Fresh Del Monte Produce Inc (FDP) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte second quarter 2011 conference call. At this time all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question and answer session. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce to host for today's conference call, Christine Cannella for the opening remarks.

Thank you, Jeannine. Good morning everyone. Welcome to Fresh Del Monte's second quarter 2011 conference call. Joining me today are Chairman and Chief Executive Officer, Mohammad Abu-Ghazaleh, and Senior Vice President and Chief Financial Officer, Richard Contreras. This morning Mohammad will review our operating performance during the quarter along with recent developments. Richard will then review our financial performance for the second quarter of 2011.

Fresh Del Monte issued a press release this morning by a Business Wire e-mail and First Call, and a copy of our earnings release is available on our website. You may visit our website at www.freshdelmonte.com to register for future distributions. This conference call is being webcast on our website and will be available for replay approximately 2 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.

During the call today much of the information that we will discuss 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 provision 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 December 31, 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. It is now my pleasure to turn this call over to Mohammad.

Thank you, Christine. Good morning everyone. The second quarter of 2011 was a quarter of progress and achievement at Fresh Del Monte produce. During the quarter we delivered year-over-year increases in net sales, gross profit and operating income. Along with very strong operating cash flow. We also increased market share across several of our product lines.

North America lead our growth during the quarters. Our Gold pineapple continually performed exceptionally well driven by our ability to maintain our premium pricing despite an attempted increase in industry supplies. Our Fresh Cut product line was also a strong contributor with higher sales and pricing. The result of strong consumer demand. We expect this trend to continue as we further introduce our Fresh Cut products in non-traditional channels where we see tremendous growth opportunities.

During the quarter we continued to expand our product offerings in North America. With the completion of our state-of-the-art greenhouses in Guatemala where we are growing tomatoes. We are also in the process of building several multi-purpose greenhouse facilities in Costa Rica where we plan to produce peppers and a variety of vegetables. Strategic steps such as these allow us to manage our product supply more effectively in these lines.

We also made progress with our efforts to further establish a specialty melon program and move our way from traditional melon varieties. With limited various entry, traditional melons have simply become a commodity. And producers continue to oversupply the markets. During the quarter we made the decision to scale back our production facilities and terminate some land leases in Guatemala and Costa Rica to further reduce our traditional melon volume. These strategic actions allow us to concentrate our efforts on expanding our specialty melon program.

Our prepared food business performed better year-over-year with stronger sales and improved margins. We have worked hard over the past few years to improve our overall core structure, introduce new product offerings and gain shelf space in this business segment. We are encouraged by the positive strides we are seeing and expect these trends to continue. During the quarter our Middle East business grew at a very fast pace. Demand for Del Monte products remains strong throughout this region. We continue to identify opportunities to further expand our customer base.

While I was pleased with our all over achievement during the quarters, our results were negatively impacted by several events that began to unfold in late May in Europe. The early arrival of an abundant supply of locally grown competing fruits and the complexity and concerns surrounding the poor economic environment in Europe. These events were compounded by unfavorable exchange rates in several producing countries and significantly higher costs associated with fewer end packaging.

In summary, I am encouraged by our performance in the first 6 months of 2011, given the challenges we have faced and I remain optimistic about the future. We continue our focus on creating efficiencies and cutting costs throughout our business as we expand our customer base and market share around the globe. The power of our brand, our diversification strategy, our operation of flexibility, our healthy balance sheet, our strong ethic base and our low debt continues to be key differentiators for Fresh Del Monte produce in this industry. At this time I would like to turn the call to Richard Contreras.

Thanks, Mohammad and good morning. For the second quarter of 2011, excluding asset impairment and other charges, we reported earnings per diluted share of $0.77 compared with earnings per diluted share of $0.85 in the second quarter of 2010. Net sales increased 4% to just over $1 billion compared to the prior year. And gross profit was $104 million, 13% higher than $92 million in the second quarter of 2010. In addition, excluding asset impairment and other charges, operating income increased 9% to $56 million compared with $52 million in the prior year and net income was $46 million compared with $53 million in the second quarter of 2010.

