Fresh Del Monte Produce Inc (FDP) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Fresh Del Monte third quarter 2010 conference call. (Operator Instructions). I would now like to introduce to your host for today's conference call, Christine Cannella for opening remarks.

Thank you, Melanie. Good morning everyone and welcome to Fresh Del Monte third quarter 2010 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 third quarter.

Fresh Del issued a press release this morning via BusinessWire, e-mail , and first call. You may visit our website at www.freshdelmonte.com to register for future distribution. This conference call is being webcast on our website and it will be available for replay approximately two hours after conclusion of this call. Our press release includes reconciliations of any non-GAAP financial measures we mention today to their corresponding GAAP measures. The press release may be found on our website.

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 third quarter of 2010. Please let me remind you that much of the information that we will discuss this morning including the answers we given 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 10-K for the year ended January 1st, 2010.

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 would like to turn this call over to Mohammad Abu-Ghazaleh.

Thank you, Christine. Good morning everyone and thank you for joining us today. For the third quarter despite the prolonged global economic slowdown and difficult market conditions we achieved higher set growth in our banana and gold pineapple businesses in North America along with continued sales growth in our Middle East region.

We also continued to extend our market reach through new and existing distribution channel as a means of promoting our global growth and awareness. For example, we made strong progress with our expansion in the vending machine and convenience store channel where our products have been well received. Delivery points such as these allow us to further capitalize on the convenience ready to eat healthy snack and quick service categories.

During the quarter we continued to transform our melon strategy. This strategy includes changing our product mix and volume to be more in line with current market demand. We also closed on the sale of our South African Fruit Canning business in October. A move that will further streamline production and lower costs in our prepared food business by consolidating to our facility in Greece. We believe in initiative such as melon strategy, the consolidation of our canning operations and expansion into new markets and new channels offer excellent opportunities for improved efficiencies, greater balance in today's economic environment and enhanced profitability over the long-term.

During the quarter we generated strong cash flow from operations which enabled us to purchase additional shares as part of our repurchase program and yet still maintain one of the strongest balance sheets in the industry. While we are pleased with our top-line performance, ongoing improvements in many of our business lines and strong cash flow during the third quarter, we were certainly disappointed with our bottom line. Our achievements were countered by a number of challenging events which resulted in our missing several key targets.

These challenges included heavy rains in our Guatemala banana sourcing areas, and to a lesser extent drought conditions in our Philippine sourcing areas negatively affected our banana and pineapple production volume. These adverse events were compounded by stronger currencies versus the dollar in several of our producing countries, along with increased fuel and [carton] prices. Together these factors led to significantly higher costs during the quarter compared to last year at this time.

In addition to higher production costs we were challenged with ongoing complex market conditions in Europe. Weak consumer demand and an industry wide banana supply imbalance kept the average price of bananas suppressed negatively affecting our profitability.

As you may -- knew or heard the Iranian authorities stopped granting banana import licenses at the end of September. Upon hearing the news we immediately took steps to redeploy fruit to other markets in the area. However, I am happy to inform you today that as of this week licenses have been issued and we have started loading to that destination.

In summary, while we are currently facing a number of issues I am convinced as we properly execute our strategy we will deliver long-term benefits to our shareholders. As we move forward we are cautious about the near-term as industry and economic conditions do not appear to be improving. However, we have a broad and diverse product line that is sourced and marketed globally decreasing our risk exposure. We have a strong balance sheet which allows us flexibility and we are supported by a management team that understands today's challenges. Is at this point I would like to turn the call to Richard. Richard?

Thanks, Mohammad, and good morning. For the third quarter of 2010 excluding asset impairment and other charges or credits net Fresh Del Monte delivered earnings per diluted share $0.22 compared with $0.61 in the prior year period.

Net sales increased $27 million to $793 million compared with $766 million in the third quarter of 2009. In addition, excluding asset impairment and other charges or credits net, gross profit was $51 million (sic- see Press Release) compared with $69 million in the third quarter of 2009. Operating income was $14 million compared with $28 million in the prior year and net income was $13 million compared with $39 million last year. During the quarter we benefited from a $1 million net credit primarily related to an insurance recovery from flood damage to our Guatemala banana operation.

