Fresh Del Monte Produce Inc (FDP) 2004 Q2 法說會逐字稿

Welcome to Fresh Del Monte's second-quarter 2004 conference call. On the call today are Chairman and Chief Executive Officer, Mohammad Abu-Ghazaleh, and Executive Vice President and Chief Financial Officer, John Inserra, who will discuss the Company's results for the quarter ended June 25, 2004. All lines will be muted during the call. After the presentation, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Fresh Del Monte issued a press release this morning via business wire, e-mail and First Call. If you have not received a copy of this press release, please contact Eva Torres at 305-520-8156. This conference call is being webcast live on the Fresh Del Monte Website, and it will be available for replay approximately two hours after the conclusion of this call.

This morning, Mr. Abu-Ghazaleh will review the Company's operating performance, recent developments and outlook, after which Mr. Inserra will review the Company's financial performance for the second quarter of 2004.

Please let me remind you that much of the information that the Company will provide this morning, including the answers they give in response to your questions, may include forward-looking statements regarding their beliefs and current expectations with respect to the Company's business. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. The Company's actual results may differ materially from those in the forward-looking statements as a result of various factors, including those described under the heading description of risk factors in the Company's Form 20-F for the year ended December 26, 2003.

With that, I would like to turn this call over to Chairman and Chief Executive Officer, Mohammad Abu-Ghazaleh. Please go ahead, sir.

Good morning, everyone. I am pleased to report that we have delivered another successful quarter, and a performance that is noteworthy in light of the challenges that we faced during the quarter, including unfavorable climate conditions in Columbia and Puerto Rico and higher fuel and corrugated board costs. Fortunately, nearly all of the world's major banana markets improved during the quarter, apart from North America, where the supply outweighted demand and pricing was stable.

However, due to natural flowering, pineapple volumes increased substantially during the second quarter, thus forcing us to offer more promotions, which resulted in lower average prices. Finally, there was an oversupply of melons in North America during the quarter, with (indiscernible) supply of delivery and improved melon yield naturally lowering melon market prices.

During the quarter, we continue to expand our other product lines, including tomatoes, potatoes, onions and avocados. We introduced avocados recently and we believe that they will, over time, become an important revenue contributor. We also remain on track with our plans to roll out the exciting new Del Monte Honey Gold pineapple in 2006.

We also continue during the quarter to expand our distribution business, a move that has allowed us to drive new revenues, increase our customer base, penetrate more markets and offer a wider variety of fruits and vegetables. We are currently building a Fresh-Cut facility in Dallas, improving our infrastructure there. We are also constructing a new distribution center in Germany, as well as expanding our Fresh-Cut facilities in the UK.

In addition, we are creating a state-of-the-art facility for the packing and processing of avocados in Mexico. Once we have established our Mexican facility, we expect our avocado venture to begin to generate impressive results in 2005. Just to let you know how many we have in the U.S. and outside when talking about distribution centers and Fresh-Cut facilities, we do now have right now 31 distribution and Fresh-Cut facilities in the United States and another 21 distribution and Fresh-Cut facilities outside the United States. Our Fresh-Cut fruit and vegetable business continues to thrive and to attract new customers, and its growth is accelerating each month. In fact, we saw marked increases in sales, volumes, and pricing in North America and Europe during both the quarter and for the first 6 months. We already lead the Fresh-Cut fruit and vegetable segment by far, and the business is extremely healthy, growing more than 20 percent annually.

As you know, on July 15th we announced the largest and most important acquisition in our history to date. We signed an agreement to acquire Del Monte Foods Europe, including its operations in Europe, Africa and the Middle East. This acquisition will add $370 million in sales, consolidate the Del Monte brand, and further diversify our company by adding an array of products such as processed fruits, vegetables, and beverages to our product portfolio. The acquisition will also dramatically move our ability to send Del Monte branded products in 100 markets, including many in Europe, Russia, the Middle East and Africa. It will create a stronger growth platform by improving our distribution capabilities, and it will provide us with access to new products and innovation opportunities. It will also create significant cost savings and selling synergies, as well as provide us with enhanced financial strength by reducing our earnings volatility. We are extremely pleased about this acquisition, and we are confident that it will open a world of new growth opportunities for Fresh Del Monte Produce. Del Monte Foods Europe is a company that has tremendous potential, but its strength has been vastly underutilized. We are extremely well positioned to leverage its potential, add value in an unprecedented way, and drive increased return on investments.