In our banana business segment, net sales rose $14 million to $466 million compared with $452 million in the second quarter of 2010. Volume was 4% lower compared to the same period last year. Worldwide pricing increased $1.02 or 7% per box to $15.50 with higher selling prices in our Asia, North America and Middle East regions. While pricing in Europe was higher year-over-year during the month of April and May, the drastic price drop in June negatively impacted our worldwide pricing for the quarter. Excluding other charges, gross profit for the quarter increased $7 million to $41 million compared with the second quarter of 2010. Unit cost increased 5% compared with last year.

In our other fresh produce business segment for the second quarter, net sales increased $19 million to $477 million compared with $458 million in the second quarter of 2010. And excluding other charges, gross profit decreased 4% to $45 million. In our Gold pineapple category, net sales increased $12 million to $155 million compared with $143 million in the prior year. Driven by increased volume in North America and expansion of our pineapple business in the Middle East. Volume increased 8% due to a temporary industry over supply, the result of climatic changes in Central America which forced fruit to mature ahead of schedule. Unit pricing and unit cost were in line with the prior year.

In our melon category, net sales decreased $13 million to $42 million compared with $55 million in the second quarter of 2010. Volume decreased 22% as we further rationalize our melon operations. Unit pricing was 2% lower and unit cost was in line with the prior year. In our Fresh Cut category, net sales increased $11 million to $101 million, compared with $90 million in the second quarter of 2010. Volume increased 5%, unit pricing increased 6% with higher selling prices in North America and Europe, and unit cost was 7% higher compared to last year.

In our non-tropical category, net sales increased $20 million to $114 million, compared with $94 million in the second quarter of 2010. The increase was attributable to higher sales in our avocado and grape product lines. Volume increased 6%, unit pricing increased 15%, largely driven by lower industry supplies of avocados along with stronger demand. And unit cost was 16% higher compared to the prior year period. The increasing cost was primarily attributable to higher costs associated with procurement of avocados.

In our tomato category, net sales increased 6% to $32 million, compared with $31 million in the prior year due to expansion of our tomato business in North America. Volume increased 7%, pricing was in line with the prior year period and unit cost was 8% higher. In our prepared food segment, net sales increased $7 million to $97 million during the quarter, primarily the result of strong sales in our pineapple product lines and increased sales in our processed meat product line. And gross profit increased 62% to $18 million.

Now moving to costs. Banana fruit costs, which includes our own production and procurement from growers, increased 3% worldwide and represented 28% of our total cost of sales. Carton costs increased 15% and represented 4% of our total cost of sales. Bunker fuel increased 40% versus the prior year and represented 4% of our total cost of sales. And ocean freight costs, which includes bunker fuel, third party charters and fleet operating costs, was 10% higher primarily due to the significant increase in bunker fuel. For the quarter ocean freight represented 14% of our total cost to sales.

The foreign currency impact at the sales level for the second quarter compared to the prior year was favorable by $16 million. And at the gross profit level the impact was unfavorable by $6 million compared to the second quarter of 2010. SG&A expense during the quarter was $48 million compared with $43 million in the second quarter of 2010. The increase was primarily the result of higher professional fees. At the end of the quarter our total debt was $87 million. Income tax expense was $6 million during the quarter, $11 million higher than the prior year period. This is because in the second quarter of 2010 our tax provision included a $7 million benefit related to a change in estimate. Capital expenditures for the year are expected to be approximately $100 million. This concludes our financial review. We can now turn the call over to Q&A.

(Operator Instructions) We will first hear from Heather Jones from BB&T Capital Markets.

Good morning. I have a couple of questions on the banana side. Your cost per box were up, I guess, roughly 5%, 5.5% year-on-year compared to about a 1% increase in Q1. I was surprised by that trend. I would have thought it would have been up more year-on-year in Q1 given the impact of the floods and Latin America late 2010, and I guess I am just trying to get a sense of what changed during the quarter to cause that much of an increase year-on-year. Clearly bunker fuel is up. Bunker fuel is up in Q1 as well. I wonder if you could speak to the trends there and what we should be looking for as we go into the back half of the year?

Heather, the 5% is total cost on bananas. That includes, as you say, bunker fuel distribution everything else. The fruit cost itself was up 3%.

I should have been clear. Total cost per box were up over 5% year-on-year whereas they were up only 1% in Q1.

Right.

I am talking about total cost, I would have expected the trend to have improved in Q2. If you could speak to why that didn't happen and what we should expect for the back half?

For the back half, because most of the storm in Guatemala last year hit at the end of May, for the back half, we should see everything else equal. We should see a lessening of that increase.