Now for our segment performance. In our Banana business segment, net sales increased $19 million to $370 million compared with $351 million in the third quarter of 2009 driven by increased volume and higher pricing in North America and our expansion in the Middle East.

Volume was 8% higher than last year, worldwide pricing decreased 2% or $0.28 per box to $13.47. While we experienced price increases in North America and favorable exchange rates in Asia these increases were not enough to offset lower pricing in Europe and the Middle East.

Gross profit excluding other credits decreased $22 million to a loss of $8 million compared with gross profit of $14 million a year ago. And worldwide unit cost was 4% higher primarily driven by an 11% increase in fruit production and procurement costs.

In regards to the suspension of importation licenses by the Iranian government that Mohammad mentioned, the negative impact that we experienced in October and will probably continue to experience for the next few week is not only the loss profit on our sales in this market, but also the impact the excess supply has had on pricing in the Middle East and Asian markets.

In our Other Fresh Produce segment, business for the third quarter net sales increased 3% to $320 million compared with $311 million in the third quarter of 2009. And gross profit for the quarter increased 4% to $46 million compared with $44 million in the prior year.

In our gold pineapple category net sales increased 14% to $118 million compared with $104 million in the prior year. Volume increased 11%, unit pricing was 2% higher and units cost decreased 3% due to higher production volume partially offset by unfavorable exchange rates in Costa Rica.

In our melon category net sales decreased 15% to $18 million compared with $22 million in the third quarter of 2010. Volume decreased 9% as a result of our strategy to match market demand, unit pricing decreased 7% and units cost was in line with the prior year.

In our fresh-cut category net sales decreased 4% to $79 million compared with $82 million in the prior year, the result of lower sales in Europe. Volume was 9% lower, unit pricing increased 5%, primarily in North America, and unit cost was 2% higher.

In our non-tropical category net sales increased 13% to $53 million compared with $47 million in the third quarter of 2009. Volume increased 21%, unit pricing decreased 6% and units cost was 5% higher.

In our tomato category net sales decreased 8% to $24 million compared with $27 million in the prior year, volume was 6% lower pricing decreased 3% an unit cost was in line with the prior year.

In our Prepared Food segment net sales increased $8 million to $94 million during the quarter, the rise in net sales was primarily the result of increased sales in our canned pineapple and deciduous fruit product lines and gross profit decreased 3% to $14 million primarily due to higher production costs.

In our Other Products and Services business segment net sales for the quarter decreased $10 million to $9 million. The result of lower sales in our third the party freight and Argentine grain businesses. Gross profit improved by approximately $3 million due to lower losses in these businesses.

Now some cost highlights. Banana fruit cost which includes our own production and procurement from growers increased 11% world wide and represented 33% of our total cost of sales for the third quarter. Carton costs increased 21% and represented 7% of our total cost of sales. Bunker fuel increased 5% versus the prior year and represented 4% of our total cost of sales. And ocean freight cost during the quarter, including bunker fuel third-party charters and fleet operating costs was 8% lower and represented 14% of our total cost to sales.

The foreign currency impact at the sales level for the third quarter compared to the prior year was unfavorable by $5 million and the foreign currency impact at the gross profit level in the third quarter was unfavorable by $6 million compared to the prior year.

SG&A expense during the quarter was $41 million compared with $43 million in the third quarter of 2009. The decrease versus last year was primarily the result of lower administrative expenses partially offset by higher marketing expenses in Europe and Asia.

During the quarter we benefited from a $5 million gain on the sale of property, plant, and equipment which included a $3 million gain on the sale of a distribution center in Brazil and a $2 million gain on the sale of a ship and shipping equipment.

Other income net was $3 million compared with income of $1 million in the prior year primarily due to foreign exchange.

For the quarter interest expense net was $2 million. At the end of the quarter our debt was $202 million as we paid down $14 million during the quarter. We also spent approximately $29 million in the quarter to repurchase an additional 1.4 million shares as part of our share repurchase program.

Income tax expense was $3 million during the quarter compared with a net credit of $13 million in the prior year period. And capital expenditures for the year are expected to be approximately $80 million. This concludes our financial review. Operator, can you turn it over to Q&A please.

Thank you. (Operator Instructions). Our first question comes if Heather Jones with BB&T Capital Markets.

