Fresh Del Monte Produce Inc (FDP) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Fresh Del Monte second quarter 2008 conference call. I would like to remind you that today's call is being recorded and that all lines are currently muted for the call. After the presentation, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS).

At this time for opening remarks and introductions, I'd like to turn the call over to Ms. Christine Cannella. Please go ahead, ma'am.

Thank you. Good morning, everyone, and welcome to Fresh Del Monte's second quarter 2008 conference call. I am Christine Cannella, Assistant Vice President of Investor Relations. Joining me today are Chairman and Chief Executive Officer Mohammad Abu-Ghazaleh, and Senior Vice President and Chief Financial Officer Richard Contreras, who will discuss our results for the second quarter.

Fresh Del Monte issued a press release this morning via business wire, email and First Call. You may visit our website at www.freshdelmonte.com to register for future distributions. This conference call is being webcast live at our website, and it will be available for replay approximately two hours after conclusion of this call. Our press release includes reconciliation of any non-GAAP financial measures we mention in our presentations today, to their corresponding GAAP measures. The press release may be found on our website which, again, is www.freshdelmonte.com.

This morning, Mohammad will review our operating performance during the quarter, along with recent developments and our future outlook. Richard will then review our financial performance for the second quarter of 2008. Please let me remind you that much of the information that we will discuss this morning, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters.

These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our 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 Business Risk Factors in our Form 20-F for the year ended December 28, 2007. This call is the property of Fresh Del Monte Produce. Redistribution, retransmission or rebroadcast of this call in any form without our written consent is strictly prohibited.

With that, I'd like to turn this call over to Mohammad Abu-Ghazaleh. Mohammad?

Thank you, Christine. Good morning, everyone. The second quarter of 2008 was an exciting period for Fresh Del Monte. We made solid progress on our strategy to position the Company for improved performance by expanding our asset base and production capabilities, and securing new banana and pineapple volumes to further strengthen our competitive positions.

We benefited from net revenues that were up 5%. Our global banana business, strong demand for our canned pineapple, and increased sales of our Del Monte Gold pineapple, drove the year-over-year performance with all regions contributing to our top line expansion.

While net sales improved over the previous year period, we experienced fluctuations in our gross profit performance during the quarter. The fluctuations in our performance were the result of several factors; primarily, the impact of higher costs in every aspect of our operations. Richard will address the impact of costs in further detail in his financial discussions.

In addition to higher costs, weather-related issues also impacted our daily operations and production levels in some of our products. Most notable was flooding in our banana farms in Brazil and a blow-down at our [banana] farms in Guatemala.

Both events significantly reduced our banana volumes during the quarter. We were also impacted from lower volumes from our domestic melon operations in Arizona. Our North America fresh cut operations also remained a barrier to our growth during the second quarter, a result of continuing challenges with labor. Additionally, Easter, which is the highest Gold pineapple selling season in both Europe and North America, was in the first quarter this year, while usually it is in the second quarter.

Clearly, a lot happened in the second quarter. We remain proactive, revising our strategic plan, taking measures that would improve the performance of the Company in the long-term. While we were successful in obtaining price increases across almost all of our product lines, the results are best measured in our improved global banana performance. While we experienced higher than expected transportation and banana production and procurement costs, we were able to offset these costs with higher global pricing, which resulted in improved banana margins.

A steady mandate of continuous cost controls improved efficiencies, and innovation remained the pillars of our long-term strategy. For example, we continue to expand in and penetrate exciting new markets during the quarter. Our Middle Eastern operations continued to gain momentum. Our fresh cut beverage and [protein] operations are well received and we attracted new customers during the quarter.

In addition, we've continued development of the three new distribution centers in Saudi Arabia, which remain on schedule to open in late 2009. We enhanced our beverage line in the Middle East by successfully completing the rollout of our juice production with a [toll-packer] in Asia.