So, you would expect year-on-year increases to -- you would expect there to still to be year-on-year increases, but not to the same magnitude we saw in Q2?

Could be.

Okay, can you speak to why the year-on-year was so much larger in Q2 than Q1?

That could be -- Heather, that could be from -- because our pricing in the Philippines changed during the second quarter. There might be some of that effect due to that factor. There was a change in the cost of product that is paid to the groves.

Okay.

I cannot say what amount. That -- some increase in pricing to the groves.

Then your melon business, this has been -- you have struggled with this business for a while. Wondering when you would expect results there to plateau?

I think we have reached the bottom of this, Heather. I believe that our actions that we have taken during the last several months, have been given this business enough time to really find out if it can turn around and if the tradition of melons can still be a good business.

Unfortunately, we don't believe that this business is rational because, for one reason, the retailers, particularly on melons, don't really care too much about quality. That is what we notice in most of the retailers and they care about price. We have a competition that really doesn't have the same criterias and the same quality standards that Del Monte has. We have a disadvantage in this respect that we cannot put melons in our boxes unless they are Del Monte quality. Which makes the cost for us, of course, higher than competition that they can pack whatever they have. That is a big advantage.

Plus it is an easy product to produce and [the barriers are relative]. So, we don't see really much future in the traditional melons. We have, I think, for the next coming season, we have rationalized our offshore plantings. All this justifies the need that we have for our Fresh Cut operations, for our DC's and for sets of selected customers that will be ready to commit themselves ahead of the season, before the season starts. All in all, I believe that we have bottomed out and I hope, by next quarter we should not see the negative trends that we have seen in the last few quarters.

I want to make sure I understand correctly. I heard you say that you were terminating some leases in Costa Rica and Guatemala. Should we interpret that to mean that, with the exception of the melons that you need to produce for Fresh Cut, and then these premium melons that you are beginning to produce, all other melon production will cease?

We produce some volumes, as I said, mainly for our Fresh Cut operations, for our DC requirements. Because we do have customer base and they do serve through the distribution centers. Plus we have [second] customers that they want a very clear program during the season that we are ready to accept and execute provided we have a fixed price before we start the season. We want to make sure that we're not going into a speculative, let's say, [mood].

Okay. Then 2 final questions. You mentioned SG&A, there being some professional fees. Typically, your SG&A has been very well managed but the last few quarters has been up fairly substantially year-on-year on an absolute basis and relative to sales. Wondering when we should expect those increases to subside? Or should we expect them to stay at a higher run rate from here on out?

We have been increasing spending with the expansion of the Middle East and also with the prepared foods. That is part of it, in addition to these one-off items like the administrative fees that we talk about. We're modeling about 5% for the second half of the year of sales.

Okay. And then my final question is, understand that your long-term relationship with [Resaro] is ending at the end of this year. So, wondering -- I believe I asked you this on the last call. Just getting an update on your plans there. Is it -- should we assume that you still plan to target southern Europe, despite the end of that relationship?

Oh yes, of course we will remain in this market and we will have our own operations there going forward.

Okay. All right, thank you so much.

We will now hear from Scott Mushkin from Jefferies & Company.

Hi, guys. I want to follow-up on Heather's, I think she was talking about cost at the beginning and get your perspective on where things flow for the rest of the year. If we -- Richard, you said costs are not up as much as they were in the second quarter but the pressure continues and, of course, I think the weak dollar doesn't help things on the sourcing side.

We've got, obviously, some problems in the macro economic back drops with Europe and the US. I am trying to understand, with that, how -- obviously, you guys are doing a good job with the Fresh Cut business and expanding it and other things, but how we don't think that business conditions will be even get a little tougher in the back half of the year given the fact that costs continue to escalate, yet consumers in some of the big developed areas like North America and Europe look to be under further pressure in the back half?

I guess that Europe is more under pressure than the North American market in my opinion. I think Europe is -- the economic conditions there are not very favorable at all. I believe that Europe will be under pressure. We have seen this during the last couple of months. But, all in all, I think that we adapt to the business conditions and we have been doing this for so many years. I believe we will be able to overcome.

As well, we don't have a choice when our price -- I mean costs increase to a level where we cannot bear it anymore. We have to pass the price increases into pricing and to our customers. That's a fact we have to live with. As you have seen during the first half of the year, we had to put that surcharge in bananas. That may come back if the cost pressure continues.