Good morning.

Good morning, Heather.

Real quick, just briefly on the Iran issue. Could you give us a sense of the impact, you mentioned October and you expect the next few weeks. Are you able to give us some sense -- to quantify that somewhat for the Q4?

Well, I can tell you today for instance, prices in Japan are around JPY400 to JPY500 for a box of bananas which is tremendously low for this time of the year and we don't see that that's going to improve the next few weeks because really there is a lots of volume in the market and I don't see definitely any breakthrough before five, six weeks from now that we can see, hopefully.

If Iran continues -- I said that we started receiving or our buyers started receiving licenses in the last few days. I don't know if this is open for everybody or everyone can get this license, but in our case we have been able to continue shipping through to the Iranian market.

Now as far as the Middle East, Middle East has not been impacted as bad as Japan and Korea. Korea also is selling at very reduced prices. The Middle East has been affected because we had to take a lot more volume into these markets in order to mitigate the situation in Japan and Korea. So on both sides we have suffered financially, but I think the financial burden is much more on the Asian markets rather than the Middle East markets.

So you think it will take five to six weeks to clean up the excess volumes?

I believe so. I think that we need to see an increase to the end of the year for the market to start shipping up again and, hopefully, the volumes because it just happened at the wrong time. Iran stopped importing as well as the surge in production in the Philippine came at the same time. I mean we are talking about 500,000 to 600,000 boxes a week and then all of a sudden we started receiving about a million boxes of week of production. So you can see that there was like a double hit. Prices went down as well as production went up, so.

Okay.

And the production I think by the end of the year, beginning of next year we will see a more balanced production then.

So real quickly before I move on to my next question. Could you give us a sense of the JPY400 to JPY500 a box? Could you give us a sense of how much that is down year-on-year?

I don't have year-on-year right here, Heather. I can tell you that from right before the licenses stopped being issued Japan pricing dropped about 45%, Middle East about 30% and Korea about 31%. That's down from September when right before the announcement.

Okay. Moving on to the US, we have heard a number of reports indicating that in some instances US contract pricing for 2011 could be down slightly. Whether it's through the use of rebates or whatever that effective pricing for next year could be down. Could you give us some color on what you're seeing during contracting season for this market?

Well, its unfortunate that it is true that there is some pressure on pricing going forward. There has been some heavy competition and erosion on some of the pricing, but I hope it will not be so significant that it can lead to a very, let's say negative situation. But yes, there has been -- the competitive environment especially with the volumes being in Central America and Ecuador has been a factor into this.

Because Latin America volumes have been strong this year so there's more fruit than there was last year?

One of the reasons maybe, yes.

Okay. And then my final question is there's been a number of reports about you, Fresh Del Monte among others, potentially rationalizing some production in Costa Rica because -- well among other things, the strengthening in the Cologne. I was just wondering if you could speak to that and also if you could speak to what your expectations are for costs next year in Costa Rica because I would assume that the independent producers are going to want to pass on higher costs because of the Cologne, and so if you could just give us some sense as to what your expectations are?

As far as we are concerned and we made it public that we are going to close down -- we closed down some of our farms be it in bananas or melons and that's a policy that we have adopted. As far as production, if the farms are not yielding enough to justify their existence, we will be closed.

We have also -- did not renew for some growers that contracts would end at the end of this year. So we are rationalizing our volumes [in cast eye] be it through our own farms or through contracting through growers. It's very simple. We want to make sure that we will not do anything unless it is profitable. There's no point to take volumes when you cannot sell it or if you have to sell it then you have to compromise on pricing and that's something that we would like to avoid.

Now, as far as the impact for next year I think with all the actions or all the measures that we are taking it will be definitely on the positive side. I mean we will definitely see some improvements in our costing and going forward, but we have -- let's face it, we have excess volumes this year that force us to sell volumes, especially into the Mediterranean market, that sustained sizeable losses to us during the year.

And unfortunately this year has been a very special year in terms of pricing. The markets were extremely weak, pricing never picked up be it in Europe or the Mediterranean or Black Sea markets and that's something that we will look at very carefully going into next year and I'm sure that we are going to do better than what we did this year.

