MICHAEL MITCHELL (Director of Corporate Communications, Chiquita Brands International): Welcome to Chiquita Brands International's third quarter 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. 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 am pleased to have this opportunity to discuss our third quarter 2007 financial and operating results. On today's call, I will provide highlights of our business performance and then will turn the call over to Jeff Zalla, our chief financial officer, for more in-depth review of our financial and operating results. As we have been discussing throughout this year, we have been experiencing a challenging external environment that has pressured multiple facets of our business. And it is imperative to the long-term success of our company to take proactive steps to improve our performance in areas we can more directly influence and control. You have seen us doing this by adding new businesses and introducing new products, by making strategic divestitures like the sale of our ships that we completed earlier this year, and, most recently, through the restructuring plan that we announced last week. The restructuring is another major step in creating a stronger future for Chiquita. We are consolidating operations, streamlining functions, and reducing our overhead expenses, while stimulating innovation and further enhancing our focus on customers and consumers. We expect this effort will result in sustainable annual cost savings beginning in 2008 of $60 to $80 million. Jeff and I will provide more details on these activities later in the call. Turning to our third quarter performance, which is typically the most challenging of the year in our business, as we had anticipated, we saw a modest improvement in operating results. Despite a number of external challenges, our top line increased 3 percent over the year-ago period while we narrowed our net loss to $28 million. Even excluding last year's $43 million goodwill impairment charge and $9 million of direct cost from the industry E. coli outbreak, we delivered a modest $16 million improvement in net income. We expect to deliver further year-over-year progress in the fourth quarter and given the restructured design and its initial execution, I am very optimistic about next year as well. Higher pricing drove profit improvements in both of our key segments. Year-over-year segment operating income improved by $36 million in Bananas and $11 million in Salads and Healthy Snacks. Performance in our Other Produce segment continues to be affected by declines in profitability at Atlanta AG, as well as previously announced charges relating to the company's planned downsizing in Chile. In addition, we invested more in the planned expansion of Chiquita's Just Fruit in a Bottle. In Germany, for example, where we launched this product before the start of the summer, we've already achieved 48 percent retail distribution and nearly 15 percent market value share. We are very excited about our long-term growth potential for this fresh fruit smoothie product. We will continue our strategic focus on developing innovative, higher-margin products in every business segment. Now, I will ask Jeff to review our third quarter financial results and then I will offer a more detailed discussion of our recent restructuring actions to improve profitability and accelerate our strategy. Jeff? JEFF ZALLA (Chief Financial Officer, Chiquita Brands International):
Thank you, Fernando. Following are some key highlights of our performance in the third quarter:
Now I'd like to turn to our segment results.
In our Banana segment, year-over-year sales rose 3 percent in the third quarter to $458 million and operating income was $4 million, compared to an operating loss of $32 million a year ago. Segment operating results benefited most significantly from higher prices in core European and North American markets attributable to soft pricing in the year ago period and a temporary disruption in industry supply at the end of the 2007 quarter due to Hurricane Dean. Segment results also benefited by $11 million year-over-year due to favorable currency exchange. These benefits were partly offset by higher banana production and logistics costs as well as higher industry costs for purchased fruit, paper, ship charters and fuel. 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.