I believe that very few people realize that the combination of the 2 companies creates the only branded food company in the countries that we operate that can offer to retailers cross-merchandising and cost promotions on both fresh and processed foods at the same time, thus giving the retailers a complaint solution and the opportunity to increase sales and earnings. You might wonder why we are so confident that we will be successful at operating Del Monte Foods Europe when others have failed. The fact is that we are experienced at executing and integrating acquisitions in a way that creates real value for our shareholders. We also have the management expertise and the in-depth knowledge of Del Monte Foods Europe's market, which will help us to manage the business effectively.

Moreover we are still identifying (indiscernible) opportunities. For example, we know that yields in Del Monte Foods Europe's pineapple production are not what they should be. However, we know precisely what we must do to optimize those yields, and we also know how to leverage (indiscernible) ranging from (indiscernible) and logistics to marketing. We will move swiftly to implement these and other measures to create shareholder value as quickly as possible.

One cannot underestimate the importance of leadership in making our acquisitions work. Del Monte Foods Europe has often suffered due to a variety of operational issues. Yet, it has enormous promise, potential that can be unleashed under great leadership. I am confident that the sale of Del Monte Foods Europe will be as dramatic a turnaround story as that of Fresh Del Monte Produce. I fully expect revenues from this acquisition to grow significantly as we move forward.

Strong management has always been a key strength at Fresh Del Monte. We are a hands-on, closely-knit management team. We have tremendous knowledge and must believe (ph) our business. However, we do not operate solely from our office tower in Coral Gables. We operate in a global environment, and we earn our business by getting close to where the action is. We go to the fields; we visit the plants; we talk to the local managers; we mingle with people at all levels. We see each other. They hear us and they understand our mission. We are unusually well-connected to our people, and this has been absolutely essential to our success.

Those of you who know me well know that I gain tremendous satisfaction when I see how our company has evolved. We continue to go (indiscernible) steadily year in and year out. Every once in a while, we make an acquisition, but we are equally focused on internal growth. Our business is certainly not flashy, but our results have been strong and steady. Our balance sheet is solid and our business is sustainable. You cannot say that about many companies today.

As we move toward the end of 2004, we expect the fourth quarter to perform more strongly than the third, and we expect earnings per share between $2.55 and $2.65 for the year. As always, I appreciate the time that you take to participate in these calls. I am convinced that to understand our business is to be bullish on our business. I thank you for all of your commitment to learn as much as you can about what we do.

Thank you, Mohammad, and good morning everybody. As Mohammad indicated, the second quarter of 2004 was quite good. Total sales improved by 9 percent from last year at this time, while volumes increased 11 percent. Net sales increased $63 million to $764 million, compared with $701 million at the end of 2003 second quarter, with $19 million in exchange gains. On a 6-month basis, net sales grew to $1.477 billion, a $133 million increase over the first half of 2003.

Overall, gross profit for the quarter declined 19 percent to $89 million from $109 million at this time last year, driven by higher costs, including fuel, transportation, and corrugated board prices, combined with a decrease in selling prices of Del Monte Gold pineapple and melons. Overall, gross profit for the 6 months was $166 million compared with $216 million in the second quarter of 2003, driven by our banana performance in the first quarter and higher costs in the second quarter.

EPS for the quarter was $1.03 per share compared with $1.42 last year, including a 10 cents per share benefit from the sale of the box manufacturing facility in Guatemala. During the quarter, we funneled more products than ever thorough our North American distribution centers, generating a 22 percent increase in sales to $167 million. For the 6 months, sales through our distribution centers were up 32 percent year-over-year, generating $321 million in sales compared with $244 million last year.

Regarding our cash balances, at the end of the second quarter we had $114 million in cash, up from $51 million at year-end 2003, and up from just $18 million at the end of the first quarter of 2004. As you know, we will pay EUR275 million or approximately $340 million for Del Monte Foods Europe, part of which will be paid from our cash on hand, with the rest paid from our credit facility. Our new debt-to-equity capitalization ratio will be approximately 24 percent, up from 4 percent at year-end 2003. And as we indicated on our July 15th conference call, we believe that we will be able to pay down this debt in the near-term.