So do you think your total banana volume will be down next year or are you just going to be shifting? Like you might take less from Costa Rica, but you will take more else where? Do you think you will have an absolute reduction in your volume?

No. We will have absolute reduction Z okay.

Okay. Thank you very much.

We'll take our next question from Scott Mushkin with Jeffries & Company.

Hey guys. I wanted to clarify quickly what Heather was going after. And just trying to understand what's going on in North America a little bit better. So I think, Mohammad, you said that the competitive environment deteriorated a little bit in the pricing. It's more difficult as you go through this contract negotiation for the year. With costs up, I'm just trying to understand what's driving that given the market is pretty well controlled by three different companies and are you guys -- who do you think is driving the issues here and why would they be doing it? I mean it seems to me you need price increases to deal with a lot of your costs.

Well, actually, we're -- I hate to call this that we control the markets, three players. But definitely, with the size of the volume that we have and all the implications of handling this volume and the logistics gives us better leverage in delivering a good quality fruit. However, I believe it's not only on the our side. It's the client side as well. That they are flexing more muscle and we see a lot of direct import by some of the retail buyers. This also has given some difficulty at the source.

The growers gets -- it disrupts the relationship as well as gives them wrong impression of what is going on. We know how complex and difficult this business is and we know that import is not going to take over our industry, but still it is a very disturbing factor. And it creates wrong impressions, be it on the growers' side or the buyer's side, and these are some of the factors that is really disturbing the marketplace and I would say the added volume in the market has contributed as well to the pressure on the multinationals to put their volumes into the market. So I hope the situation will work itself out and then I believe that going forward things will turn to be better.

So I have a couple follow-up questions, but I just want to make sure I understood you right, Mohammad, because I'm on a cell phone. Did you say some of the retailers are doing more direct buying or did I mishear what you said? Did you say that.

Some retailers are doing direct buying, yes. We're not saying that this is a competition. We're not saying that this is undermining our business. However, the growers starts to thinking differently and the whole environment becomes let's say more competitive.

Okay. Thank you. Thanks for that clarification. So I wanted to move on to currency. Bill Gross is out today talking about the US dollars probably in for another 20% decline. Let's just pretend he's right. Is there anything you guys can do when you look at sourcing a lot your product out of Costa Rica to offset this? If indeed, he's right. And how should we look at this as investors as we go into next year, if we do get this kind of depreciation of the dollar?

I mean I'm not sure he was talking about versus the Central American currency, Scott, but most people I think are expecting a little bit of an improvement there. But what we can do is what we continue to do is just manage our costs as best we can and rationalize volumes into places where it's least expensive to produce is all we can do.

And, Rich, what part of your COGS are associated with Costa Rica? What percentage of your product, I guess, is Costa Rican in origin?

I have that here. All together including growers, Scott, roughly for the quarter it's about 25% of it.

About 25%.

Bananas. Bananas.

Oh, that's bananas.

That's bananas. Yes.

But of the total, like most of your pineapples are coming out of -- is it upwards of 40% of the fruit that you guys?

I don't think its quite that high but yes, it's certainly higher. Pineapples are a majority from coast Costa Rica.

Okay. And then let takes a note here. And then going on to melons. I know we were down volumes and we had a big down volume a year ago. What's our expectations that the melon business as we go into next year, do we think we will start seeing up volumes with the new varieties or is that too ambitious?

No. We will see a significant increase in our new variety going to the offshore season starting by end of December, middle of December, but -- and that's our direction. We are going into varieties that really have a premium in the market, really can demand a price because we believe that the melon, particularly in general, is in a very poor, let's say, situation. I don't believe that the melon, particularly with the tradition of varieties, will ever pull out of it's bad situation as we have seen for the last 18 months and we are experiencing today.

So actually we have come down on our traditional varieties, we have rationalized our production and we have now focused on the new variety which I believe will turn around this category because actually in the last PMA meeting or convention that happened a few weeks ago, they did a reception on the new variety by the retailers and food service and everybody that tested that variety was extremely favorable. So we are very confident and hopeful that this will really be a new -- something that will be very special in its place in the market.

And I just have one finalized quick one. Are you guys dispensing bananas from vending machines already or is that going to happen eventually? Where are we on that? I think there was an update, but I missed it.

We have started. It's still in its infancy, obviously, but it has started.