Let me turn to our Salads and Healthy Snacks segment, where our third quarter net sales increased 7 percent from the year ago quarter to $314 million. Operating income was $13 million compared to $2 million a year-ago. Operating results benefited from the favorable comparison to the year-ago period, when consumer concerns about the safety of fresh spinach led to a dramatic reduction in demand and increased direct costs. Results also benefited from cost savings related to improved production scheduling and logistics as well as higher pricing and volumes in retail value-added salads. These benefits were partially offset by increases in industry costs, innovation and promotional spending, and administrative costs. We are pleased to see volumes rebounding in retail value-added salads with Fresh Express volumes up 5 percent year-over-year during the third quarter and continuing to outpace the competition. In addition, net revenue per case increased 3 percent versus a year-ago. As we move beyond the anniversary of the industry E. coli outbreak of September 2006, we are seeing even more dramatic year-over-year improvement. IRI retail scan data from the four weeks ended October 14 show both category and Fresh Express retail dollar sales up nearly 30 percent. This was the first four-week comparison to the period immediately following the industry events of a year ago, so it is extraordinarily high. The year-over-year change in future periods will moderate considerably as we move beyond the anniversary of this event. We expect our recent acquisition of Verdelli Farms will help us take advantage of this recovery as we deliver even fresher product and accelerate our expansion in the northeastern United States. In our Other Produce segment, net sales decreased 2 percent to $289 million. The quarterly operating loss narrowed to $14 million compared to $33 million in the third quarter 2006, due to the absence of last year's goodwill impairment charge related to Atlanta AG. Excluding that charge, segment operating results declined year-over-year due to lower profitability in our German distribution business, a charge related to our downsizing in Chile, and planned investments in the rollout of Just Fruit in a Bottle in Europe. As announced last week, we are exploring strategic alternatives for Atlanta, including the possible sale of this unit. To assist with this effort, we have retained Taylor Companies Inc., a Washington, D.C. based investment bank specializing in synergistic mergers and acquisitions. Unless and until a definitive transaction has been reached, we will not disclose developments related to the expected timing or outcome of this process. In addition, we continue to restructure our Chilean operations to improve financial performance and reduce our risk profile. In fact, we have accelerated the pace of these actions and now expect to have sold almost all of our assets in Chile by year-end, enabling our shift to direct exports of fruit from independent growers. We expect asset sale gains and charges to roughly offset each other in the fourth quarter, and any future charges not to be material. We have thus positioned ourselves for a very significant year-on-year benefit in 2008 from our restructured Chilean operation, compared to the approximately $13 million in year-to-date net losses we have incurred in 2007, including charges. Now let me turn to a discussion of the company's outlook and the various performance and risk assumptions for the remainder of the year, which is summarized in the outlook section of today's press release. - Our full-year 2007 estimate for capital expenditures is now expected to be between $55 and $60 million. - We estimate that depreciation and amortization for the full year 2007 will be between $85 and $90 million. - In the third quarter, we incurred tax expense of roughly $1 million. Similar to last year, in the fourth quarter 2007, our tax results are likely to reflect a $5 million non-cash benefit from the reversal of a valuation allowance against certain foreign deferred tax assets. - We continue our prudent euro and fuel hedging programs. We recently reset our euro put options for 2008 at an average strike rate of more than $1.40 per euro, up from $1.28 previously. This gave us a greater degree of downside protection and at the same time locked in at least $12 million of exchange gains for 2008, compared to an estimated average euro rate of $1.37 in 2007. By buying put options, we will also benefit from any further strengthening of the euro. In light of much higher fuel prices, we will face significantly higher fuel costs in the balance of the year than we had earlier estimated. This will be partially offset by fuel hedging gains that we now expect, based on current forward rates, to be about $14 million for the full year 2007, compared to $7 million we had estimated three months ago. Further, our fuel hedging gains in 2008 and 2009 based on high current forward rates are expected to be even more significant at $25 million and $20 million, respectively. - As we have noted previously, we continue to experience significant pressure from higher costs. We incurred $16 million of higher industry costs during the third quarter, primarily for purchased raw product, paper, ship charters and fuel, and we expect these pressures to continue through the balance of the year. As a result we have updated our full year outlook to $75 to $80 million. In addition to what we traditional refer to as industry costs, we expect cost pressures to continue for other items, such as agricultural programs to drive further productivity gains and higher rates for discharging and trucking in the market. To mitigate these industry and other cost increases we continuously seek cost savings throughout our operations. In 2007 we targeted to achieve $40 million in year-on-year gross cost savings. We are on track to meet this target having achieved approximately $28 million in gross cost savings year-to-date. This includes third quarter savings of $6 million in our Banana segment related to supply chain and tropical production, and $6 million in our Salads and Healthy Snacks segment related to production scheduling and logistics. However, while our current cost savings programs are proceeding on track, they have not been sufficient to offset higher costs and other negative factors in 2007. As a result, as Fernando said, we are taking decisive actions to improve our performance in areas we can more directly influence and control. We expect to achieve $60 to $80 million in sustainable cost savings, beginning in 2008 from the restructuring efforts announced last week, after a $25 million charge in the fourth quarter. Let me provide additional information about the timing and composition of the savings and the charge. - Reductions in employment will account for more than half of the total savings, and we expect these to begin at a full run rate basis by mid-January 2008. Most cost reductions related to announced facility closures and other business model changes are expected to be in place by the end of March 2008. As a result, we are confident that we can achieve $60 to $80 million in cost savings in 2008. None of these savings relate to Atlanta AG. - The $25 million restructuring charge will reduce reported income in the fourth quarter 2007. Of this amount, about $15 million is for anticipated cash severance costs, and the remainder is for non-cash write-downs related to certain asset divestitures. Almost all of the severance costs will be a cash outflow in the first quarter 2008. Excluding this $25 million restructuring charge we expect our fourth quarter financial results to improve year-over-year principally driven by higher pricing and currency benefits in bananas. Since last quarter's call we did carefully reviewed financing alternatives and we did identify several good opportunities available to us. In light of an improved earnings outlook, however, we have determined that it is not necessary at this time to replace or to restructure our current bank debt facility, with which we remain in full compliance. Instead, we are focusing our efforts on the successful execution of the business restructuring we have announced. We look forward to updating you on our progress in coming quarters. Now let me return the call to Fernando.
