Jul 29, 2008
Executives
Christine Cannella – Assistant Vice President of Investor Relations Mohammad Abu-Ghazaleh – Chairman and CEO Richard Contreras – Senior Vice President and CFO
Analysts
Jonathan Feeney – Wachovia Securities Heather Jones – BB&T Capital Markets Vincent Andrews – Morgan Stanley Nicole Miller – Piper Jaffray & Co.
Operator
Welcome to the Fresh Del Monte second quarter 2008 conference call. (Operator Instructions) At this time, for opening remarks and introductions, I’d like to turn the call over to Christine Cannella.
Christine Cannella
Welcome to Fresh Del Monte 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. First, Del Monte issues 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 on our Website, and it will be available for replay approximately two hours after conclusion of the call.
Our press release includes reconciliations 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 most 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 Security’s 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.
Mohammad Abu-Ghazaleh
The second quarter of 2008 was an exciting period for Fresh Del Monte. We made solid progress in our strategy to position the Company for improved performance by expanding our asset-base and production capabilities and securing new banana/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 [inaudible] 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 prior 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 course 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 [inaudible] farms in Guatemala, both advanced 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 remain imperative to our growth during the second quarter, a result of continued challenges [inaudible].
Additionally, Easter, which is the highest Gold pineapple selling season in both Europe and North America, was in the first quarter this year where 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 platforms.
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 remain pillars of our long-term strategy.
For example, we continue to expand in and penetrate exciting new markets during the quarter. Our Eastern operations continue to gain momentum.
Our fresh cut beverage and protein operations are well received and we attracted new customers during the quarter. In addition, we continue development of the three new distribution centers in Saudi Arabia, which remains 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 12-pack in Egypt. 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 and production of Caribana, the largest 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 replicated it considering the decline 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 when preexisting contracts that we agree to honor expire.
We are proud of the fact that our strong balance sheet, low overall debt level, and ample cash flow uniquely positions us to execute the transaction and feels what we view as an ample growth opportunity in our industry. I’m 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 of our exceptional balance sheet and solid financial position. These focused initiatives to secure land and production offer us tremendous opportunities as global demand for agricultural products increases and suppliers face new hurdles in meeting that demand.
We are also pleasantly exploring agriculture 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.
I have 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 many times before and we know how to take advantage of times that are tough.
With the right strategy, 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’m so confident about the significant upside potential in our operations.
We are continuing to raise prices, control costs, and drive 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 agriculture land to secure volumes both organically and through acquisitions. We are advancing into amazing 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 long-term growth.
We believe in our business today more than ever and we’re still enthusiastic about the opportunities ahead. Richard, please.
Richard Contreras
For the second quarter of 2008, excluding asset impairment and other charges, EPS was $0.87 per diluted share compared with a $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 a $102 million, a direct result of significantly higher input costs, and operating income decreased $13 million to $59 million, due primarily to a 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, food costs for all products, which includes our production, procurement from growers, packaging and labor costs, and foreign exchange increased 14%.
These costs represent 69% of our total cost of sales for the quarter. Ocean freight costs, which include 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, if 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, reduced transportation, warehousing freight and logistics costs, along with lower selling and administrative costs by introducing these incremental volumes through our existing infrastructure.
Let’s turn now to segment performance. Here in 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 new few months due primarily to lower production volumes in our banana farms in Central America in general and the negative impact that floods in Brazil and [inaudible] in Guatemala. The floods in the Brazil will cause us to lose 2.9 million boxes of bananas and the Guatemala [inaudible] 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 from the Caribana acquisition. With 30% volume increase in Gold pineapple that Caribana will give us on what is by the 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 16% increase in costs.
We experienced a 19% decrease in our U.S. 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 cost 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 precut convenience products back to whole fresh fruit 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 and 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 Chili. 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 U.S., 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 process meat business.
Pricing was 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 resulted shipping sales to third party distributors. Foreign Currency: Foreign currency impacted the gross profit level with 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 $39 million benefit for the quarter compared with a $12 million 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 to distributors and our continued cost reduction efforts.