Mohammad, on that -- on that thought as we look at the North America market and Europe market. Are we expecting further price increases given the cost pressures, is that where your head is at this stage or is that not necessarily the case?

It all depends on how the cost of the weather. We are talking now at the beginning of August. We don't know what's going to happen in the next couple of months, 2 or 3 months. God forbid if we get very severe weather in the producing countries, Costa Rica, Guatemala, or any of the other countries. That might disrupt production and increase costs tremendously. We have so many factors playing here that we really cannot predict going to the next 3 or 4 months to the end of the year.

How about dollar depreciation in this mix? Can you walk us through if we continue to see the dollar under a lot of pressure, how that influences your thought processes as far as the costs go and what you have to do with pricing?

As far as producing countries, we have seen a kind of leveling of the exchange rate like in Costa Rica it's about 500 (Inaudible) to develop which is quite low, compared to what it should be. I believe it hasn't been going south, continuously going south. Chile, for instance, is another area where we see very strong appreciation of the local currency. But this is for different types of foods, deciduous and others.

So, we -- I hope that the cost, as far as the currency is concerned, will not affect us in that respect. What we are really concerned about is other cost of products, cost of oil, fuel, and the weather of course. Always I keep it in mind that the weather is a very important factor.

Great and I have one last one before I give you the floor, maybe a better topic. I know you touched on tomatoes in your remarks. I was wondering if you could get into a little bit more detail on how it went bringing the tomatoes up, I think mostly into the east cost, but maybe I am off there, from the greenhouses and what your thought is on that becoming really a fourth power vertical for you guys, if you were going to say bananas, pineapples and specialty melons is the 3 main verticals, tomatoes could be a fourth power vertical for you?

That is very good question. Our strategy now has been actually for the last 1.5 years is to start our own production in Costa Rica and Guatemala to produce different types of tomatoes and, hopefully, running down the road would be able to produce our proprietary tomato varieties that we are looking at and experimenting at this stage. This project by itself is a very, very important and strategic project that we have in Guatemala. It is state-of-the-art and probably the most modern and highest quality tomatoes you can ever find in all of Central America.

We have been doing extremely well since we started a few months ago from Guatemala. We are planning to expand the project by next year. Right now we are building the greenhouses in Costa Rica, hopefully by the end of the year, end of January we will start producing peppers and other types of vegetables from there as well.

And it works, if you look at strategically this is very important to us. Realizing what is happening on the West Coast. And the cost of production and the way it is increasing in Mexico and California. Most importantly, this rate -- the transportation cost coming from the West Coast. The West Coast or Mexico. It is really becoming very prohibitive factors.

While we are bringing this products on our own ships coming from the tropics. As much shorter time and transportation time as well with a very -- most competitive freight rates. We do have a double advantage here. We have products that are highest quality available, as well as being able to bring products into the country in a much shorter time, as well as, with a very competitive rate. These are the kinds of studies and decisions that lead us into bringing the food from there.

Mohammad, I said that was my last one, but I just wanted to follow-up, when do you think we'd actually see P&L impact of this noteworthy positive P&L impact? Is it as soon as next year or are we already seeing it, or is it a couple of years before we are actually going to see it on the P&L?

We will see a slightly at the end of the year. Probably more impact will come by middle of next year, going forward.

Perfect, thanks. Thanks for taking my questions.

Our next question comes from Bill Chappel with SunTrust.

Good morning. I want to follow-up on Scott's question on the tomato side. Trying to understand how this differs from kind of the melon strategy of 3 or 4 years ago when you were expanding production, going to leverage the distribution and kind of go to market. And now kind of retracing those steps. Now we look to be investing in tomatoes. It sounds like it's more of a cost than a brand focus. Just want to understand how this differs from that strategy of just a few years ago.

It is a completely different business. We cannot compare apples to oranges. It is a different business. Tomato is a consist business every day of the year. We are packing and delivering tomatoes to our customers. To produce tomatoes in green houses, I am talking about soil. I am talking about hydroponic cultivation, that means we don't touch the soil. This is the safest, the most sustainable, the most environment friendly production that you can ever find. This is very high investment. The investment itself is very high. It was very high value. It's not like melon, you just put the seeds in the ground and with a little work you can produce melons after 2 months. This is a long-term project. This is a high investment costs. It needs a lot of technology and knowledge, expertise, transportation, and packaging.

