much it will take. But it will take more than what we expended in Belgium. Vahabzadeh: I hear you. That was fine. Thank you. Zafar Nazim (JP Morgan): Jeff, in your opening comments, you mentioned that even though you are within covenants for your bank facility, you continue to look to potentially changing the terms of the facility for additional flexibility. I was just wondering if you can give us some more color on that? What kind of flexibility would you be looking for since you are, I guess, well within your covenants, at least right now?
Zalla: We are within the covenants now, Zafar, and we expect to remain in compliance. It's just that the EBITDA cushion that we have under those covenants is not what we customarily like to operate under and in particular, in light of the potential for event risks in a business of this type, we think it's prudent to expand the degree of cushion that we've got under those covenants. And so we're looking at a variety of alternatives to address that.
Nazim: And then, you know, you're still carrying a pretty sizeable cash balance and you've mentioned in the past that you can use this to either pay down debt or to make some further growth investments. Any sense you can give us on when do you decide to pay down debt or to reinvest in the business?
Zalla: Sure. We have about $52 million of proceeds from the ship sale which we would need to either put to use in assets or use to repay debt by December. I would expect that much of that will go to additional debt reduction, but we'll decide on the exact amount and timing in light of the evaluation we're undertaking with respect to the bank covenant.
Nazim: Okay, and you mentioned that you're at 49 percent debt to cap ratio and you plan to be at 40 percent. Would issuing additional equity be one of the options that you would consider? Is that something that you ever consider at all or would look at?
Zalla: We always look at any opportunities that are available to us, but we wouldn't speculate on what components of the capital structure we might pursue.
Nazim: Great. A couple of questions on the cash flow. CAPEX for the year, you've reduced that from what you had in the first quarter. Where is the reduction coming from?
Zalla: It's coming from a variety of categories. Basically we took the estimate from the year down about 15 percent. That's spread across different areas of the business as we try to focus on capital efficiency and cash flow return.
Nazim: Okay. And then just finally, working capital during the quarter -- would you have a number for that? I guess it was probably a source of cash. How much of a source of cash was that?
Zalla: That's right. It was a source of cash during the quarter.
Nazim: And would you have a number for that? What was the amount?
Zalla: In the second quarter of this year, working capital changes were a source in the amount of $37 million compared to $29 million in the second quarter a year ago. So an improvement driven largely by improvement in our collection of receivables and DSO.
Nazim: Okay. And I guess that's for the year, how should working capital for fiscal '07? Is that going to be neutral or a source of cash or a use? How do you think about whether it's going to be a source of cash or a use of cash, and any idea what the magnitude?
Zalla: Sure. It will be a use of cash for the year.
Nazim: Okay. Great. That's it for me. Thank you. Bryan Hunt (Wachovia Securities): Thank you. Many of my questions have been answered, however one of your competitors announced on the fresh cut side that they were taking a price increase. One, have you seen that in the market and two, you know, considering the inflation on a lot of raw materials whether it's fruit or vegetables in a system, do you plan on taking a price increase as well?
Aguirre: We typically take all pricing decisions in the context of all our annual plans, and we obviously take into consideration all costs. And until we announce any price increase, we'd rather not speculate on any potential plans.
Hunt: Okay. And then, I mean, going back to Zafar's question, given where the equities valued relative to your cash flow, do you think a convert is a likely possibility in terms of potentially raising capital to help reduce your bank liability? Zalla: Bryan, as I mentioned, we're evaluating the whole array of options that may be available to us, and so converts or equity are among the portfolio of options that we would explore. Hunt: Okay. Thank you. Dean Haskell (Morgan Joseph): Two questions, first one on SG&A. I believe it was Fernando that stated that SG&A was pretty smooth across the quarters. I've got that in my model. However, looking at last year's third quarter, there was about a $10 million reduction in SG&A in the third quarter from the second, and then a jump of about $22 million in the fourth quarter. Remind me what occurred in that quarter please.
Zalla: Sure. We had in the fourth quarter of '06, we had a $25 million settlement related to the Department of Justice investigation.
Haskell: And in the third quarter, why did it drop off so dramatically?
Zalla: The most significant item was due to accruals for bonuses, for incentive compensation.
Haskell: That will probably not very good last year, right?
Zalla: Correct.
Haskell: I appreciate that. Next question, moving to the fresh fruit smoothie product launched in Belgium last year, in Germany earlier this year. I missed the market that you're going to in the third quarter?
Aguirre: That will be the Netherlands. Germany just started.
Haskell: Any other markets planned for this year or next year?
Aguirre: Not at the moment.
Haskell: Okay. Thank you very much. Again, congratulations on a good quarter.
Zalla: Thank you. Jonathan Feeney (Wachovia Securities): Fernando, can you talk about, you know, in the salad business, we've been doing some channel checks through the course of the quarter, especially in May and April, and saw a fair amount of discounting. Now I realize some of that might be funded by the retailer but, you know, was there still is some considerable discount activity to clear inventory and if so, does that have any impact on the premium image of Fresh Express versus say other bag salads out there?