However, the most dramatic measures that we took during the second quarter was to secure Fresh Del Monte's long-held goal to become the world's leading producer, marketer and distributor of fresh produce, acquiring the assets of production of Caribana, the largest [agri] acquisition in our history. This dramatically boosted our banana and Gold pineapple production in a way that would have taken many years to replicate organically. I'm not even certain that we could have duplicated the [possibility of] the decline in availability of quality agricultural land in our growing regions.

We are integrating the acquisition as planned and we are now beginning to see the optimization of the operation. We expect to experience the acquisition's full benefits by the end of the year, one pre-existing contract that we agreed to honor expires. We are proud of the fact that our strong balance sheet, low overall debt levels, and ample cash flow uniquely positions us to execute the transaction and seize what we view as an example of a growth opportunity in [northern Brazil].

I am excited to share with you that we recently made another successful long-term strategic acquisition, acquiring the melon production assets from our 50% joint venture partner in Costa Rica, giving us more control of production and securing this melon volume for years to come.

We continue to pursue other similar opportunities in the region to expand our melon volume at a time when many growers in the industry are experiencing financial difficulties -- another testament to our exceptional balance sheet and solid financial position.

These focused initiatives to secure land and production offer us tremendous growth opportunities, as global demand for agricultural products increases and suppliers face new hurdles in meeting that demand.

We are also presently exploring agricultural investment opportunities in new regions of the world. Given rising fuel costs and freight rates, it makes sense for us to look at sourcing geographically closer to end markets like the Middle East, Asia and Africa with an eye on improving margins. And I've always believed that some of the very best opportunities are to be found in less developed markets where few competitors dare to venture.

We are very optimistic about the future. Our business is growing and our management team has shown a steadfast ability to overcome challenges through any economic cycle. We have been through them many times before and we know how to take advantage of times that are tough. With the right strategies, a skilled management team and a strong balance sheet as our foundation, we are working hard to address the short-term challenges that we face.

Before I turn today's call over to Richard, I would like to summarize why I am so confident about the significant upside potential in our operations.

We are continuing today's prices, controlled costs and [rise] efficiencies to deal with the cost pressures faced by everyone in our industry. For example, in our Del Monte pineapple and melon product lines, we continue to add more contract business, which allows us to increase prices and pass along certain cost increases through surcharges. We are expanding our portfolio of agricultural land to secure volumes both organically and through acquisitions.

We are advancing into emerging markets to establish a competitive position and take advantage of new opportunities as they arise. As you know, I have always viewed Fresh Del Monte as a long-term investment. With this in mind, we will continue to conduct our business in much of the same way as we have over the last 12 years, with an intense focus on [lean] long-term growth. We believe in our business today more than ever and we are extremely enthusiastic about the opportunities ahead.

I will -- Richard, please.

Thanks, Mohammad, and good morning. For the second quarter of 2008, excluding asset impairment and other charges, EPS was $0.87 per diluted share compared with $1.18 in the prior-year period.

Net sales were $972 million, 5% higher than last year. Net income decreased $13 million to $56 million. Gross profit decreased $18 million or 17% to $102 million, a direct result of significantly higher input costs. And operating income decreased $13 million to $59 million, due primarily to the lower gross profit.

Before I describe our operating segment performance, I think it's worthwhile to remind you what Mohammad has already said. We experienced dramatic increases in input costs during the quarter. Compared with just one year ago, fruit costs for all products -- which includes our own production, procurement from growers, packaging and labor cost, and foreign exchange -- increased 14%. These costs represent 69% of our total cost of sales for the quarter.

Ocean freight costs, which includes bunker fuel, third party charters and fleet operating costs, increased 27%. This cost represents 14% of our total cost of sales for the quarter. Just as an example, bunker fuel increased $15 million or 61%.

These costs, as you would expect, significantly impacted our results. However, we expect the synergies resulting from the Caribana acquisition to lower banana and pineapple unit costs. We expect to benefit from synergies throughout our supply chain, such as lowering farming and administrative costs, reduce transportation, warehousing, freight and logistics cost, along with lower selling and administrative costs by introducing these incrementals volumes through our existing infrastructure.