Other income was $2 million, primarily associated with the sale of under utilized 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 $1150 million This concludes the financial review, and we’ll now open the line up for questions.
Operator
(Operator Instructions) Our first question of the morning will come from Jonathan Feeney at Wachovia.
Jonathan Feeney – Wachovia Securities
First question about, I’m 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 imagine that was probably some positive currency effect that maybe actual list pricing worse. Can you talk a little bit more about that, and why you didn’t maybe try to pass-through increase fuel and logistic costs maybe a little bit more aggressively?
Richard Contreras
Well, I think we did try to past cost 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.
[inaudible] increased pricing and also to pass on surcharges such as fuel and others.
Mohammad Abu-Ghazaleh
Jonathan, this is really not only the Gold pineapple, but it applies to bananas as well. Don’t forget that we have contracts that are in place since let’s say July last year or August last year.
We have been renewing contracts throughout the years. When we are hit with additional costs, we can pass certain costs.
For instance, the banana contracts, we do have surcharges [inaudible]. Pineapple didn’t have actually some of the contracts or most of the contracts don’t have surcharge total.
No matter what we do, even with these surcharges still we are hit with additional costs that we could not pass to our customers. 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 balances will 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 operation or for 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.
Jonathan Feeney – Wachovia Securities
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?
Mohammad Abu-Ghazaleh
Definitely. I mean as I always say, “We are not here to work free of charge.”
We need to balance the cost. 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.
Jonathan Feeney – Wachovia Securities
Richard, you talked a lot about 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?
Richard Contreras
It shouldn’t because everything was calculated on current pricing so…
Jonathan Feeney – Wachovia Securities
So generally still just as comfortable now as you were say a couple months ago in terms of the outlook broadly speaking?
Richard Contreras
Absolutely.
Jonathan Feeney – Wachovia Securities
Just one final one, could you comment, 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 of the banana markets globally?
Do you think we’re at peak profitability now or we can stay here for a while?
Mohammad Abu-Ghazaleh
I believe that we’re going to stay here for a while. I believe that we have definitely have improved our pricing significantly, and we’ll see more benefits as we go forward because lots of these contracts are just being renewed now and will continue to renew them in the next six months of this year.
So some of the contracts have been, they increased, sizing has been reflected and some of these contracts still. But we hope by the end of the year, we will maintain the same pricing let’s say structure an environment; and I don’t believe personally that supply is increasing any significant growth from the tropics.
I believe that in the long-term demand will outstretch supply, and that’s what I’ve been saying for years. 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 maintain a reasonable pricing and the U.S.
we see supplies being absorbed quite comfortably in the markets. So that’s why I’m very confident and hopefully in the marketplace realize 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 a decent return on her products.
Operator
We’ll next go to Heather Jones at BB&T Capital Markets.
Heather Jones – BB&T Capital Markets
I have a few questions. 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? I just was wondering what happened in the quarter because we had asked you about this on the Q1 call and you 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.
Richard Contreras
The Q1 issue, as we had said in the first quarter, was the offshore season, and we had said that it was going to last till about the middle of May. A completely new season was our domestic growing season in the U.S.
and Arizona and they also happen 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 a new one.
Heather Jones – BB&T Capital Markets
How is California progressing?
Richard Contreras
California is looking fine. Volume is…
Mohammad Abu-Ghazaleh
California is really no concern.
Heather Jones – BB&T Capital Markets
California is what?
Mohammad Abu-Ghazaleh
It’s no concern… We don’t buy the fruit. We just market the fruit for how it grows.
Heather Jones – BB&T Capital Markets
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?
Richard Contreras
Q4 you’re got the Arizona season at the beginning of the quarter and then in November you start moving into Guatemala and then January Costa Rica.
Heather Jones – BB&T Capital Markets
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?
Mohammad Abu-Ghazaleh
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 [inaudible] supply issues in Guatemala for the next season. Costa Rica, we know there are also other issues, but we’re not sure about the figure you mentioned, Heather, 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 in our earning, 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 anymore 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.