Aguirre: Well, Jonathan, our net revenue per case was essentially stable in the second quarter. In fact, to be very specific, it was down 1 percent. And so that shows that we in fact have not been really investing much more than we had the same quarter a year ago. What the rest of the competition is doing, while I'm sure from a lot of your checks you can assess that and you can tell exactly what they're doing. But as far as we're concerned, we remain very confident that the brand that we have and the very strong market position we have commands a premium, and so far, certainly based on every decision we've made, we continue to see price premiums in the marketplace. Now, obviously I'm speaking from our own decision making. That doesn't say or mean that the retailers themselves may take some of their own investment and put it into price to try to, you know, recuperate the category. But clearly, even in those instances where the grocery retailers are taking some pricing on their own, we remain as the price premium brand in the value-added salad segment and that continues to be our strategy.
Feeney: Thanks. And this is a follow up. Recently a couple of my other food companies, Kraft and Sara Lee, have announced some considerable brand extensions in the value-added salad arena and I guess I would ask, have you seen any impact on the category? I mean, maybe that's why the category's a little slower to come back, some new entrants? And also, you know, have you seen supply get tighter? I mean, somebody's going to be doing that co-packaging for them on those salad products. Aguirre: We in general have not seen anything that would point to any tighter supply. On the other hand, we've seen their entries and they by and large have been most niche-type of entry products which we are competing head-to-head in some markets with them with some of our own entries. The Gourmet Cafe, for example, is one of the executions which specifically is competing in some of the same marketplaces in some of the test areas that I mentioned, the three different markets where we've gone into -- Seattle, Denver and Phoenix. And we're doing very well. We're getting excellent, positive consumer reaction and an excellent customer reaction, and our expectation is that we clearly plan to continue not only testing that but expanding it nationally. And so we are very, very pleased with the results of that. And that is one of the few specific examples that we have from competition. But other than that, Jonathan, frankly it's really for them to make comments about what they're planning on doing and -- but we continue to have a very strong position and believe that frankly, any and all competition is good for the category. The more people that compete in this market will be very good for the category as the category will continue to grow. Feeney: Thanks. And just a quick one for Jeff. I'm sorry if I missed this, but on the tax rate, it was a radically different tax rate this quarter than what I'm used to seeing from you guys and that was a lot of the variance between what was probably about a consensus EBITDA number versus a little bit below consensus EPS. Is there some change to the tax behavior this quarter and for the full year? Zalla: No, it's very, very much the same actually. The second quarter expense is $5 million this year versus $4 million in the same quarter a year ago. So, you know, that fluctuates, Jonathan, with jurisdictions and the mix of earnings. Feeney: And could you expand on that a little bit? Like what would be the mix -- what would drive more? How could we know in the future when taxes were going to be higher, for example? Zalla: Actually, the bigger impact in the future would be less about that and more about the settlement of any contingencies. You know, the settlement of any outstanding claims or the expiration of statutes of limitations that would allow us to take off reserves that we've got in the tax line. So it is hard to predict, Jonathan, and it fluctuates quarter to quarter. Feeney: But you say, I mean, the guidance is still -- is about 10 percent, right, for the full year? Zalla: Well, on a lower earnings base, that -- it is harder to gauge it in terms of a percent. I think the best guidance is to look at historical tax rates in terms of cash. Operator: Due to time constraints, our final question will be from Sam Martini with Cobalt Capital.
Sam Martini (Cobalt Capital): Thanks so much. I just wanted to ask a couple questions on the new products, the apple slices and the minis. Can you just give a little bit more granularity as to what types of rollout we could be looking at, what types of capital you think that would require, and what types of margins that product is commanding in the market that you're seeing under your trials? Thanks so much.
Zalla: Sure. If I could start with the Chiquita Apple Bites, which is the most prominent product so far in our healthy snacking category, revenue in the second quarter was up 10 percent versus a year ago, so we're seeing strong growth. A big contributor to that was the successful expansion with Subway where we added 1,200 stores versus the first quarter and we're up to close to 15,000.
Martini: Is there any way that you can help me just frame the dollar amounts around this?
Zalla: Frankly, for competitive reasons, we report the results for the segment -- salads and healthy snacks -- and are not going to estimate by individual product category what revenue and growth rates would be. However; we have confidence in the future for this product. We believe we can grow it steadily. It is the kind of high-margin, value-added product that we want to diversify into as a company. So it's something you can expect us to continue to market and invest behind, although we've got sufficient capacity now to sustain significant growth and would not expect it to employ a lot of capital in the short term.
Martini: Okay. And the minis?
Zalla: And minis are a successful product introduced in the U.S., now entering in a test in Finland. It is a product that helped us move from price per pound to price per cluster so it allows us to achieve higher margins and it helps to grow total category sales. So where we've introduced minis successfully, we've seen growth in the total category.
Martini: And what would be the right way to be thinking about Fresh Express, the bagged salad business margins with the minis and the slices margins? Should we expect these to remain meaningfully higher?
Zalla: Yes, you would expect them to remain higher, although the growth potential is more limited. The minis are more of a niche product in the market than Fresh Express, which is, of course, the commanding market leader in value-added salads.
Operator: That will conclude our question and answer session. At this time I would like to turn the conference back to our speakers for additional or closing comment. Aguirre: 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. Thanks again.
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[The information contained in this transcript is a textual representation of an audio presentation. Efforts are made to provide an accurate transcription; however, there may be inadvertent errors, omissions or inaccuracies in the reporting of the conference call.]