It is nothing to do with melons, really. You are right by saying we have ramped up production of melons. It was for a different reason. We tried to leverage our melon production by penetrating more markets and getting at cheaper cost. That, unfortunately, hasn't happened because of the market conditions. Not only the competitive situation but, unfortunately it is a cheap commodity. You go into any supermarket and I don't think you'll see a melon more than $1 on the shelf. And that is not the kind of business that we would like to be in, unfortunately.

No. I understand they are different businesses. I am just trying to understand, would you largely be competing on price or do you think retailers will pay up for a better tomato out there?

No. It is not on price. Tomatoes are very special because, right now, in the summer, there is probably enough supply of tomatoes. Come October and you will see a completely different story. Tomatoes will only be coming either from Florida or from Mexico and usually there is a big shortage of tomatoes for the markets.

Now, we build a relationship. We are not talking here about sending tomatoes to [speculate on them]. We have contracts that go on either 3 months, 6 months or 1 year terms. We have customers that they need steps in quality. We have retailers and we have food service as well. We are serving both of them and we are increasing our -- growing our business steadily in this category.

Last question. Is this 30%, 50% of your CapEx program over the next year in building out these greenhouses?

About 30%.

Okay, just switching gears on the bananas. Can you give us an idea of what you've seen in terms of pricing as we've moved into July? Has it stabilized, has it continued to deteriorate?

Europe, I think has bottomed out. I don't know if it can go lower than 6 of 5 Euros for bananas, but that is what is going on in the markets right now. Hopefully, I assume by the end of August when vacations are over and schools are back -- people are back in school, that things normalize. I don't believe that we will see a significant increase in prices over the next couple of months.

Okay great. Thank you.

Our next question will come from Jonathan Feeney with Janney Capital Markets.

Good morning. Thank you very much for taking my questions. I just wanted to follow-up on something Richard said about pineapple supply, does it follow that if you had fruit maturing early that there will be a significant supply reduction in the months ahead and therefore the pricing environment will improve, dramatically?

That is true.

So, historically what has been the elasticity around -- do you see demand get destroyed when prices go up in global markets or do you expect a lot of that can improve your profitability?

No. If the supply is short, of course the price is reflected on prices. There is no question about it. Don't forget that we used to sell pineapples for $20 a box.

Yes, I remember.

He remembers. People were still buying it.

Those were good days, hopefully they are coming back. Okay, that's helpful. Just as far as when we look at -- have you seen any significant European market exits as far as -- it seems to be where the distress is in the banana business. Do you see others cutting back supply? I know you guys cut back some supply earlier this year. What is your assessment of people exiting the market potentially with low profitability here as we enter the low cash flow part of the year in Europe?

Everyone has cut down on volumes. We cut down on at least our sales and our volumes during the last 6 or 7 weeks and going forward until the market improves. I don't know about the others, if they have cut down or not. However, the market itself is bad. The economies in Europe are bad. The consumption is lower and in my opinion, the buying power is weaker and all these factors together have helped to create this really crash into the market. That we have seen at the beginning of June and late May.

Is it really an economic factor, Mohammad? Do you think it is really -- that has a big amount to do with it? Yes. I definitely believe this. Maybe others don't have the same idea, but I believe -- I traveled in Europe a lot and I have been there many, many years. I haven't seen the conditions that I see today. Thank you very much. I appreciate it.

We will now hear from Dianne Geissler from CLSA.

Good morning. I wanted to ask on the prepared foods line item on the gross profit. A significant improvement and I know that had to do with some of the charges you took last year. But is this kind of year-to-date number somewhere up around 18% level what we should be thinking about the for the full year or is there some seasonality that would cause that back half kind of margin run rate to be lower or higher?

That is about what we are hoping for the second half of the year. It is not only the changes you talked about last year, but it is inventory reductions and gaining some market share shelf space and listings and so on. We are predicting it to remain steady.

Okay, I just wanted to check because of your commentary about the weakness in the European market and, obviously, that business is predominantly Europe, although I know there is some sort of Russia and northern -- (multiple speakers). I am assuming economic distress effects canned fruit purchases as much as it effects fresh fruit purchases. It effects consumption.

Matter of fact, it will be surprising that people eat more canned now because it is much cheaper than eating fresh.