Heather Jones – BB&T Capital Markets
So continuing 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?
Richard Contreras
That is correct, and we also may be able to get some more volume and take advantage of some of this.
Heather Jones – BB&T Capital Markets
Then fast forwarding to ’09, clearly we never can predict what whether, 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 in the volume from other players that we’re talking about.
Is that correct?
Richard Contreras
Correct. I mean to answer you original question, Heather, as far as what costs, obviously fuel is something people watch and can come down because 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 said, 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 cost can come down.
Heather Jones – BB&T Capital Markets
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 ahead?
Richard Contreras
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.
Heather Jones – BB&T Capital Markets
For melons.
Richard Contreras
For melons, correct.
Heather Jones – BB&T Capital Markets
Now in your pineapple business post Caribana acquisition, are you going to own roughly two-thirds of your production?
Richard Contreras
I would say that’s about right.
Heather Jones – BB&T Capital Markets
Now as far as with surcharges on the banana business, our understanding is that those are going to continue through at least Q3. This is here in North America.
Was wondering if you could speak to that? Secondly, if you could talk about your outlook for contract pricing, given that it doesn’t look like these costs are going away anytime soon, are you trying to take steps to make these increases more permanent?
Mohammad Abu-Ghazaleh
The surcharge that we have that was put in the later 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.
Our pricing has moved up dramatically over the last I would say 12 months. I believe that this would be sustained and I believe that this still in my opinion will have to improve further as we come in 2009 or 2010.
I still believe there is room for the… I mean just to give you an example, right now in Costa Rica the authorities, the government, is probably going to impose another $1 addition to the minimum price given to the growers So the price that we have now is $6.45 and they’re talking about $7.45 and probably within a week or two they will impose this on everybody. That gives you an idea of how much costs, additional costs will be in the future, going $1 per box from Costa Rica additional.
Heather Jones – BB&T Capital Markets
Effective immediately?
Mohammad Abu-Ghazaleh
It will be effective yes; once it is issued, it will be effective immediately. 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.
Heather Jones – BB&T Capital Markets
How much production do you own versus source from independent growers in Costa Rica, post Caribana?
Richard Contreras
Well pre Caribana was about 50/60 and you can add 18 million, 13 million boxes to that.
Heather Jones – BB&T Capital Markets
I don’t know how many boxes you get out of Costa Rica right now.
Richard Contreras
Hold on, let me give you that.
Mohammad Abu-Ghazaleh
It’s about 70/30 right now, 70 [inaudible] and 30% independent.
Heather Jones – BB&T Capital Markets
70/30, okay.
Mohammad Abu-Ghazaleh
About.
Heather Jones – BB&T Capital Markets
Then the Guatemala blowdown and Brazilian floods, those costs, are those going to be more onerous in Q3 than they were in Q2?
Richard Contreras
No, they should be steady because it’s all straight line, so the cost would be the same for the whole year until those volumes come back.
Heather Jones – BB&T Capital Markets
Then my 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, etc, 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 kind of costs, but some of these things are not as easy for us to keep track of so.
Richard Contreras
I mean it’s hard for us to give an outlook, as you say. I mean we are certainly are trying to more and more in the quarterly discussions give outlook on the cost.
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 fright cost, which is [inaudible] operating expenses, that’s up about $10 million and that represents about 10% of our cost of sales.
Heather Jones – BB&T Capital Markets
Is that expected to be up $10 million in Q3 as well or is that worsening or?
Richard Contreras
We don’t know. We don’t know.
Heather Jones – BB&T Capital Markets
What has determined that because I was under the impression that you all owned a fair amount of you ocean vessels, so what is determining this increase? Is it the amount that you have on spot, those cost increases?
Richard Contreras
That’s a lot of it, the charter that comes spot and then there’s vessel operating expenses for our own fleet.
Operator
We’ll go next to Vincent Andrews at Morgan Stanley.