We reduced our SG&A expense by $3 million due to reduced professional fees. We benefited during the quarter by our lower interest payments on debt, and we saw a slight reduction in taxes during the second quarter and the 6 months to date, due to decreases in our U.S. taxable income.

Now, I will provide detail on our business segment on a quarterly and year-to-date basis. Banana sales were up 8 percent for the quarter. Volume was up 5 percent and pricing was up 3 percent. Gross profit was down 6 percent or $2 million, due to higher transportation costs and weather-related expenses in Costa Rica. Year-to-date, banana sales and volume are each up 6 percent, while pricing is off 1 percent, and gross profit is down 34 percent or $21 million due to higher fruit costs. Del Monte Gold pineapple volume was up by 5 percent during the quarter, and sales and pricing were down 4 percent and 8 percent respectively due to increased competition and from favorable production conditions in Costa Rica. In melons for the quarter, overall volume was up 17 percent and pricing was down 13 percent, due to oversupply conditions.

In our Fresh-Cut business for the quarter and year-to-date, we saw both higher sales and higher pricing. For the quarter we saw a 24 percent increase in sales, a 13 percent rise in volume, and a 9 percent increase in price. Fresh-Cut sales represented 10 percent of the Company's total sales in the second quarter, due to growth in North American market where sales rose 42 percent on volume, increase of 27 percent. For the 6 months, we had a 22 percent increase in sales, 14 percent in volume and 7 percent in price. In North America, we saw a 39 percent increase in Fresh-Cut sales year-to-date and a 28 percent increase in volume. In Europe during the quarter, we had an 8 percent increase in Fresh-Cut sales, primarily from price, and a 6 percent increase in sales for the 6 months, again based on price.

Tomatoes sales were very strong, up 37 percent, with 32 percent higher volume and 4 percent higher selling prices. On a year-to-date basis, tomato sales were up 49 percent with a 43 percent increase in volume. We have higher expectations for our tomato business and look forward to that product becoming a key revenue contributor in the future. Net sales for our non-tropical product segment rose 6 percent for the quarter on higher volumes. Year-to-date, sales were up 9 percent due to volume growth.

Avocados, a new product category for us, generated $8.2 million in sales. We are expecting strong sales of avocados as we move through the year. The nonproduce segment for the quarter continues to track prior-quarter levels. Finally, as Mohammad mentioned, we expect the fourth quarter to perform more strongly than the third quarter, and we expect earnings per share between $2.55 and $2.65 for the year. We will give more detailed guidance as we progress.

I will now turn the call over to the operator for the question-and-answer session. Pam?

(OPERATOR INSTRUCTIONS) Leonard Teitelbaum, Merrill Lynch.

Good morning. I was having a little trouble, Mohammad, hearing some of your comments. We were getting kind of an echo on the line, so if you covered this, forgive me. I just want to make sure now. Clearly, the Fresh-Cut area is finally starting to move. John, is it profitable yet?

Yes, it has been profitable. It's just not extremely profitable, but it is really moving up. We are very, very pleased with our Fresh-Cut performance, and we see really very strong growth in this category, and the second quarter was really very good.

So we have hit the point now to where it is starting to move the needle? I'm not talking in terms of revenue; I'm talking about in terms of earnings.

It is starting to contribute.

Okay. I thought earnings might be a bit higher because we had been hoping for this, but to be honest with you, we had our sales and gross profit pretty well on, but we overestimated your SG&A substantially. Can you give us some more reason as to why the SG&A costs are down? You said legal fees, but can you kind of talk about what was that related to? And I guess we are pleased with the earnings, but I want to make sure I know how we got there and is it sustainable?

Well, I think professional fees will move around from one quarter to another, but we did have substantially lower administrative fees this quarter than we had in some of the previous quarters.

Was that the whole $6 million approximately? Was that all legal fees?

Well, 3 million is what we said the reduction was on a quarterly basis.

You're talking for the professional fees.

No, no, SG&A was down 2.7 million quarter-over-quarter.

Yes, sir. I appreciate that. I was looking at it versus our estimate, I'm sorry. Okay, that is the first thing. The second, the tax rate, I know you have got some flexibility there, but 3.7 percent, what should we be using for the year and what is it, the way the income got sourced is why it's so low?

Well, we had lower taxable income in the U.S. And Mohammad alluded to it, some of our business in the U.S. didn't do as well as some other parts of the world, and that is really the reason. Taxable income is based on profits within a certain country, and the U.S., you know, we mentioned our banana business and other businesses did not do that well in the U.S.