Let's turn now to segment performance. During the second quarter, we saw very strong performance in our global banana segment, including a 17% increase in net sales to $382 million on 12% higher global pricing. Worldwide pricing for the quarter increased $1.49 per box to $14.14, and gross profit increased 32% to $42 million. These strong results were driven by strong global banana selling prices, increased production volume in the Philippines for the Middle East and Asia markets, favorable exchange rates in Europe and Asia. And these results were offset by a 10% increase in costs.

We expect banana volume to continue to be short over the next few months, due primarily to lower production volumes in our banana farms in central America in general, and the negative impact of floods in Brazil and a blow-down in Guatemala. The floods in Brazil will cause us to lose 2.9 million boxes of bananas, and the Guatemala blow-down will decrease production by about 1.5 million boxes.

In our other fresh produce business segment, net sales decreased 6% to $445 million, due primarily to lower sales in our melon, fresh cut, and tomato product lines. Volumes were 17% lower. We saw a 14% increase in pricing, offset by a 22% increase in costs. This resulted in a $33 million decrease in gross profit.

In the Gold pineapple category, net sales increased 4% to $119 million, primarily driven by higher sales in Asia and North America. Volume rose 5%, primarily in Asia, and pricing was relatively flat, down less than 1%, but costs were higher by 17%. The Gold pineapple category is another area where we expect to see the most positive impact to our operations for the Caribana acquisition. The 30% volume increase in Gold pineapple that Caribana will give us on what is by far the highest margin product in our portfolio, will further enhance our number one global market position in the Gold pineapple category.

In our melon category, net sales decreased 23% to $58 million. Volumes were down 30% and pricing rose 10%, offset by a 16% increase in costs. We experienced a 19% decrease in our US domestic melon volume, primarily due to poor weather conditions. We were also negatively impacted through mid-May by the offshore melon season that we spoke about in the first quarter of 2008. As Mohammad mentioned, we continue to invest in the melon category and we'll seek new opportunities to further strengthen our presence in this category.

In the fresh cut category, net sales decreased 7% to $92 million, decreasing in both North America and Europe. Volume was 17% lower, and pricing was up 11%, while costs increased 23%. This was primarily the result of continued labor shortages in North America. It's important to mention that we're just beginning to see a trend that has some consumers switching from higher priced, pre-cut convenience products back to whole fresh food and vegetables. We believe this is a result of current economic conditions.

In our non-tropical category, net sales increased 5% to $99 million, primarily due to increased sales in Asia in Europe. Volumes were 12% lower, primarily in North America, and pricing increased 20%, offset by a 30% increase in costs, primarily driven by increased production and procurement costs in Chile. It's important to note that the Chilean season ended in May, and we're now procuring products from local suppliers.

In our tomato category, net sales decreased 12% to $39 million. Volumes were 18% lower and pricing increased 7% with a 10% increase in costs. The results here were driven by decreased demand, a direct result of the salmonella outbreak in the US, which was originally linked to tomatoes.

In our prepared food segment, net sales increased 14% to $115 million, primarily driven by increased sales of canned pineapple due to continued industry production shortages in Thailand and the Philippines, and strong growth in our Jordan-based poultry and processed meat business. Pricing rose 4%. Gross profit decreased $2 million due to a 9% increase in costs. However, operating income improved by $2 million, due to the reduction in sales and marketing costs, a result of shifting sales to third party distributors.

Foreign currency impact at the gross profit level was a benefit of $19 million for the quarter compared with a $9 million benefit in the second quarter of 2007. The foreign currency impact at the sales level was a $39 million benefit for the quarter, compared with a $12 million benefit in the second quarter of 2007. This was primarily driven by a stronger euro and yen. The foreign currency impact at the cost level was a negative $12 million for the quarter, compared with a negative $3 million in 2007, as currencies in our producing countries strengthened against the dollar.

SG&A decreased $5 million to $43 million, primarily due to selling our prepared food products through distributors and our continued cost reduction efforts. Other income was $2 million, primarily associated with the sale of underutilized assets.