AGUIRRE: Thank you, Jeff. As we've discussed in the past, our vision is to become the global leader in branded healthy fresh foods. To reach this vision we've outlined a clear strategy to achieve sustainable, profitable growth by building a high-performance organization and delivering innovative, higher-margin products. We have already taken many positive actions to improve our business and help us achieve our vision. In fact, during the past three years, we have taken decisive actions to strengthen the balance sheet, improve our risk profile and diversify the company. For example, we have:
- Improved pricing and profitability in our North American banana business; - Acquired Fresh Express and have expanded our market leadership in valued-added salads; - Successfully introduced new value-added products like Chiquita to Go in North America and Just Fruit in a Bottle in Europe; - Made the needed decisions in Chile to improve profitability and reduce risk; - Simplified our business and increased financial flexibility through the sale of our ships and; - Demonstrated prudent financial management including our focus on hedging and debt reduction. Yet, we continue to face a very challenging market environment that has limited our profitability: - Industry costs for fuel, purchased fruit and lettuce, paper, resins and other items continue to increase significantly. - The high-cost European tariff regime continues to punish importers of Latin American bananas like Chiquita. - Category growth in U.S. value-added salads has been slow in the aftermath of an outbreak of E. coli in some of our competitors' products more than a year ago.
To face these challenges, I am confident that by fundamentally restructuring our business, we can alleviate some of the burdens that have limited our profitability and slowed down the execution of our strategy. This restructuring is a major step for us in addressing controllable factors and creating a more positive future for our company. As we started analyzing the data this past summer, we made several difficult choices, but we are confident that this restructuring will achieve two main objectives: - First, to improve profitability through sustainable cost savings and; - Second, to increase the flexibility and efficiency of our organization.
Let me talk about these two objectives in more detail. The primary goal of our restructuring is to improve profitability. We are de-layering our management structure and reducing corporate overhead, including the elimination of more than 160 positions or 21 percent of the most senior management level employees across the company. We are also changing our business to optimize production and distribution efficiency and streamline operations in a long-term and sustainable way. We are concentrating on the components of our business that are profitable or have the potential to be profitable in the near-term and we will be exiting those businesses that are non-strategic or unprofitable. For example: - Our recent acquisition of Verdelli Farms allows us to optimize our Fresh Express supply chain. As a result, we will gain efficiencies by consolidating operations and closing one processing plant in Georgia and one distribution facility in Pennsylvania. Similarly, we are improving cost efficiency in our North American logistics operations by closing one banana distribution center and consolidating the work performed there into our facility at Port Everglades, Florida. - We have also chosen to exit the fruit bowl business in North America, which we could not operate at attractive profit margins, particularly due to stiff competition from in-store cut fruit. Instead, we will be focusing our attention on our line of higher profit healthy snacks such as Chiquita Apple Bites, which hold significant promise. The second objective is that we are implementing these changes to increase flexibility and efficiency of our organization. The reduction in management layers will enable faster decisions, greater accountability and more efficiencies across business units and geographies. Let me highlight three areas where significant consolidation is occurring and introduce the leaders of these efforts.