Okay. Given some of the agronomic conditions that have existed in your prime growing areas, what should we look for in terms of gross profit as we start to go through? Is this pretty typical of what we should see?

I think the gross profit is good, and I think we have been tracking consistently across the year.

So we should look for 300 to 400 basis points in terms of cost of goods sold percentage?

I think, you know, depending if the product mix is, you know, we have more domestic products than we have had in the past.

Okay. Your tax rate for the year, John?

I think it could range between 4 to 6 percent. I think that is on a continuing ongoing tax basis.

Two more questions quickly. Have we heard from Wendy's or Starbucks or McDonald's in Europe on the Fresh-Cut? Are we going to get firm --?

I believe, Lenny, that we are really going on the right track. We have tests going on, and I hope that by the fourth quarter I can give you very good news, but let's keep our fingers crossed. But I can tell you that we have very promising plans going on right now in the States and Europe, which will hopefully result in a very big breakthrough.

The final question, the acquisition certainly looks good on paper. John, have you got a payback rate of when this should be a contributor, or are we going to have to subsidize it for most of next year?

Well, I think we already commented, Lenny, that we see it being accretive in 2005, and I don't think in the last 15 days or so we have changed our opinion.

Okay, very good. Thank you very much.

Terry Bivens, Bear Stearns.

Good morning, everyone. Maybe I missed this; what is the approximate size of the Fresh-Cut business now?

The Fresh-Cut?

Yes. You threw out a lot of numbers there, John.

Percent of the total?

Yes.

Of the total company?

Yes.

We had about 73 million or 74 million in sales during the quarter.

73, and then for the 6 months, what would we have looked at, roughly?

127.

127, okay, got it. As you look at the guidance, kind of taking the midpoint of it, it looks like I guess from here we are going to do about 40 cents the rest of the year versus, I guess, 95 was the number last year. How would you characterize the biggest source of the negative variance there? What would you look to first?

There are several factors. One of them like we discussed, we had a very bad melon season, actually. The offshore wasn't that great at all. Even the domestic melon season, we have a crop in Arizona which we call the spring crop which also was not very good at all in terms of -- if you compare it to the last 3, 4, 5 years, probably this was the worst that I have seen. Pineapples as I mentioned as well, we have climatic conditions when the pineapples they flower naturally. We usually induce the pineapple to flower when we need them in certain periods of the year, but sometimes because of a climatic condition, they will flower naturally, and thus, you cannot control the volume. That is what actually happened with us in the last 2 months. We have so much more volume that what we needed, actually, the wrong weeks or the wrong timing. That has also affected us by offering more promotions and lowering our prices.

That doesn't mean that there was not more pineapples in the market. The competition is increasing, more pineapples in the market and more competition. But we are still maintaining our position and we are stilling selling more volumes than we sold last year, and we will still, I think, have a very healthy margin on our product.

Terry, maybe you have a different calculator, but 40 cents doesn't seem to subtract from $1.84. I get about 76 cents if you do the math for the second half.

I will look over it again. Just in terms of banana pricing, I was a little bit surprised to hear that it did seem to hold up better than I thought it might. Could you just walk us through Asia, North America, Europe volume and pricing in those 3 key markets, please?

I think volumes, as we said, we have an increase of volumes of about 5 percent.

5 percent overall?

Overall. However the prices in the second quarter in the Far East were much stronger than the first quarter. They were quite (indiscernible). The prices in Europe were very strong as well, as a matter of fact, except for North America where the prices really stayed flat more or less. Most of this volume in the States is a contract basis as an industry, and even if the market improves, you still don't get the benefit. And there were shortages also in the tropics because of climatic conditions where we had to source fruit from Ecuador into the U.S., which really added more cost on our product, and that is increasing our fruit (indiscernible).

You mentioned that in Q1, Mohammad, but you were still sourcing out of Ecuador in Q2 as well?

Yes, the weather conditions really did not improve at all in Costa Rica. Columbia was in very poor shape, and they had a big blight for quite many weeks. So both climate conditions (indiscernible) in Columbia, and Costa Rica had very bad climatic conditions as well. Ecuador, as a matter of fact, did not have the same volumes that they usually have. Comparatively speaking, they have shorter volumes than normal. So all of these factors pushed the prices up in Ecuador, as well as having less volumes from other sources, and that impacted our costs, and thus resulting in impacting our margins.