Interest expense net decreased $5 million due to reduced debt levels and lower interest rates. At the end of the quarter, our debt level was $449 million. Tax expense for the quarter was $4 million or 8% of pretax income. And we expect our capital expenditures for the year to be about $115 million.

This concludes the financial review. We'll now open the line up for questions.

(OPERATOR INSTRUCTIONS). Jonathan Feeney, Wachovia.

First question about -- I'm a little surprised that you wouldn't try to protect yourself, pass through costs a little bit in pineapple more aggressively. How do you determine -- it looks like net pricing was down 1%. I mean, I'd imagine that was sort of a -- probably some positive currency effect that made the actual list price [being] worse -- can you talk a little bit more about that? And why you didn't maybe try to pass through increased fuel and logistics costs maybe a little bit more aggressively?

Well, I think we did try to pass costs through. Obviously, pineapple -- what we're doing to combat that is we're entering into more contracts with pineapple customers. And today, probably 50% of -- at least our North American business -- is contract. So, this allows us to increase pricing and also to pass on surcharges, such as fuel and others.

And is -- I'm sorry --

Jonathan, this is really not only the Gold pineapple but it applies to bananas as well. I mean, we -- don't forget that we have contracts that are in place in, let's say, July last year or August last year. You know, we have been renewing contracts for other years. So we are helped with additional costs, we can pass certain costs. For instance, the banana contracts, we do have surcharges [close] there.

Pineapple didn't have actually some of the contracts, or most of the contracts don't have surcharge clauses. And no matter what we do, even with these surcharges still, we are hit with additional costs that we could not pass to our customers. And that's actually the same story with the bananas, with the pineapple.

So, as we move forward and as we renew our contracts, we believe that these negative variances were going to be rectified, and hopefully we will recover the additional costs. We have also to take into consideration that I believe that we have peaked with these higher costs in the sense that we see a trend for the duration of even down trend on the costs.

So I believe that we will see better times as we go forward because I don't believe that these costs can keep going up the way they have been doing for the last 12 months or so.

But as you renegotiate those contracts, Mohammad, as they roll off, are you getting -- are you experiencing enough pricing in the new contracts to sort of reflect the current cost environment?

Definitely. I mean, as I always say, we are not here to work free of charge. We need to pass the costs -- we're not saying that we want to increase our margins or increase our price, but what we are saying is that we want to make sure that our margins are not eaten up by the additional costs. And that's what we are trying very hard now to put in place.

Richard, when we talk about -- talk a lot about the Caribana synergies, I mean, does this kind of price cost environment hurt your outlook for benefiting from that transaction the second half of this year? Or how does that look?

It shouldn't, because everything was calculated on current pricing, so.

So, you're generally still just as comfortable now as you were, say, a couple of months ago in terms of the outlook, broadly speaking?

Yes. Absolutely.

Okay. And just one final one. Could you comment -- I mean, I guess lost in some of this other stuff is a pretty strong performance for bananas year-over-year. A lot of folks talking about how inevitably supply has to come up. I mean, what's your outlook for the next six to 12 months, the banana markets globally? Do you think we're at peak profitability now or can we stay here for awhile?

No, I believe that we are going to stay here for awhile. I believe that we definitely have improved our pricing significantly. And we will see more benefits as we go forward. Because lots of these contracts are just being renewed now and will continue to be renewed until the next six months of this year. So, some of the contracts have been -- the increased pricing has been reflected in some of these contracts still. But we hope by the end the year, we will maintain the same pricing, let's say, (inaudible) environment.

And I don't believe personally, that supplies will increase in any significant way, from [the tropics]. I believe that in the long-term, demand will outstrip supply. And that's what I've been saying for years. I mean, my belief that was banana prices will go up and supplies will not be able to meet the demand.