All right. Thank you. Thanks (inaudible) for taking all my questions. I appreciate it.

We'll take our next question from Bill Chappell with SunTrust.

Good morning.

Good morning, Bill.

I know you don't give guidance and a lot of things that have happened this year but just trying to understand with currency and with what you're seeing on pricing, do you think you can grow earnings in 2011 versus 2010, or is that going to be more of a stretch with so many headwinds?

That's always our target to grow earnings, but how can I -- I was planning to do a lot better than what I did now. At the beginning of this year we were extremely hopeful that it would be a very good year. It turned out not to be a good year. In our business we can never predict what will be the weather, what will be the markets, what will be the -- so many factors, the currencies, the politics and conditions. So we definitely look forward to do better earnings, but that should be our motivation and our target.

Okay. And then on the melon side I'm not sure I heard you say before that you felt like the core business could never pull out of what we have seen over the past 18 months. I mean does that mean there is further rationalization of your assets to go or have you right sized that business. Now waiting for incremental upside from the new version?

We have rationalized during the last six, seven months and now the programs for next season is already in place and the seeds are in the ground and volumes are already fixed for the coming five, six months. Now at the end of this coming season, we will re-examine our operation and our results and we will make decisions based on these results. So going forward if we need to rationalize again, we will. If we see things are going the right way, we will, of course, remain in the same situation. But what I'm saying is that we are very encouraged by the indications about the new melons that we are introducing in the market, and I think that would be, in my opinion, a very important milestone in our operation going forward.

And just with regards to that theory, planned program by retailers or you to educate consumers on the new version and build that out?

Yes. I think what we are going to do is more or less what we did with the Del Monte gold at the time of introduction. It would take the same kind of footsteps.

Okay and then just one last housekeeping. The gain on asset this quarters, you might have mentioned that but can just tell me again, are there any other gains expected in the fourth quarter similar to that?

The gain was about $3 million on the sale of a distribution center we had in Brazil and about $1.5 million on a ship and some shipping related equipment. We never forecasted, although if you look quarter-to-quarter we typically have that. But no, we don't have any forecasted future sales.

But nothing expected I mean so far this quarter I guess?

Correct.

Okay. Thanks so much.

We'll take our next question from Eric Larson with Soleil Securities.

Good morning everyone.

Good morning, Eric.

Mohammad, I just have a couple questions. Number one is it sounds like with the impact of the Iranian market -- I don't want to beat this horse to death. Its more of trying to put it into a relative perspective. It sounds like that was one of your more developed Middle East countries and I know that Saudi Arabia you just have put some new distribution centers in there and that's sort of ramping up. Is that a fair comment that Iran is probably one of your more developed Middle Eastern countries, and that we should expect better growth coming out of some of your newer markets like Saudi Arabia?

It's one of our major markets definitely, Iran, but it's not our -- I mean we do have very diversified markets in the Middle East. We cover all the Gulf region from Kuwait, to the Emirates, to Oman, to Saudi Arabia, Iraq, Jordan. We cover the whole area.

I mean it's not only one market, so that's why when the stoppage of permits or stoppage of imports into Iran took place, we were able to diversify and to reallocate the volumes into all these different markets. Of course it affected our pricing, but at least we did not dump the fruit like other operators did. I mean we did not have to chop the fruit in the farm.

We did not have to let it sit there without having a destination. We had destination for all the fruit and the fruit was allocated in different markets. So Iran is an important market, but it's not life and death for us.

I mean we can live without it though it would be nice to have it all the time because it adds volume and income. But I believe that going forward, the permits will be not as abundant as it used to be, they will be a little bit scarce. But so far our customers, our buyers have been able to secure import licenses and we have been continuously supplying them the regular volumes.

Sure. That makes sense. And Mohammad, give me an overall a 30,000-foot look down. As you enter your first half of next year when you have -- obviously that's your seasonally strong period for banana sales. From a supply perspective the fourth quarter is still going to be tough.

As you go into the first half of next year are you seeing banana production globally, particularly many out of Ecuador which tends to be the swing country, are you seeing banana production starting to subside a little bit, or how do you view the whole banana global supply picture as you gets into your seasonally strong first half period in 2011?