And that will continue in the second half as well, to some extent?

I hope not. We do hope that the situation in -- Columbia has started getting back to normal. Costa Rica, we hope within the next 5 weeks will be back to normal. We would like always a shortage, not an oversupply situation, but in a way that can just be an equilibrium. But I believe that the markets, now we are in July and August. These are the worst months of the year as far as banana consumption. As a matter of fact, as much fruit that you can have, that affects the whole range of fruits and not only bananas. So July and August are not a very good indicator of the markets, but I believe once we go through with August, I believe that the markets in Europe and Asia and North America will start seeing a very significant improvement.

Okay, thank you very much.

Eric Larson with Piper Jaffray.

Good morning, everyone. Just a quick follow-up on Terry's last question, Mohammad. In terms of the supply for pineapples, you said that -- are your comments with Costa Rica getting back to normal also applicable in the next few months for pineapples as well?

Yes, our volumes, and actually since last week started coming down back to normal, which is good for us, because now in July and August we don't want to have too much volume, and hopefully we would get back to our higher volumes come September, the middle of September onwards, and that's (indiscernible).

Okay. Then, John, foreign exchange in the quarter, you mentioned that as a positive. Was that a big positive in terms of local currency vested (ph)?

Yes, it was about $19 million primarily from the euro. We did very well in the euro and some from the yen, and a little bit from the pound, the sterling.

Will that continue to be a modest positive second half, or have you hedged forward on any of that?

Yes, we are hedged forward. We still should get some benefit. It depends on the currencies, of course.

Absolutely. So a little bit of benefit again in the second half. Then looking at the Fresh-Cut business, which obviously has a lot of potential going forward, are you done with your distribution centers in the U.S. at this point? I think you are, but now the focus is internationally, I would assume; right, Mohammad?

True, but as I mentioned minutes earlier, we are actually putting up a new Fresh-Cut -- within our Dallas facility, we are putting a Fresh-Cut operation there to supplement the whole other set-up. So I believe in the U.S. we are almost done with the Fresh-Cut operations as far as infrastructure is concerned and as far as distribution centers. We are expanding right now in Europe and, of course, with the new acquisition we will be also leveraging some of the infrastructures that they have in Europe into Fresh-Cut as well. Like in Italy, for instance, we will be initiating hopefully very soon a Fresh-Cut operation there as well.

Then, John, just a final question on fuel, bunker fuel. As I recall, I think the range of where that can go can be between 2 to 5 percent of your cost of goods sold. Are we on the high end of that? Obviously, it will probably stay there for a bit of time as well. What are your thoughts on your fuel costs?

Well, we will see how the second half goes, but it has been much more expensive overall for bunker fuel, but we will see. It is not at the extreme end because of some of the averages we had early in the year, but we see that climbing as we go forward.

Okay, thank you, everyone.

(OPERATOR INSTRUCTIONS) Jonathan Feeney, Wachovia.

My first question is you mentioned -- thanks for the granularity on pineapple pricing. Could you give us -- down 8 percent. Could you give us a sense what that works out to kind of per case, or if not that, just give us a sense of what that is off of say the peak of pineapple pricing you have experienced in the last 6 or 7 years?

We did experience like that before in the last 3 -- I would say 3 years, 3 1/2 years. We did experience situations like this, and prices could vary from $1 to $2 a box on average when we do these promotions. We had to ship, for instance, some of these weeks that I'm talking about, we had to ship about 300 to 400,000 boxes of pineapple Del Monte Gold into Europe on a weekly basis, where we usually ship about 220 to 250 on a normal basis. So you can see we have to get really very aggressive promotions to the supermarkets to move the fruit, as well as in the U.S. on a much smaller scale.

We had a very good and we still have very good markets in Asia and Japan and Korea, as far as Del Monte Gold. As a matter of fact, we have less supply than demand. So these kinds of events happen. However, I just want to repeat again that, nobody can misunderstand me, that -- want to compare that as there has been more pineapples in the market, more competition. But, however, I would like also to stress that our quality, our consistency and customer loyalty, I would say, has kept us at our level, and with our volumes moving and our margins are still at the very healthy trend. So, you know, people should understand there is more competition. However, we still maintain our position and our margins.