- In North America, we are consolidating our operations so that there will be one face to the customer for bananas, salads and other healthy snacks, thus speeding up the integration of Fresh Express and Chiquita Fresh North America. I have selected Brian Kocher to lead our operations in this region. Brian brings a deep understanding of the company from his experience as controller as well as experience in sales and finance at General Electric and Hill-Rom. I have seen Brian in action for nearly three years, and he is an outstanding, well-rounded, solutions-oriented leader. Another one of his strengths is a keen ability to execute complex business process change, which is exactly what our North American business requires at this time. Brian is the perfect leader for this role.
- In our innovation program, we are consolidating research, quality and product development initiatives worldwide to ensure that we focus our resources on the most promising ideas, accelerate decision-making, achieve better economies of scale and improve execution. I have tapped Tanios Viviani to lead this global effort, which is directly related to his key strengths and experience. I have worked with Tanios here in Chiquita and in our pervious professional life for years and with his passion behind this effort, I am very confident we will become faster, more innovative and even more competitive in the marketplace. Innovation is a key for our future and we have an outstanding experienced leader to guide our efforts in a more centralized and efficient manner. - In our new product supply organization, Waheed Zaman will build upon his previous role leading parts of our supply chain and global procurement group to drive a truly global product supply organization including all aspects from product sourcing, agricultural production, and manufacturing, to ports, transportation, logistics and distribution centers. We are consolidating from "seed-to-shelf" across all of our product lines, which will improve our network efficiency and customer focus. I asked Waheed to take on some of the supply chain responsibilities more than 18 months ago precisely to build his capacity to broaden his scope at some point in the future. Today is that future. I have great confidence in the ability of each of our leaders to capitalize on these opportunities. I hand-picked each one of them and each has been part of our talent management and succession planning process for several years. We are all eager to drive shareholder value across every part of our business.
In conjunction with these organization changes, the president and chief operating officer role at Chiquita Fresh Group has been eliminated. Bob Kistinger has served in that capacity with distinction and I wish to thank Bob for his significant contributions, dedication and loyalty to Chiquita for more than a quarter century. While we will miss his extensive industry knowledge and input, Bob developed a strong team of leaders throughout the company, several of whom will take on his current responsibilities. For example, every one of the leaders in supply chain within the fruit organization who will now report to Waheed trained and learned under Bob. We all join in wishing Bob the best. Let me reiterate that although our restructuring program is a major initiative and will be a significant focus in 2008, our overall strategy remains the same. We are steadfast in our commitment to achieve sustainable profitable growth and the restructuring is a vital step towards this goal. Given the combination of the major negative market dynamics such as the EU tariff regime and the E. coli events, together with these changes, we will need to redefine our growth targets and we expect to provide more information about our long-term financial goals early in 2008. In summary, we are excited about the future. As a result of our ongoing proactive and disciplined approach to managing the business, we are looking forward to more improvements to our bottom line in 2008. At this time, I'd like to open the call for questions. Jeff and I will take as many questions as time permits. Operator?
QUESTIONS AND ANSWERS Jonathan Feeney (Wachovia Securities): Good afternoon guys, thank you. Fernando, this is an impressive ambitious cost savings program you've outlined here. Can you talk a little bit about the timing of this plan, what makes now a great time to do it and is this something you envisioned doing from the time you arrived at the company and if so, I guess what have been the obstacles to maybe outlining this kind of cost savings initiative earlier on? Aguirre: I divide my answer in two parts, Jonathan. Number one, we are clearly doing it now because of the market dynamics and the competitive landscape that have very rapidly changed. It has limited our profitability and this has led to a slowdown of our execution of the strategy that we've laid out. The second part of the answer is that, while of course I started succession and talent development planning from essentially my first month on the job here, it does take time to develop the leadership that we required and it does take time also to attract the leadership that we wanted to attract. So, we did not see doing this type of major restructuring from the moment that I walked in the door, but clearly we started with attracting the right people, with developing the right people and then the fact that the competitive landscape has changed and the market dynamics have affected us so negatively, we recently decided this was the right time to do it. We began the analysis in the summer and redesigned the structure and we announced it as quickly as we had all the agreements from the board of