I believe that definitely during the first half the year it's gold and usually the weather changes and the production goes down in all Central America. So we will see shorter production for sure in the first half of next year. Definitely there will be better markets and there's no question about it.

I'm not so sure about Europe. If it's going to improve as it should. As we used to see it in the previous years. I have been saying from the beginning of this year that Europe is poor and will stay poor and I think my predictions or my vision was correct in terms of the pricing and the Europe situation.

I believe what we are going to see and that's my own thinking that nobody can sustain losses going forward on a long-term basis. I mean be it on the production side in Central America. Farms that are producing 1,700 or 1,800 or even 2,000 boxes with today's cost pressure and the cost increases. I don't think this kind of farms can survive in a medium or long-term. So they have to go out of production and ultimately the market itself will determine what and who will be able to produce and what kind of volumes will be in the market. So it will take time, but I think that we will see more balanced supply and demand going down the road in the future.

Okay. That makes sense. And then, Mohammad, just one other follow-up question. Year to date you've spent nearly $80 million on share repurchases which I commend you for that and it's certainly a bit of a departure from your previous use of cash. If I go back a number of years you would have normally put that $80 million towards debt reduction and you would be probably just closer to a $100 million or a little bit more of debt at this point under your previous philosophies.

Can you talk a little bit about that? Your philosophy again on share repurchase program versus debt reduction? Then at some point would you recommend to your board that you maybe put a modest dividend back on the Company given that your free cash generation is so strong?

I mean you're talking about the debt reduction. Yes, I would like to reduce, but we will be buying stock as well as reducing our debts going forward. I mean our cash flow will allow us to buy shares and to reduce our debt going forward. And maybe, sometime maybe in the future we can also recommend to our board payments.

Sure. Okay. Well, thank you for your comments, Mohammad.

We'll take our next question from Jon Feeney with Janney.

Good morning. Thank you.

Good morning, Jonathan.

Mohammad, you identified some of the local producers into Europe as marginal producers that are going to struggle to remain in existence, but what I'm wondering is where are the other marginal producers that are losing money right now? Because all I see -- while I see fundamentals trying to deteriorate, I have watched all the pricing going down and now US pricing. Just word on the marketplace is that it's cracking a little bit. Are there producers right now selling a significant amount of bananas at a loss and where are we in terms of the correction of that process overall globally?

Well, I can give you an example of ourself. As I said earlier the growers now are contracted on long-term basis with the multinationals. I mean some of them will end the end of this year or maybe next year or I don't know when.

But definitely, I mean in our case, we have some contracts that are ending this year and they will not be renewed because we're not supposed to buy a product at certain price and sell it with a loss. I mean the growers, even he can't sell this product to someone else at the same price he was selling in order to make money, or he will sell it with a loss or he will have to shut down. I don't see any other scenario here.

I mean you have had a lot of experience, Mohammad. If you look at the past 20 years, say on a scale of one to ten, one being the worst banana markets I remember, which was 2005, and 2010 being the best. Where are we in terms of the ability for a marginal grower to survive?

I think we are at a time where really drastic and significant changes to the industry have to take place. Because the banana industry used to be in the old days a very reasonably, a very good business. I mean a very profitable business. Over the last 20, 25 years I would say, production has gone [wide] and the increase even in Ecuador or even in Central America has been really unacceptable.

I mean and it's not their fault. It's the fault of the multinationals because the multinationals finance these growers and give them long-term contracts. So you have any grower that will be with a ten years contract he will go into a bank and this will be just like cash in his hands and it was easy to finance these farms.

I think the situations changing. And I believe that no one in his mind will go and start growing additional bananas that he cannot sell in the market and I think it's the same -- I believe this is a general environment and everybody, is I believe, thinks the same way. If one has to make money and if you want to stay in the business. That's the only way you can survive.

So it's really a question, in your opinion, of the behavior of the multinationals around profit discipline? It's not the marginal growers that are going say direct to retailers or other channels?

Yes. I speak for myself. That's our situation. I cannot speak for my competitors, but as far as Del Monte, Fresh Del Monte, is concerned we believe that we will live with only the volumes that we can sell comfortably in our markets and hopefully make a decent return on our investment.