Good. Just a follow-up on your comments, Mohammad, I'm just trying to get a sense of how in the absolute best quarter for pricing, like I am imagining with between competition and the supply conditions, pricing is somewhat off its all-time highs on a per case. I guess I want to get a feeling for how much off that all-time high pineapple pricing was this quarter. Is it like 20 percent off the all-time high? I know it was 8 percent down year-over-year. Just an order of magnitude would be great.

I don't think it is 20 percent off, Jonathan. Just to reiterate, about 3 years ago we had a very similar situation. We had a lot of oversupply during the summer about 3 years ago in the third quarter, and we had a similar condition. And then, of course, the situation leveled out when the supplies came back to normal. So I don't think we are off our highs anywhere near 20 percent, but I think we are down 8 percent now and, you know.

That answers that question. Thank you very much. For you, John, could you give us a sense -- I know -- just to follow up, could you give us a sense of what the order of magnitude might be for the potential accretion of the Del Monte Europe transaction and what kind of effect it could have on next year's numbers?

I prefer not to at this time. We will give you an update when we close the transaction and I think we have a much better feel for the information that we have been given.

Okay, thank you. On the banana business, since I am somewhat new to at least being launched on you guys, your pricing is fixed somewhat, and that can be problematic at times, because you deal on long-term contracts. How often do those kind of contracts come up and what is their tenor? I guess if banana pricing is good, has improved globally, shouldn't that mean you see better conditions in the U.S. in the months ahead?

I believe that as the markets improve and you have the volumes, definitely your pricing will improve on average. These contracts usually go from 1 year to 2 years on average. But the U.S. market unfortunately has been affected, and I would say really so much influenced by this practice of long-term contracting at very competitive pricing. However, I think that what we need to look at as far as Fresh Del Monte is concerned is the European market, which for us is a more, let's say, attractive and profitable market in the long-term, especially after the licenses, hopefully, by the end of next year finished and over, and we will come to a (indiscernible) tariff-only system.

Just to give you an idea of where our position compared to the competition like Chiquita, for instance; we do buy licenses to cover the volumes that we have to bring into Europe. Just as a reference, until this year we had to buy licenses for about 9,710,000 boxes, which cost us in license 19 million 371 dollars, which equates on 6-month basis 23 cents in terms of per-share costs. If you look at throughout the year if we take the same average, it will be around 50 cents on an annual basis. And that, actually, is not the only story, because even though we buy these licenses, we are not able to secure enough licenses to bring enough fruit to satisfy our customer base in Europe.

I mean, had we not had this system in place, we could sell even more fruit and have better margins as we go forward. So this is a very good important note that we have to compare between us and others as far as bananas is concerned in Europe; that it's costing us an EPS about 50 cents per year just because of the license.

Okay. Thank you very much.

Heather Jones, BB&T Capital Markets.

Good afternoon. I was wondering, just a few quick questions. On the SG&A, I understand there were lower professional fees for the quarter, but I guess just looking to the second half should we expect the same magnitude of decline, or was this more like a one-quarter issue?

I don't think we are going to have the same magnitude, but we don't expect administration to climb up dramatically in the second half.

Okay. Now, going to the second half, it is about a 76 cent swing using the midpoint of your guidance between what you've earned for the first half and the second half. You said that the fourth quarter would be stronger than the third quarter. So just rough approximations, that would entail like a 40 percent decline in the third quarter, and I guess I am curious as to what your assumptions are for that kind of performance for the third quarter. I understand what affected you for the second quarter.

Well, I think we can see, at least as we saw the quarter, a continuation of the same factors into the July period and into August, and we will see how it goes.

Same factors meaning melon pricing and pineapple pricing?

Well, we may see some melon pricing. We will see how it goes. That is our estimate.

Okay. On your Fresh-Cut, is that roughly half and half UK versus US?

Excuse me?

The revenues for Fresh-Cut, is roughly half of that UK and the remainder US, or what is the rough approximation of the revenue split?

It is about 60/40 U.S.

60/40 U.S., okay. When you say that's profitable, is it profitable on an EBIT basis or gross margin? What were you referring to?

We always talk in gross margin, Heather.

Okay. I was wondering, you spoke of the licenses, and I think in your first-quarter call you had said you didn't expect exports to the EU 10 (ph) to increase dramatically. What is a rough approximation of what you're exporting to the former Eastern European countries?