Vincent Andrews – Morgan Stanley
Just want to, a couple of clarifying questions here: Just want to make sure, on the current [inaudible] of the press release it appears that the [inaudible] from the banana operations has been excluded from your 87/10 calculation and then later when you discussed the banana results, you said they included a $2.1 million charge [inaudible] damages in Brazil and then there’s also the Guatemala expense. 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?
Richard Contreras
Correct.
Vincent Andrews – Morgan Stanley
Would you care to quantify what Guatemala was?
Richard Contreras
We got, it’s not huge… Under the lack of volume, it’s not a very, it’s a $1 million or $2 million.
Vincent Andrews – Morgan Stanley
Then as we look out to the back half of the year, I mean I know there’s been some discussion of this already, but it seems… I mean is it fair to characterize it that these, the challenges and conditions in 2Q are going to persist at least through the balance of the year and be some offset from Caribana?
Richard Contreras
There will certainly be some offset from Caribana, but we don’t know what’s going to happen these 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 what happens in the economy and what happens to fuel costs and all the costs that are derived from fuels such as plastics and fertilizers.
Vincent Andrews – Morgan Stanley
Right, but that $1 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?
Richard Contreras
Which $1 per unit?
Vincent Andrews – Morgan Stanley
Well when 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?
Richard Contreras
Yeah, the $1… There was an increase that the growers had in December, which passed, and they’re requesting $1 now; but that has not been agreed to. That’s being negotiated right now.
Mohammad Abu-Ghazaleh
It could happen, but there will be an increase in cost. I mean be it $1 or $0.80 or $0.75, there will be an increase in cost.
Now they are talking about $1. We are disagreeing with that.
We were arguing with the authorities. Hopefully we can succeed in reducing that.
But definitely there will be an increase in the price of bananas, minimum price on bananas out of Costa Rica.
Vincent Andrews – Morgan Stanley
Do you feel like you fully passed through the cost increase that you got in December? In other words, if this goes through, what’s going to be the lag effect on your ability to price to offset?
Mohammad Abu-Ghazaleh
We have priced… I mean our new contracts, they have them priced I would say reasonably well and any new contract definitely will have to take into consideration additional costs.
Richard Contreras
Obviously the margin change shows that, yes, the December cost forecast through.
Vincent Andrews – Morgan Stanley
Then, Mohammad, it sounds there’s been a lot of [inaudible] in the market that banana pricing in the UE is going to fall off in the second half of this year [inaudible] simply there 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?
Mohammad Abu-Ghazaleh
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 effect only the [inaudible], it affected almost every producer in the country. I don’t know the figure today, but that has taken out also some production out of the way.
So we will see that shortly going forward September, October, and beyond. I don’t think… I mean we have to look into the Russian market which is expanding very rapidly because of their capital income that is increasing steadily and their increasing wealth.
So this market has been increasing significantly over the last two/three years. If it continues on that track, I think that there will definitely be an issue with supply of bananas.
Vincent Andrews – Morgan Stanley
When you say an issue, you mean…
Mohammad Abu-Ghazaleh
Enough supply.
Vincent Andrews – Morgan Stanley
Not being enough supply?
Mohammad Abu-Ghazaleh
No.
Vincent Andrews – Morgan Stanley
To try and wrap up what you just said, I believe you’re basically saying that all Costa Rica is going to be lower in volume including yourself. Russian demand continues to grow.
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’ll be different this year is that you’ll have lower volumes but you’ll still have higher prices. Is that fair?
Mohammad Abu-Ghazaleh
I believe so, yes. Don’t forget also, I mean the fuel costs has 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 charting rates. If you look now at the fleet worldwide has been decreasing in number of vessels, additional vessels to carry bananas or other products, related products and the fuel costs went sky high.
So these two factors, not enough ships in the market, or as much as it used to, as well as very high cost of fuel has made it so difficult now for people to import bananas from Ecuador. The [inaudible] price has increased dramatically.
The cost of shipping has gone 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, in 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.