Thanks. And just one other thing. Do you think in the markets where you operate given the ship ownership you have, the land ownership you have which is a little bit more heavy than some of your competitors that you are a low cost producer among the multinationals and presumably among the growers as well?

I think we are in the mainstream. I believe that we did have -- we rationalize all time even with our shipping, now we are rationalizing this. We have less ships now than what we had a year ago. We are rationalizing our logistics as well in order to maximize utilization and maximize returns.

We are not just sitting there and waiting. We are evolving as the market evolves. Be it shipping, be it production, packaging. I mean we do have to be always alert of what's going on in the market and that's what we do.

Yes. My last question is what -- the recent recovery in spot charter rates which seems to be pretty significant just the rates that anyone could get if they went out tomorrow to bring fruit someplace around the world. What impact has that had on the resale value of ships you're looking to sell and what impact has that had on maybe the amount of volume coming into the marketplace, particularly in Europe and Asia? If any.

I think that the shipping industry has changed significantly because of the container ships. You know the container ships have made a big difference in shipping. The conventional shipping which is the refrigerated vessels, of course, has been a very important element in transporting fruits and perishables. With the introduction of the container ships and the -- I would say the expansion of the container liners into carrying more refrigerated cargo has definitely depressed let's say the conventional side of refrigerated shipping.

This year, for instance, was not the best year for reefer carriers. I mean for operators. Last year maybe it was a much better year than this year. The rates haven't been, especially lately, they haven't been very strong at all. I mean one has to evolve as the market evolves or as the industry evolves. I don't see that the conventional vessels will be as determining factor as it used to be years ago.

Okay. Thanks so much for your time.

We'll go next to Diane Geissler with CLSA.

Good morning.

Good morning.

Maybe I'm confused here, but I thought part of your strategy was to optimize your [DCs] and transportation assets by increasing the volume, in particular, banana volume and that was a core strategy even going back to the Caribana acquisition two years ago, and now what I'm hearing this morning is raising costs are up and the growers are going bananas with banana raising and there's just too much production out there and we are backing off that as a strategy. I guess the question is that an incremental blip in the total volume strategy over the next three to five years or has there been a systemic step down in your expectation about banana volume?

No. I think what we are doing we are looking at -- it I mean we didn't change our strategy. Our strategy is the same. However, we are rationalizing. Europe is not going to be the Europe that we have seen before, I mean definitely. And we are not there to continue losing money all the time. I mean it doesn't make sense. So that's why we are rationalizing about volumes, and we are reducing our volumes from certain growers in order to adjust to the market needs. And that would be our policy going forward.

Okay. But all in total net with the growth that you see in the Middle East over the next couple years. I mean obviously, the Iranian situation, et cetera, we have going on now, but I'm trying to look at it from a longer term perspective. Your strategy would be to continue to build volume in the Middle East. Is that going to offset what you're doing in Europe?

No no no. In the Middle East, definitely, that is the case. And we are growing on an annual basis there and we are opening new markets and then you can see from our figures that we are growing there continuously. I'm talking about markets that really we don't see future in.

Okay. Perfect. And then if we could talk a little bit about your Prepared Foods division. Obviously, this year you had a couple different issues. The deciduous product. I mean I think your gross margins year to date are down about 300 basis points. I think partly that's just the deciduous fruit not producing inventory, and then I guess the other piece is you see some margin benefits next year with the closure of the South African plants. Do you expect the 2011 margins to get back to that 16% level which is I think what you did in 2009, or is there some other reason that would prevent margins from rebounding in 2011?

I mean I can't say 16% or not, but definitely we should start to see the improvement in 2011 and then definitely into 2012 for these changes we've made in the business.

The deciduous, am I correct on about a hundred basis point hit to this year because of the amortization of the fixed costs without the production, is that how I should think about it?

It's about a $7 million hit to this year.

I'm sorry. Could you repeat that.

About a $7 million hit to this year.

$7 million. Okay. I can work that out on an EPS basis. And then I guess what is the marketplace like for those products. The canned and juice products?

I believe that as far as the juice product itself we are expanding very well. Touching on that, our concentrates, pineapple concentrate, has been doing extremely well during the last 12 months and we believe that this is going forward will be a very positive element of our operation. Because if the orange juice orange concentrate has been going up throughout the last 12 months and there is a shortage as well. And pineapple is becoming like a substitute, or concentrate that is not replacing but helping to blend with the orange juice. So as far as our juice, concentrate juice, I think we are doing extremely well.