I don't have that split with me, Heather.

Is it meaningful or is it just a small presence?

No, I think we're doing very well in Poland and other places in Eastern Europe. I just don't have the numbers handy.

Okay. What would be your outlook for pineapple pricing once this weather pattern normalizes? Because we heard that Kroger was putting their business up for auction, and there has been an increased level just from a competitive standpoint. And I guess for the North American market, I mean, what would you anticipate there?

Well, I think we see our pineapple pricing bouncing back as we go through the rest of the year.

Okay, thank you.

Shamone Sadukin (ph) with Basswood Partners.

This is Shamone with Basswood Partners. I have a question for Mohammad, specifically about the acquisition in Europe. Actually, a couple of questions, but the first one is, Mohammad, you have said to investors about how you had sort of grown up in the fruit business, and you talk about riding on the ships and the trucks and going to Chile and developing that business for your family. We as investors are very appreciative of that experience that you have, but this business that you have acquired in Europe, it seems to be a little bit different from the sort of standard fresh produce business. And I am wondering how you see your experience and the experience of the people in your company fitting into running that business going forward.

As I mentioned, I think on the 15th of July, I said that people think that this is a process business. This business relates very much on raw materials and produce. They bring the concentrate from pineapples that we produce. They bring the other concentrates for other products from fruits that we produce. We produce in Chile, we produce in South Africa, we produce in the States. We know about this business maybe more than they do, as far as sourcing material, as far as logistics are concerned, as far as packaging is concerned, and as far as marketing is concerned. Trust me, and as I said a few minutes earlier, this will be another Fresh Del Monte story. Just wait and see.

Okay. Can you tell me just what you think, so when I look at the business improving its profitability, there are obviously going to be a lot of synergies going forward. There is obviously going to be just having good management in and running the business for profitability, because I guess it hasn't been for probability, and there's also going to be expansion into new products and new markets. Can you explain how you feel each of those three components will fit into sort of the overall plan for the business? Which of those is the more important? Is it new markets and new products, the efficiency side or the synergy side?

Every one of these factors is as important as the other. We know actually the minute that we close this transaction that there will be tremendous synergies and there will be significant cost savings immediately. That is number 1. As far as production and as far as sourcing, we know that we will source (indiscernible) and products, raw materials, in a better and more efficient way than it is being done presently.

As far as marketing is concerned, we know every single customer. As a matter of fact, on a bigger scale than Del Monte Foods Europe (indiscernible), as we are penetrated in a better way, we have more leverage, we have better relations with the supermarket, and we have more products to offer. So I believe that once we do become one company, as I said earlier, the merchandising and costs promoting the products to the supermarket is going to be phenomenal. There is no one else that can come to a supermarket and say, I will give you -- for argument's sake, I will give you a box of juice and I will give you, if you're buying a carton of juice you will get a banana free, for argument's sake. Or if you buy a pineapple, I will give you 2 boxes of juice or whatever. Nobody can do that except Fresh Del Monte or Del Monte Foods in Europe.

So I think that the potential and the synergies that we will have is really phenomenal. I believe that we have our plans and we know exactly where we will be going. If you look at the market that they are covering right now, it's really not even 5 percent of their utilization. I mean, they are not touching even the tip of the ice. With all of these companies that they cover, with all the population that they can serve, they are really in a small corner of that market.

I want to switch gears now and ask you a question about Fresh-Cut. Your sales volume numbers for the quarter were great. Can you explain what at this point is the source of that? How much of it is foodservice and how much of it is grocery stores, or are there other sources? What is it that is allowing you also to increase prices or to get higher pricing for the product?

Well, I will give you -- it is difficult to give you now a breakdown between foodservice, and we serve foodservice and we serve retailers. But just to give you an example, we are covering now some of the chains on national basis. This has never even been -- you know, it was like a dream 2 or 3 years ago that you would come to a supermarket and say, I will cover you on a national basis. We are now serving, for instance, Winn Dixie on national basis. We are serving Ralph's in a very big part of the country. We will be serving other -- I don't want to mention names now, but we will be serving so many other retailers in the country, be it in North America or in Europe on exclusive basis across the country. That is something that really one -- it is actually a result of the hard work and the dedication we put in this business when we started about 6 years ago. We knew that we have to build up the infrastructure. We knew we have to build a new client base. This business has not been known -- it was not something that people got used to, the supermarket nor the people who used to buy Fresh-Cut fruits and vegetables in containers.