directors and we were ready to go. But again, this is the right time to do this type of restructuring. Feeney: Thanks for that and just as a follow-up, to make somewhat of a generalization, it seems like a lot of time has been spent in Chiquita's history building this big global fixed-cost advantage and part of that was owning the ships and part of that was having all this management locally and even you could view Atlanta to some extent as part of that. Now that you're maybe exploring strategic alternatives in Atlanta, taking out of lot of cost, is the next possible step to this plan maybe selectively reducing volume in certain markets, in bananas, certainly in other fruits? Aguirre: As we've laid out in our long-term strategy, our main objective is to grow the non-banana segments of the market and we'll continue to grow the banana segments as long as it remains profitable. And we do not have an objective to reduce our business in banana, we have an objective to grow the rest of the business. And as a result of that, the banana business will become a smaller part of the organization of the company, but clearly our objective is to grow the non-banana and make sure that the rest of the business is profitable. Feeney: And just finally for Jeff, I'm sorry if I've overlooked this in the past but could you give us a sense how much depreciation and or ballpark what assets from a book perspective would be associated with the Atlanta business? Zalla: We have not disclosed that, Jonathan, in the past because it's not its own segment or unit; it's a relatively small part of the total, so until and unless we reach a definitive agreement about Atlanta, we are not going to be providing more details about that business. Feeney: Okay, all right, thanks very much. Dean Haskell (Morgan Joseph): Good evening gentlemen, thank you. You are reducing employee management head count by 160 positions; what is the total employee head count that will be finding themselves new opportunities in the New Year? Aguirre: The total amount is a little over 700 people, of which about 400 or so are hourly workers and the balance, 300 and a bit, are salaried employees. The 160 people that I mentioned are at the top three levels of the company, the so-called management levels. Haskell: Okay, and how are your treating these hourly workers in terms of severance packages, et cetera? Aguirre: Everyone is being treated very fairly. We have very specific guidelines for severance that obviously reflect time with the company, reflect market practices, and everyone is being treated very fairly. Again not just hourly, but everyone who's been separated. Haskell: Okay and would you give us an update on the WTO EU tariff issues? Aguirre: Sure, the latest is that the litigation continues. The process has continued and it is now in one of the final stages. We are expecting that the Latin American countries that have filed the Article 21.5 case, and mainly that's Ecuador, will continue the case. We expect an initial tariff panel ruling to happen in December, according to the timing that we have seen in the past, and beyond that, sometime in early 2008 we would expect that some sort of decision. This, of course, would be following just the litigation itself. There is always a possibility that the European Union would engage with negotiations with the Latin American countries to try to negotiate an outcome outside of the litigation process. Haskell: But you're not aware if that's happening at this time and nothing has changed as far as the timetable? Aguirre: As far as the timetable nothing has changed. Obviously calls are being made, meetings happen between the Latin American countries and the EU and so that is an ongoing process. And so they all know that the table is there and they all go back to the negotiation table once in awhile, but they're letting the litigation process move forward. Haskell: Okay, thank you very much. Heather Jones (BB&T Capital Markets): I have a few questions, first going back to the cost savings program. I just want to get an idea of what it's made up of and how this differs from cost savings programs you've initiated in the past? For instance the $40 million this year, the $40 million that you had in '06, because looking at your full year '07 estimates, you're looking at higher industry costs of $75 to $80 million; then higher costs that have been offsetting the gross cost savings, I don't know what they total year-to-date, but it was just $14 million just in this quarter. So I guess what I'm trying to figure out, is if this is a massive cost reduction effort, and then are there going to be more cost reduction efforts on top of it, because $60 to $80 million wouldn't even cover your higher costs this year. Zalla: Heather, obviously our goal and our objective is to increase profitability. This restructuring is one major step toward that. So the $60 to $80 million in savings is from restructuring the overhead of the company, and taking out layers of management and streamlining operations. That is different from the normal, every year ongoing cost reduction effort, where each of the last two years we've targeted and will have achieved $40 million in savings in operating costs. The other portion of the $60 to $80 million is from combining operations and consolidating plants. Those are likewise not part of the normal, every year reductions in cost that we continually pursue. You are absolutely right that industry costs are expected to be up this year $75 to $80 million. Big portions of that are purchased fruit and especially fuel. We have mechanisms in pricing contracts, such as the fuel surcharge to recover a good portion of that. And we have a long