As far as our cardboard, or let's say the containers juice, that we are doing very well actually in Europe, right now. We are expanding in Africa, we are expanding in the Middle East. As far as the -- as well as new products that we are introducing in the market. So we are extremely happy with the development of the Prepared food in the markets there.

Okay. Great. And then could you address the -- I've had a couple of investors ask am me about the insider sales over the last quarter or two. Could you talk a little bit about what we should expect to see? I mean obviously it's.

I don't believe we are going to see any major -- it's marginal sales and part of the family members, but we cannot as I said earlier in the last conference call, we cannot -- these are personal decisions that I cannot influence. They are investors and they have shareholding which they can do whatever they want with.

Okay. All right. Great. Thank you.

We'll take our next question from Vincent Andrews of Morgan Stanley.

Thanks. And good morning everyone or good afternoon I guess by now. I just have one little question left and that's just as it goes back to the Japanese environment. I know you gave the pricing and you talked about the supply part of it. But could you just talk a little bit about the demand issue? And I think on the last call we felt like demand had normalized after the banana diet fad and I just wanted to make sure that demand level didn't take another tick down sequentially.

No. I think demand is staying stable, but when you have 50% more volumes in the market or more. I mean that definitely will depress the price, but the demand is there. I meanit's the same consumption and the same demand.

Okay. Thanks very much. I'll leave it there.

(Operator Instructions). We'll take our next question from Heather Jones with BB&T Capital Markets.

Thanks for taking this follow-up. I just had one final question. I was wondering you talked about you're going to let some of your contracts expire at the end of this year and just that fruit. Say you do this as well as some of the other multinationals do this. What are your expectations of what will happen with that fruit? Because you know I believe that's crucial for the directions the market next year. I mean do you think it's going to go on the Maersk Liner services? Do you think they'll just will stop producing? I mean I agree with you that these losses cannot be sustained and ultimately you will have significant reductions in production, but I just wonder if you could give me a sense of what you're thinking more in early 2011 what these independent producers will do once you and other multinationals don't take their fruit?

I believe that probably they will try to sell it to one the other multinationals if I leave it behind. Or maybe they will find a home for it in the next four or five months in Europe because Europe during that period, hopefully, hopefully, will be improved and that can return back costs on some profits. But the problem will be not only from January to April, May but what will happen from May to December next year, or to end of November next year. That's the big question.

So I think if be everybody rationalizes and everybody does his homework properly, I think that we will see the market going back to normalcy or to some sane behavior going forward. Because it's actually the name of the game is supply, and if supply and demand are more in line everybody can make money. If supply as we see it today is over the demand side, then I don't see where we break off from there.

So if you as well as other multinationals act rationally and cut your independent fruit contracts. That basically will leave too much fruit for them to try to place on their own, so it'll sort of force a rationalization? Is that what you're thinking?

It could be. It could be one of the ways. Actually Europe today is in a very poor situation. Europe, I mean in general the European country conditions are not right at all, so I don't see how Europe is going to recover to be honest with you in the short-term.

Maybe in the long-term we can see a better future, but I don't think in the short-term we will see -- maybe we will see an uptick in the next few because of the winter -- some shortages here or there, but I don't see a very huge improvement for a prolonged period of time let's say. For three months you will see prices that we saw three years back, for instance.

Do you think this Tomas -- the damage it's done in St. Lucia, St. Vincent and Martinique, do you think that could help the EU market over the next few months or just if you could speak to that.

This is really minimal, Heather.

Okay.

It's like a drop in the ocean I mean [Tonalee ya] is over producing, Africa is over producing. I mean there is a enough fruit in APP countries than all -- I mean it's nothing what has been lost.

Okay. All right. Thank you very much.

Thank you.

And that concludes the question and answer session today and at this time I would like to turn the conference back over to Mr. Abu-Ghazaleh for any additional or closing remarks.

I would like to thank everybody for joining us today and I hope that we can be back next quarter with better results and better news. Thank you very much. Have a good day.

That concludes today's conference. We thank you for your participation.