Operator
Thank you. (Operator Instructions) We’ll go next to Nicole Miller at Piper Jaffray.
Nicole Miller – Piper Jaffray & Co.
Can you quantify by any measure that (inaudbie0 shipped out of the second quarter that was in the first quarter by dollar or volume or percent?
Richard Contreras
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 North America as well.
But now that North America is building more contracts each year, you have less of an impact there.
Nicole Miller – Piper Jaffray & Co.
Did that also impact gross margin then?
Richard Contreras
Sure because pricing.
Nicole Miller – Piper Jaffray & Co.
Are there any other holiday shifts we should know about for the remainder of the year?
Richard Contreras
No.
Nicole Miller – Piper Jaffray & Co.
I’m a little confused on, I want to make sure I have these numbers right, that [inaudible] was 2.9 million, volume in Guatemala was 1.5, is that what those figures were?
Richard Contreras
Correct.
Nicole Miller – Piper Jaffray & Co.
That was out of the second quarter?
Richard Contreras
No, that is for the remainder of the year. That is until the volume is replanted.
Nicole Miller – Piper Jaffray & Co.
Quarterly or for the remainder, the second half of the year in total?
Richard Contreras
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.
Nicole Miller – Piper Jaffray & Co.
So that’s… I guess given that shouldn’t Caribana have that then [inaudible] shouldn’t that be about $3 million of increased volume each quarter, so shouldn’t the two offset one another approximately?
Richard Contreras
Well it’s not $3 million a quarter what was lost. Caribana is 13 million boxes incremental and this is three or four.
Nicole Miller – Piper Jaffray & Co.
Right, but I guess so then the way I’m looking at it is you start getting Caribana, I guess I don’t, the 13 million just come on line all one time as of now?
Richard Contreras
Yes, the full volume has come on line sure, not the 13 million. I mean the 13 million is an annual volume.
Nicole Miller – Piper Jaffray & Co.
Right, that’s what I’m saying. So that’s like 3 a quarter approximately, which is 6 plus, so plus 6 minus 2.9 minus 1.5, I’m saying shouldn’t they offset one another?
Richard Contreras
Not exactly because the Brazil will spread out longer, so not exactly.
Nicole Miller – Piper Jaffray & Co.
So volumes will be down even though Caribana comes on line?
Richard Contreras
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 countrywide volume is lower this year than it was last year, not just for us, but the country’s [inaudible].
Nicole Miller – Piper Jaffray & Co.
When you look at SG&A, it’s been down about 40 basis points in the first and second quarter approximately. Is that the right run rate for the reminder of the year?
Richard Contreras
I think the spending you see is, you could use that.
Nicole Miller – Piper Jaffray & Co.
Will capex in ’09 look like capex in ’08, same figure, similar?
Richard Contreras
You could use the same figure.
Nicole Miller – Piper Jaffray & Co.
So I’ve modeled out using that same 1.15 and I came 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?
Richard Contreras
How much cash we’re going to generate next year?
Nicole Miller – Piper Jaffray & Co.
Yes, and what’s your plan for it?
Richard Contreras
We’re not giving that.
Nicole Miller – Piper Jaffray & Co.
But it’s very meaningful. I mean so what’s, when you do generate the cash, will you be paying down debt?
Richard Contreras
Typically that’s what we do if we’re not doing acquisitions, yes.
Operator
We’ll go down to Heather Jones of BB&T Capital Management.
Heather Jones – BB&T Capital Markets
Sorry, I just had a couple clarifications. So you’re banana volumes, speaking to you specifically, not the industry, even with Caribana will be down year-on-year in Q3 and Q4?
Richard Contreras
No, our banana volume will be higher because of Caribana for sure.
Heather Jones – BB&T Capital Markets
Okay, I think there’s some confusion there. 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?
Richard Contreras
That is not being considered at this time.
Operator
Mr. Abu-Ghazaleh, with no other questions remaining in the queue, I’d like to turn the call back to you please.
Mohammad Abu-Ghazaleh
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, I hope. Thank you very much, everybody and have a good day.