established track record of seeking to regain cost increases through pricing. You can see that in our historical contract renewals and the pricing updates that we give periodically. Jones: Okay, so the $40 million, just using the $40 million as an example, we should see, looking into '08, and I know you're not giving guidance or anything like that, but we should expect to see another initiative like that on top of the $60 to $80 million? Zalla: You should expect every year throughout our operations we are seeking cost savings and efficiencies. Those are different and unique from the kind of management restructuring that we're going through at the moment. Jones: Okay and then going to Atlanta, you said the $60 to $80 million doesn't include that. Is it fair to say that it's been losing money on a EBIT basis this year so that if you were to get rid of it, that it would be a positive improvement in your earnings? Zalla: Heather, as we've reported several quarters, the earnings from Atlanta have been disappointing and they have been affected by a whole range of industry factors, including the EU regime change that started a year ago. We've recently concluded Atlanta is not a strong fit with our ongoing strategy, so we're going to pursue a sale. Our Other Produce segment, as you know, has been underperforming. We are committed to ensure that all of our units and segments in the business do deliver appropriate, profitability return. So one can infer that we expect improvement, both in terms of risk profile and in earnings from this kind of sale, or pursuing of other alternatives with Atlanta. Heather, just to respond to the question you had, of the $30 to $40 million of other cost increases for 2007; $28 million have been incurred year-to-date, including the amounts for the third quarter. Jones: Okay, thank you. As far as, in your comments on Q4 and your Q2 release, you had said we expect modest improvement in Q3 earnings. This quarter you didn't insert that number. Is it fair to expect given where the euro is, pricing, et cetera, that we should expect more than modest improvement in Q4 earnings? Zalla: Let me talk about the trends Heather, and you can decide whether it's modest or some other descriptor. Jones: I want you to define "is." Zalla: I don't think I'm up to that challenge. (Laughter) So in this year's fourth quarter of course we'll have the restructuring charge of $25 million, but we will not have the settlement charge we incurred a year ago from the Department of Justice settlement. One other unique item in the quarter is that last year's fourth quarter had a gain on sales from Chiquita Brand South Pacific of $6 million so that won't recur. And let's talk about the other trends in the core operating business. The euro is strongly favorable with current rates of $1.46 compared to last year's fourth quarter of $1.28. Banana pricing has been positive; it's mitigated in recent weeks, but October started out very strong. We continue to drive internal cost savings and we have $12 million to go in fourth quarter to hit our $40 million target; we've seen continued improvement in North American pricing through the year. For example, the October trend was plus 8 percent, so that's strongly positive. And offsetting that are the headwinds that we are facing are much higher industry costs, in particular for fuel. In the fourth quarter purchased fruit will be less of a disadvantage, and then other higher costs continue as I had suggested in supply chain and logistics, for example. And in the fourth quarter, we would expect to spend some more on product innovation, for example Just Fruit in a Bottle, but brand support would be roughly even to last year. Jones: Excluding Fruit in a Bottle or including Fruit in a Bottle? Zalla: Excluding Fruit in a Bottle, it'll be roughly flat. Jones: Okay. And then my final question, Fernando, is for you. Going back to Jonathan's question about volume rationalization, for lack of a better word, not implying a dramatic reduction in your size, but we've seen significant improvement in Dole's results year-to-date, fresh fruit specifically. Same thing with Fresh Del Monte, bananas specifically. And seems like they've had lower volumes, but it seems to have helped profitability. And I'm just wondering if it's something that's even on the drawing board for you. Particularly in the U.S. where you are essentially an oligopoly, and even in the EU, where the big four or five control a significant portion of the market. So that if all just took down their volumes just a little it would have a disproportionate impact on pricing? And I'm just wondering if that's something that's even on the drawing board? Aguirre: Let me, without answering very specifically such a specific question that our strategy is to grow profitably. We just stated that we will exit from unprofitable business, that's exactly what we are looking at right now. From a number of the different activities that are taking place. One of the most important objectives in our restructuring to improve profitability, which actually will be most felt in North America. The majority of the jobs at the salaried level are eliminated are happening in North America. And so the business in North America will benefit more than any other business, because it is the one that needs it the most. And so I don't have a strategy to reduce banana volume. I have a strategy to make sure that we are growing profitably and that we are not taking on any unprofitable business. That really is the focus of our strategy and we will execute that strategy in every single part of the world. It is well known that North America is the one geography that requires the most need in