Now we are going through summertime, which is the downside. But even in a summertime like this, we see that even the demand hasn't been lagging behind so much like in the previous years. I mean, even in Europe, with the very hot weather, they still are maintaining reasonable pricing. In the US, we see supplies being absorbed quite comfortably in the market. So that is why I'm very confident. And hopefully, I mean, the marketplace realized -- I mean, all the players in the market now understand that survival is very important. And we have really, I mean, as suppliers, we have to make additional return on our products.

Heather Jones, BB&T Capital Markets.

I have a few questions on -- this was the worst Q2 performance for the other fresh business since at least 2000. And I'm trying to figure out what costs are going to continue into Q3 and which are done? Clearly, fuel and logistics will continue, but are your melon production issues behind you?

And I just was wondering, what happened in the quarter? Because we had asked you about this on the Q1 call and you had implied that it was mainly a Q1 issue and largely behind you, but it seems like it affected Q2. I'm just wondering what happened there?

Well, the Q1 issue as we had said in the first quarter was the offshore season. And we have said that was going to last until about the middle of May. A completely new season was our domestic growing season in the US and Arizona, and they also happened to have weather problems and certain conditions that caused volume to drop about 19%, which obviously increased the cost significantly.

That season now is also over. So, we'll be going now into the California and then we'll have another Arizona season later on in the fourth quarter. So, every season starts anew. So those (multiple speakers) --

How is California progressing?

California is looking fine. Volume is --

Well, California is usually on consignment terms.

California is what?

It's on a consignment basis. We don't buy the fruit. We just market the fruit for our growers.

Oh, okay. So, Q3 is not a big melon quarter for you all, but Q4 starts to pick up again. And in Q4, it starts to move back to Costa Rica again?

Q4 you've got the Arizona season at the beginning of the quarter, and then in November, you start moving into Guatemala; and then January, Costa Rica.

Now, we've been hearing that a number of growers in Guatemala have some severe financial issues. Some are having their farms sold from them -- taken from them and sold. I was wondering if you could comment on that?

We've also read where Costa Rican land is going to be down dramatically -- almost half of what it was a year ago. So, was wondering if you could give us some color on your thoughts regarding that, what that could mean for your costs? And secondly, what it means for pricing?

It is true for Guatemala. We know for a fact that several growers are going out of business. And we know that there will be supply issues in Guatemala for the next season.

Costa Rica, we know that we -- there are also other issues, but we are not sure about the figure you mentioned, Heather, of 50% or maybe 40%. But we know that for a fact there will be a reduction in volumes out of Costa Rica and Guatemala.

With the present conditions, I mean, the additional costs that we have been facing over the last eight, nine months -- and the prices haven't reflected this additional cost in the market. And that's why growers are going out of business. They cannot -- banks are not financing them any more because of the tight credit situation worldwide.

So we see better outlook for melons going forward. And that's why we are focusing more on melons right now and taking a more, let's say, aggressive kind of approach to the category.

So, to continue with that train of thought -- so, Guatemala season will probably have problems, but it sounds like from a cost basis, it may not affect you unless you have some weather issues on your own farms; but you should be able to benefit from higher pricing if these growers truly go out of business. Am I understanding you correctly?

That is correct. And we also may be able to get some more volume and take advantage of some of this situation.

And then fast-forwarding to '09, clearly, we can never predict weather, so you may have these issues again, but assuming weather normalizes next year, these costs would be eliminated and pricing should be up still, because of these reductions and the volume from other players that we're talking about. Is that correct?

Correct. That's correct. I mean, to answer your original question, Heather, as far as what caused -- obviously, fuel is something people watch and can come down, but there's a lot of the other costs here that come down. I mean, it's unlikely that the banana and pineapple procurement costs, what we buy from growers, is going to come down. But as far as the bananas and pineapples we grow, would come down because of the acquisition and the incremental volume.

Melon, as you say, would definitely come down if we can increase the volume, which we are doing. And then tomatoes should come down; I mean, a lot of these costs can come down.

Can you give us an idea of the magnitude that melons -- these production issues have hurt you, as far as profitability for the first half? Just to get an idea of how much of these costs are sustained and how much are related to weather and should go away.