Okay that's fair enough point. I guess on your balance sheet, which continues to remain in excellent condition, your shareholder equity is now about $300 million above your market cap. It looks like your share count saw a little bit of growth, quarter-on-quarter, can you talk about -- I know you guys are always looking for the strategic M&A. I guess we haven't seen anything kind of come on the market that has been attractive. Can you talk about your priorities for cash flow usage?

Our cash flow, we are very prudent in our cash flow. Of course, if we find the right acquisition, which you just said that you cannot find the right acquisition so far. We do grow organically and, of course, invested sizable amount of money into the Middle East distribution centers and fresh cut facilities. We have several projects that are under -- in process right now and particularly in Saudi Arabia where it will start taking operation by, hopefully, by the end of this year which will give us a significant increase in revenue in these areas going forward. But at the same time, we are just concentrating on organic growth.

I guess what I am asking is your year-to-date net cash flow, ex-CapEx is about $200 million. You only have $80 million left on your long-term debt to pay off, looks like you have been pretty aggressive on paying that down this year. If you don't find M&A, does that just leave share buyback at this point?

We look at different options. We may.

Okay, thank you.

Thank you.

Our next question comes from Eric Larson with Ticonderoga Securities.

Hi, everybody. How are you doing today? Mohammad, I wanted to follow-up really on part of Diane's question. You have now owned your prepared food business for a number of years when you bought the Del Monte brand in Europe. A lot of learning -- the business, frankly, you have restructured it and it is doing quite well. Despite the fact that economic conditions in the UK are pretty tough. Does that give you more enthusiasm for expanding that business?

You said there are not a lot of M&A opportunities in the area. But it seems to me that the direction that you'd like to go is more of the higher value added, higher-margin products. Now that you've really go that business figured out, can that be a source of future capital investment for you?

Definitely. We are at the very beginning of the road for [our prepared] business. You rightly said that we turned around this business and, now, it is a nice business which it is about time, by the way. But we haven't yet even dipped into the potential of this business with all of the geographic coverage that we have, all of the companies that we own the brand in -- in Africa, (Inaudible), in Europe and all of these countries we haven't yet really done much.

That is the area where we are looking at now very focused on where we grow and what to grow in these areas. We have to be honest with you in the prepared segment, we have a lot of potential for the future. That is what we are really focusing on and concentrating on nowadays.

So, you look at it and you can take the countries where you have the brand ownership, you can grow that organically, so to speak, you can develop that yourself internally. You don't necessarily need an acquisition. So, you could develop that yourself. We should maybe look at a CapEx number that could be higher over the future rather than -- and use that as a proxy for making acquisitions just so you're doing it with your own internal resources?

Yes, that definitely would be our intent. I am not looking to make an acquisition to replace somebody else in the market. That doesn't make any sense. Our business is to take companies that are not doing well and making it better. Not to take a company that is well and just replacing that seat. It doesn't make any sense.

What we want to do is what we have, the assets we have, the brand we have, the markets we have. That is where we are going to grow the business, that is where we are going to increase and expand. That is our strategy.

That makes sense. The final question I know we have beaten this tomato thing to death here. When you look at what that business could be, Mohammad, in terms of if you look at a vision going out, I know it's quite capital-intensive, which by the way I think is positive because it keeps other people from doing it, if it's that capital intensive. But could it represent 20% of your tomato volumes in the next 3, 4, 5 years? What is your overall vision for what that business can be on a 5-year basis?

It can be at least -- probably maybe 50% of our business going forward. It could be $300 million to $500 million business hopefully in 5 years.

Okay, thank you.

At this time we have one question remaining in queue. (Operator Instructions) We will take a follow-up question from Heather Jones

Thanks for taking the follow-up. On the EU pricing, I was wondering if you could give us a sense of are you seeing a big difference between pricing in northern Europe versus southern Europe? Because the pricing we've seen would suggest that southern Europe remains weak while northern Europe has improved somewhat. I'm wondering what you were seeing.

Not to my knowledge. I don't know if you heard something else. But of course I don't know what you mean by southern Europe. Italy, or are you are talking about Turkey and -- the Mediterranean prices are very depressed. The north markets, Germany, Holland are more or less the same thing. It hasn't improved really. We haven't seen any improvement in these markets.

On a year-on-year basis you would say Germany is just as weak as Italy?

More or less, yes.