terms of improving profitability. So that's where we will make our best efforts to improve that. Jones: Okay, thank you. Reza Vahabzadeh (Lehman Brothers): Good afternoon. On the banana side, you are talking about the $14 million of higher company operated or company owned production costs separate from the industry costs. What is that from, what's driving that? Zalla: Reza, when we typically talk about industry costs, which include the cost of purchased fruit and that's largely rate driven, as we see the rates per box for purchased fruit under contract versus spot purchase going up period-to-period. In this case, in the third quarter we had lower owned farm productivity in the quarter. That was unique in that Q3 was down, while the first two quarters this year were up, and on balance we're roughly flat with the same peak productivity levels that we achieved last year. So overall, productivity in owned farms is positive, in fact, best in class but uniquely in Q3 we had a downturn and we replaced some of that volume with purchased fruit. Vahabzadeh: Is that – was that weather driven? I mean, how does this lack of productivity happen? Zalla: It was largely weather-driven, plus there's some element of cyclicality Reza, in the growing of bananas because they are harvested every 7 to 9 months, rather than on a calendar year basis, so it's not entirely predictable. Vahabzadeh: I see, okay. And then you talk about the $3 million of fruit smoothie spending as well as $7 million of packaged salad innovation spending or roughly $10 million, which is a decent sum of money. Is that the rate of spending that you will continue in the near term and can you quantify perhaps for us the return on capital, the return on spending for innovation and marketing in recent quarters? I'm just wondering how we can figure out the return? Zalla: Reza, let me address it in a couple of ways. In Just Fruit in a Bottle, in the third quarter, it was $3 million. We had alerted last quarter that it'd be higher than historical spending, as we launched that product successfully in a large consumer market, in particular Germany as well as the Netherlands in Q3. So that product introduction is going exceedingly well and we will continue to support the introduction of that product, but we are not going to speculate on how much we would spend or in what markets we would spend it, for competitive reasons. The $7 million increase in Salads and healthy Snacks was not just for innovation, but also for promotional spending and other administrative spending as well. We will, as part of the overall restructuring effort, reap some efficiencies and some economies of scale in innovation, but we're going to continue to spend on innovation to drive the company's strategy toward more higher margin, value-added products. And over time, as we introduce these products to the marketplace, we'll share more with investors about the types of returns that we expect over a long period of time. But clearly it's an investment in the P&L today to drive profitable growth in the company. Vahabzadeh: Right. And then as far as the restructuring is concerned, can you talk about the areas of execution risk in your mind for the 700 people eliminated? I mean presumably there was some productivity out of those 700 people; otherwise this action would have taken place earlier. Aguirre: We've tried to share the risk as much as we possibly can. Obviously with these types of cuts there is always a risk that you have to take. A very important piece of 700 people is at the Carrollton plant, and we had already planned on that, but we accelerated that with the acquisition of Verdelli Farms. This is a plant in Carrollton that was helping us distribute into the Northeast, the Verdelli plant is in a much better place and it was one of the key reasons why we made the acquisition. So with that happening we decided that it was right for us to expedite the Carrollton closure and that's about 240 of the 700 or so. That, you could say that that is one of the items that we looked at very closely to make sure that we were not taking on unnecessary risk and so that helped us. We focused a lot of attention on making sure that in three or four key items we decided not to eliminate very much. For example, anything that dealt with customer service and the sales force, and the European business, which is obviously one of our best businesses. The fact that we really needed to focus more attention in the North American fruit business because as you all have figured out before, it has been the biggest challenge for us to improve our profitability; that's been impacted the most on the management side. And then the other area where we did very, very little was in anything regarding our agricultural operations and food safety; we essentially did not touch any of those areas. On the contrary, on food safety we continue to invest a significant amount of work and money on food safety because we believe this is one of our competitive advantages and we are not going to take any risk whatsoever in that area. So that should give you a bit of an idea as to where we decided to take some of the risk and we really did not take any risk on the critical aspects. Vahabzadeh: Right, lastly, as far as working capital Jeff, was that a source or use of cash in the quarter? I don't know if you mentioned that, but I didn't catch it. Zalla: It was a source of cash this quarter, as it typically is in third quarter. It was just less of a source this year than it was in the same quarter a year ago. Vahabzadeh: And what was the amount? Zalla: From working capital this quarter, $25 million. Vahabzadeh: Thank you much. Zafar Nazim (JP Morgan): Yes, thank