Well, I would say -- let's put it this way -- the entire cost increase -- well, most of the cost increase is related to the decline in volume.

For melons.

For melons, correct.

And now on your pineapple business post-Caribana acquisition, are you going to own roughly two-thirds of your own -- of your production?

I would say that's about right.

Okay. Now, as far as the surcharges on the banana business, our understanding is that those are going through at least Q3, this is here in North America. Was wondering if you could speak to that?

And secondly, if you could talk about your outlook for contract pricing. Given that it doesn't look like these costs are going away any time soon, are you trying to take steps to make these increases more permanent?

The surcharge that we have that was put in the early part of the year has been continuing. And any contract that is renewed now and this surcharge has been taken into consideration.

So with the new contracts going forward, will be -- the surcharge has been taken into the cost. And our pricing has moved up dramatically over the last, I would say, 12 months. And I believe that this will be sustained. And I believe that this still, in my opinion, will have to improve further as we come into 2009 or 2010. I still believe there is room for -- I mean, just to give you an example, right now in Costa Rica, the authorities, the government is probably going to impose another $1.00 addition to the minimum price given to the growers. So the price that we have now is $6.45 and they are talking about $7.45. Probably within a week or two they will impose this on everybody. I mean -- and that gives you an idea of how much additional costs will be in the future, going $1.00 per box in Costa Rica additionally.

Effective immediately?

It will be effective -- yes, once it is issued, it will be effective immediately. So, I mean, what I'm saying that on one part, I think our Caribana acquisition was a very opportunistic when we made the transaction, which will give us some type of relief in that respect.

On the other hand, it shows you that the pricing going forward will have to continue going up.

How much production do you own versus source from independent growers in Costa Rica, post-Caribana?

Well, pre-Caribana was about 50/50. And you can add 13 million boxes to that.

So what -- I don't know how many boxes you get out of Costa Rica right now.

About 70/30 right now -- 70 owned and 30% independent -- about.

70/30, okay. And then the Guatemalan blow-down and Brazilian floods, those costs -- are those going to be more onerous in Q3 than they were in Q2?

No, they should be steady, because it's all straight line. So, the costs that -- would be the same for the whole year until those volumes come back.

Okay. A final thing is just wondering if -- I know you can't give guidance just given the volatility inherent in the business, but just wondering if in the future -- I would find it personally helpful; I'm sure investors would as well -- if things like the melon production issues, fresh cut, et cetera -- if you all could give some kind of color on the severity of costs like that. Because fuel is easy for us to follow and those kinds of costs, but some of these things are not as easy for us to keep track of. So, [anyway with] --

I mean, it's hard for us to give an outlook, as you say. I mean, we certainly are trying to more and more in the quarterly discussions give an outlook on the costs. I mean, we can tell you, for example, bunker fuel, which we said was up 15% -- I'm sorry, $15 million -- that's about 4% of our cost of sales.

The other ocean freight costs, which is vessel and freight operating expenses, that's up about $10 million. And that represent about 10% of our cost of sales.

And is that expected to be up $10 million in Q3 as well? Or is that worsening or --?

You know, we don't know. We don't know.

And what is determining that? Because I was under the impression that you all owned a fair amount of your ocean vessels. So what is determining this increase? Is it the amount that you have on spot? Those cost increases or --?

That's a lot if it. The charter that's on spot and then there's vessel operating expenses for our own fleet.

Vincent Andrews, Morgan Stanley.

Just want to -- a couple of clarifying questions here. Just want to make sure, on the cover page of the press release, it appears that the flooding from the banana operations has been excluded from your $0.87 calculation. And then later when you discuss the banana results, you say that they include a $2.1 million charge, alluding to flood damages in Brazil.

And then there's also the Guatemala expense. And so, just to be clear -- Brazil, you've removed from the $0.87, but Guatemala, which has not been quantified, would be included in the $0.81. Is that correct?

Correct.

And then would you care to quantify what Guatemala was?