Now, I think everybody is realizing that this is a business that is there to stay and it's growing. The supermarket wants to be a part of it, and I think the only company in the country now -- not only in the country, I would say in the world -- that has the infrastructure and the leverage and the experience and management teams that can take it somewhere is Fresh Del Monte.

Last question, on avocados can you just talk about what the potential of that might be? Are we talking about a $100 million business, a $500 million business? Can you just give us a sense of what you think the market for a product like that might be?

I can't tell you right now. This business we just started recently, and we are moving about -- right now, we don't have any facilities in Mexico nor (indiscernible), and we are moving about 7 loads a week right now from Mexico. We estimate that by next year at this time, we will be moving between 30 to 50 loads per week. That gives you an idea of where this business is. Frankly, avocados can range from $20 to $30 a tray. So this is a big business, and it's not only that we will go into the fresh avocados which is the whole avocado, but we will be putting a plant which is actually now in the planning to process avocados, and we will be selling fresh guacamole in the markets. So that is something that will be actually a novelty, and with the Del Monte brand, I think that will make a different picture as far as our strategy is concerned.

Thanks for the answers, guys. Appreciate it very much.

Ted Wachtel (ph), Millennium Partners.

I am relatively new to the story, and I am trying to -- one thing I'm trying to get my hands around is this tax rate. How do you achieve such a low tax rate? Can you walk through that a little bit with me?

Well, I think that the tax trade is based on risk, and the risk factors of our tax rate are where the agriculture is. And since most of our agriculture is outside the United States, therefore, or other countries, that is the reason for the tax rate. Because we won't get a tax reduction for crop failures that exist outside the United States; you can't take that into account. And that is basically the reason. I think if you look across the industry, you will see similar tax rates on other companies of our type.

As low as 3.5 percent? Is that what you were in the quarter?

I wouldn't make one quarter a year, and there are reasons why in one quarter the tax rate could be a little lower than other quarters.

But you're saying typically in the industry, the tax rate will range less than 10 percent?

All I said was that the tax rate is calculated in a similar manner, not the same rate. Each company has its own structure and has its own legal entity structure, and that will also impact where the ultimate taxes are.

But as your specific tax rate over time over the last couple of years, is that in line with competitors or do you have a different structure that allows you to achieve lower tax rates?

I'm not familiar with the tax rates of my competitors, so I really don't look at what they're doing. I look at what we are doing.

Okay. But going forward, you don't see any change in the tax rates that you have recently been achieving?

Well, it will depend on the risk of -- the type of income we generate and where we generate it. We will have to see as we go forward and incorporate the new companies and so forth into our tax structure what the eventual tax rate will be.

Okay. So the tax rate could markedly increase, or we foresee them being within the range they have been? I mean, that is not a question that can be answered. I mean, what should I be modeling? What I'm trying to ask you is, for the balance of '04 and '05 as a tax rate, is it possible for me to put something in my model that is a range anyway?

As John mentioned earlier, he expects 2004 between 4 and 6 percent as a range. As far as a normal trend, if we continue with our business the same way it is and with the same type of income generation we had, we might continue with basically the same range of tax rates. However, if our income in the United States increases and we generate more business and more earnings in the States, of course our tax rate would increase in the United States, and that is what John was trying to say to you.

But typically, there are taxes paid in other jurisdictions that are credited against U.S. taxes; is that right?

Not in our case because our parent company is not U.S. So, therefore, that doesn't apply to us.

I see, okay. Thank you.

Heather Jones, BB&T Capital Markets.

I apologize, I forgot to ask, I was looking through the notes and we got what banana sales were for the quarter. I think that you said up 8 percent. I was wondering what all other sales and gross profit was for the quarter?

The all other category?

Right.

You are right, I don't think we mentioned that. Sales in the quarter for the other produce category is 442 million compared to 405 million, and approximately $60 million in gross profit for the quarter.

60 million?

Yes.

Okay, thank you.

That concludes today's question-and-answer session. I'll turn the conference back over to you, Mr. Abu-Ghazaleh, for any additional or closing comments.

I would like you thank everybody for participating on this call, and I hope that we will speak together soon. Thank you very much and have a good day.

This does conclude today's conference. We do appreciate your participation. You may now disconnect.