you. Just to follow-up on the working capital question, how should we think about working capital in the fourth quarter? I know that it is typically a use of cash, but should that number be similar to what we saw the year before? Zalla: It is typically a use of cash in the fourth quarter as we build toward the high season in the year, but I am not going to give a target or estimate for what that will be in Q4, Zafar. Nazim: Okay, and then just in terms of cash on your balance sheet, what amount of cash do you think the company needs to carry on the balance sheet for operational purposes? You tend to carry a significant amount of cash in the past, and I'm just wondering how much you really need typically through the year? Zalla: We had cash September 30 of $124 million and we had a fully undrawn revolver, so we operated with ample liquidity. If one thinks about just base operating cash in the business that keeps all the parts moving every day, it's about $35 million. We've retained some more cash than that to protect against potential risks, to make sure we've got very strong liquidity, very solid capital structure and to make sure that we've got some cash available to fund limited, targeted investments, in innovation for example. Nazim: Okay and without getting into specifics about the Atlanta business, the assets over there, I'm just trying to figure out how much of the working capital, of your company's working capital, is tied with Atlanta? I would imagine that would be one of the benefits once, if and when, you sold all that business? Zalla: Zafar, it's a relatively small amount, because it's a low margin distribution business. However, I'm not going to provide any specifics on that unless and until we signed a definitive agreement for the sale of Atlanta at which time we'd clarify for investors what the forward-looking impact would be on our financials. Nazim: Okay, and just one last question if I may. Any estimates on cash taxes for the year? Zalla: No, we don't have the specific estimate on that, Zafar. I did mention that it is likely that we would have a $5 million benefit in the fourth quarter this year related to certain foreign deferred tax assets. Nazim: Great, thank you. Barry Sine (Oppenheimer): Good evening. Hi, first on the restructuring. The restructuring will involve the removal of about 700 employees and I believe that's going to be offset by employees that you brought on with Verdelli. Can you give us a sense of how many employees that was? Aguirre: I think it was around 200, if I am not mistaken. Sine: Okay. And the $60 to $80 million cost savings; can you just clarify whether that is a number that you expect to incur during the full year? Or is that kind of a run rate that you get to when you are all done with the process? Zalla: Barry, more than half of the savings is related to people, and those changes will be in place and will begin to accrue basically as of mid-January next year. The other operating changes like plant consolidations and so on, those benefits would be in place, almost all of them, by the end of March next year. Sine: So, in terms of the dollar amount that you've given, I understand the timing, but does the dollar amount apply for the full year, so we'll see that savings in the full year? Zalla: Yes. Sine: Okay, so it's not a run rate number? Zalla: Correct. Sine: Okay. And part of that is to offset rising costs, including industry costs. Do you expect that that's going to more than offset, or only partially offset higher industry costs that you expect? Zalla: Barry, it's too early to estimate what the full-year impact of industry costs would be for '08. It's clear that costs have been rising, fuel has spiked dramatically recently. Typically early in the year, we give an estimate to investors of what we expect total industry cost increases to be for the year, and I'd anticipate doing that again early next year Sine: And on the Atlanta AG business, I believe, that is in the Other Produce segment, that it's the majority of that segment? And then also why aren't you accounting for that currently as a discontinued operation? What was the accounting issue there? Zalla: Barry, roughly two-thirds of Atlanta's business flows through the Other Produce segment and one-third flows through Bananas. At this point all we are doing is exploring strategic alternatives for Atlanta, so we have not taken a definitive decision to sell and in light of that it remains a core operation of the business. So we would sell if and only if we achieve offers that we believe are attractive and it would then be up to the Board to determine whether or not to sell. Sine: And my last question, on the remaining proceeds from the sale of the shipping assets, I believe those were not used for Verdelli, but you have a deadline in terms of applying that to debt, can you update us on that? Zalla: Sure. In the third quarter, we repaid $40 million against our Term Loan C and out of the total proceeds from the ship sale that left $12 million of excess proceeds that we believe will have been invested in qualifying assets between the date of sale and 180 days afterward. So we will have satisfied our bank loan agreement commitment to employ those proceeds either for debt reduction, which got the very large majority, or for investment in qualifying assets that benefit the lenders in terms of collateral. Sine: Okay, thank you very much. Aguirre: Thank you, Barry. And thank you all very much for your questions and for joining us today. We look forward to updating you on our continued progress in the next quarter. 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.]
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