We've got -- it's not huge; under the lack of volume, it's not a very -- it's $1 million or $2 million.

Okay. And then as we look out to the back half of the year, I mean I know there's been some discussion on this already, but it seems -- I mean, is it fair to characterize it as that these -- the challenging conditions in Q2 are going to persist at least through the balance of the year and there will be some offset from Caribana?

There will certainly be some offset from Caribana, but we don't know what's going to happen the rest of the year as far as costs. As I mentioned earlier, some of these costs could certainly come down. It's going to depend -- and each product stands on its own -- it's going to depend on volume and yields and on what happens in the economy and what happens to fuel costs, and all the costs that are derived from fuel, such as plastics and fertilizers.

Right. But that's like the $1.00 per unit in bananas in Costa Rica -- I mean, that could be an immediate impact to your cost of goods sold, is that correct? On volume that you're buying third party?

Which $1.00 per unit?

Well, Mohammad was saying that you could go from $6.45 to $7.45; I presume that's what you'll pay for bananas that you don't grow yourself, is that correct?

Yes, the $1.00 -- there was an increase in -- that the growers had in December, which passed. And they're requesting $1.00 now, but that has not been agreed to. That's being negotiated right now.

It could happen, but there would be an increasing cost. I mean, be it $1.00 or $0.80 or $0.75 -- there will be an increase in costs. Now they're talking about $1.00. We are disagreeing with that. We are arguing with the authorities. Hopefully we can see them reducing that. But definitely, there will be an increase in the price of bananas, minimum price of bananas out of Costa Rica.

Do you feel like you fully passed through the cost increase that you got in December? I mean, in other words, if this goes through, what's going to be the lag effect on your ability to price to offset it?

We have priced -- I mean, our new contracts, they have been priced, I would say, reasonably well. And any new contract definitely would have to take into consideration additional costs.

Obviously the margin change shows that yes, the December costs were passed through.

And then, Mohammad, it sounds like -- there's been a lot of concern in the market that banana pricing in the EU is going to fall off in the second half of this year, because there will be an -- simply there would be an increase in supply from the tropics, unless there was similar hurricane-type events. It sounds like you don't believe that's going to happen. How much of that is a function of the fact that your banana volume is going to be down?

Well, I mean, just to give you an example, last week for instance, we also had a blow-down in Costa Rica. And this did not affect only Del Monte, but affected almost every producer in the country. I don't know the figure to date, but that has taken out also some production out of the way. So we would see that shortage going forward September, October and beyond.

I don't think that -- I mean, we have to look into the national market, which is expanding very rapidly because of the per capita income that is increasing steadily and increasing well. So this market has been increasing significantly over the last two or three years. And if it continues on that track, I think there will be definitely an issue with the supply of bananas.

When you say an issue, you mean there would be --?

Enough supplies.

Not be enough supply.

No.

Okay. Just to try and wrap up what you just said, I believe you're basically saying that all Costa Rica is going to be lower volume, including ourselves. Russian demand continues to grow. And I think that the difference year-over-year would be that last year, you benefited from the higher prices because you didn't have -- the volume loss that created the higher prices wasn't from your supply. So it will be different this year, is that you'll have lower volumes and -- but you'll still have higher prices. Is that fair?

I believe so, yes. And don't forget also -- I mean, the fuel costs have made a big difference to the market. Ecuador used to enjoy a tremendous advantage because of the low freight costs, be it the fuel and be it the ship chartering rates. If you look now, the fleet worldwide has been decreasing in number of ship vessels, traditional vessels, to carry bananas or other products, the refrigerated products. And the fuel costs has -- went sky-high.

So, these two factors, not enough ships in the market or not as much as it used to, as well as the very high cost of fuel, has made it so difficult now for people to import bananas from Ecuador. The top price has increased dramatically. The cost of shipping has gone very, very, very high. So, I mean, the risk is much higher for anybody now to go into the European market and risk losing tons of money there. And that's what happened this year, around some periods of this year, people lost a lot of money.