One of your peers reported results last week and they had noted that their internal analysis showed that volumes out of Latin America, I believe the period was June, June and July, were up nearly 20% year-on-year. Wondering if you could speak to that and what you have seen.

That is true actually. The production -- there was a surge in production in June which produced so much additional volumes that had to be divested into these markets. Especially -- it happened in the Mediterranean, then it starts spilling over into the Western Europe markets. I don't think that it was only the surge in production, Heather. The markets were weak by themselves. Let's face it, I haven't seen this situation in Europe in so many years in my -- in my business experience. The markets are weak. They are sick. That is how I can describe it. When you have a sick man or a sick market, it takes time if it can heal. I don't know how it will heal, but it will take time.

Well, I have a broader question then just stepping back. Europe has steadily deteriorated since it became an open market in '06. Even with Dole dramatically reducing its volumes into Europe this year, the market still remains very fragmented, very weak. If you look at the economic conditions they may improve slightly, but there's unlikely to be any significant improvement. Yet the supply environment remains very irrational.

So, I guess I would like to -- going back to my earlier question about this [Osaro] agreement. I was wondering if you could speak to your intentions with regards to the whole EU market because it would seem to me that it would be in your best interest to greatly reduce your exposure to that market. So, I may be missing something, so if you could just speak to your thoughts on that matter, I would appreciate it

We have rationalized our volumes to Europe significantly, Heather, we are not pushing volumes into Europe more than what it needs. I am talking here right now, we have significantly reduced our volumes during the last, let's say, 6 weeks into Europe and going forward. And so it's not that we have, let's say, a fixed volume that we have to send to Europe every week, whether the market is good or bad. We're monitoring the situation and we are doing the same thing.

As far as southern Europe, getting to these markets, don't forget we have not only the bananas but we have the pineapples and we have other products that go into these markets which are very important to us. The banana will be as well present in a very prudent and rational way. We're not going to go and bump bananas into this market just because we have them Everybody, I believe, will have to rationalize its supplies in relation to the market demand or what the market can take. That is exactly what Fresh Del Monte is doing.

Okay, I appreciate the color. Thank you.

We will take a follow-up question from Scott Mushkin.

Hey, guys. I just want to make sure I heard it right from Mohammad. $300 million $500 million business in tomatoes. I didn't hear the time frame though.

I said about 5 years.

About 5 years. Any thoughts on the margin you could earn off that business, Mohammad?

It's too early to give you an indication. Maybe down the road next year we can give you a better picture.

Okay. As far as without pinning down, but would the thought be it could be as good as bananas or as good as pineapples, or what direction would you lean us in, as far as your thoughts?

It is too difficult to say. Tomato is the most consistent business where you can have fixed prices and you can have different margins to operate with. It is not like a volatile business. It is volatile business as long as you depend on growers because the grower will have high prices. When there is a shortage they might cut you down.

What we have playing now is to build a source of supply, multiple systems. That doesn't mean that we get away from some of the producers. But we will continue working with some producers, but at the same time we have the good faith of our production coming from our own farms.

So, just so I understand it, sorry I am dwelling on this. I have one last question after this. It is almost like if you build it or farm it and they will come type of model to where you are contracting with your better retailers to produce a certain amount of tomatoes, given the way you are growing, the costs are probably more fixed. So, in the end it should be a more consistent, steady business if you're able to do what you think you can do, is that a good kind of way to frame it?

That is exactly right.

Okay. Okay, so that is good. The final question I have, again thanks for taking so many questions from me. The direct sourcing of bananas here in the US, we have been noticing more and more of that cropping up in retailers. I know Wal-Mart started it a few years ago. We now see it leaking into other places. Do you have any thoughts there and is it becoming a bigger problem for you as you compete in the North American market or am I just happening to be noticing it more at this stage?

No. I don't believe that this is -- I think we are working very closely with the retailers. They realize that the service and flexibility that we can bring to their stores. Of course, they would like to do that. And they have tried and they are doing it in a small way. But I don't think that is affecting our overall, let's say volumes or business.

Perfect, thank you.

There appears there are no further questions at this time. Mr Abu-Ghazaleh, I would like to turn the conference back over to you for any additional or closing remarks.

I would like to thank everybody for attending this call and giving us the time. Hopefully we can get together on our third quarter conference call next time. Thank you very much and have a good day.

And this does conclude today's Fresh Del Monte's second-quarter 2011 conference call. Thank you for your participation.