So I think if you look at the macro picture, I am personally optimistic about the future and about the markets. That's my own belief. That's my own vision for what's coming up.

Okay, thank you very much. I'll pass it on.

(OPERATOR INSTRUCTIONS). Nicole Miller, Piper Jaffray.

Can you quantify by any measure the Easter shift out of the second quarter into the -- that was in the first quarter, by dollar, volume, or percent?

We don't have it quantified that way. It's just that pricing is higher in the month. So last year, pricing was higher in March -- I'm sorry, in April than in March, and this year the other way around, primarily in Europe. And that North America as well, but now that North America is building more contracts each year, you have less of an impact there.

And did that also impact gross margin then?

Sure, because pricing.

Okay. Are there any other holiday shifts we should know about for the remainder of the year?

No.

I'm a little confused on -- I want to make sure I have these numbers right -- the Brazil floods was $2.9 million in volume and Guatemala was $1.5 million? Is that what those figures were?

Correct.

And that was out of the second quarter?

No, that is for the remainder of the year. That is until the volume is replanted.

Quarterly or for the remainder, the second half of the year, in total?

That was from when the events occurred until it's replanted, which in Guatemala, would be back in January. So for the most part, that would be for the remainder of the year from when the events occurred.

And so that I guess given that -- shouldn't Caribana, if it has that then rate, shouldn't that be about 3 million of increased volume each quarter, so shouldn't the two offset one another, approximately?

Well, it's not 3 million a quarter that was lost. Caribana is 13 million boxes incremental. And this is 3 million or 4 million.

Right. I guess I'm asking -- the way I'm looking at it is, do you start getting Caribana -- I guess, the 13 million just come online all at one time in this -- as of now?

Well, the full volume has come online, sure. Not the 13 million. I mean, the 13 million is an annual [folly].

Right. That's what I'm saying. So that's like 3 million a quarter, approximately, which is 6 million -- so plus 6 million minus 2.9 minus 1.5. I'm saying, shouldn't they even offset one another?

Not exactly, because Brazil will spread out longer, so not exactly.

So volumes will be down even though Caribana comes online?

Well, we said earlier, volumes will be down, not only because of the -- even with Caribana, our projections all show volume being short for the next few months; not only because of Brazil and Guatemala, but in general, in Costa Rica for example, just country-wide, volume is lower this year than it was last year. Not just for us; they're the countries' statistics.

Okay. When you look at SG&A, it's been down about 40 basis points in the first and second quarters approximately. Is that the right run rate for the remainder of the year?

I think, yes, the spending you see is -- you could use that.

And will CapEx in '09 look like CapEx in '08 [seems to here] similar?

You could use the same figure.

Okay. So, I've modeled out using that same 115 and I come up with an ability to generate at least 150 million. Does that figure sound right in cash for next year and would you pay down debt?

How much cash we're going to generate next year?

Yes. And what's the plan for it?

We're not giving that.

But it's very meaningful -- I mean, so when you do generate the cash, will you be paying down debt?

Typically that's what we do if we're not doing acquisitions, yes.

That's all I had. Thank you so much.

Heather Jones, BB&T Capital Markets.

Sorry, I just had a couple of clarifications. So, your banana volumes -- speak of the East, specifically, not the industry -- even with Caribana will be down year-on-year in Q3 and Q4?

No, our banana volume will be higher because of Caribana, for sure.

Okay. I think there's some confusion there, okay.

And then secondly, just wondering about your cash flow generation, which is very strong. Given the weakness in the stock and given your bullishness on your longer-term outlook, would you all consider a share buyback?

That is not being considered at this time.

Mr. Abu-Ghazaleh, there, with no other questions remaining in the queue, I'd like to turn the call back to you, please.

Thank you very much. And I would like to thank everyone for being with us on this conference call and look forward to speak to you next quarter with even better news. Thank you very much, everybody. And have a good day.

Thank you. That does conclude the call. We do appreciate your participation. At this time, you may disconnect. Thank you.