Fresh Del Monte Produce Inc (FDP) 2003 Q4 法說會逐字稿

Ladies and gentlemen, good morning. My name is Wanda and I will be your conference facilitator today. Please note that today's call is being recorded. At this time I would like to welcome everyone to the Fresh Del Monte Produce fourth-quarter 2003 earnings results conference call. (Operator Instructions). Now I would like to turn the call over to today's speaker, Ms. Dana Weinstein. Dana, you may begin.

Thank you. Good morning, everyone, and welcome to Fresh Del Monte's fourth-quarter and year-end 2003 conference call. I am Dana Weinstein, VP of Finance and Corporate Development. With me today are Chairman and CEO Mohammad Abu-Ghazaleh and EVP and CFO John Inserra who will discuss our results for the quarter and year ended December 31, 2003. We released our results this morning via Business Wire, e-mail and First Call. If you've not received a copy of our earnings release, please contact Eva Torres (ph) -- 305-520-8156. You may also visit our website at www.FreshDelMonte.com to register for future distribution. This conference call is also being Webcast live on our website, and will be available for replay approximately two hours after the conclusion of this call.

This morning, Mohammed will review our operating performance, recent developments and outlook, after which John will review our financial performance during the fourth quarter and for the twelve-month period. Let me remind you, please, that much in the information 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 our business. 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 risk factors in the company's form 20-S for the year ended December 27, 2002. With that, I would like to turn the call over to Mohammad Abu-Ghazaleh.

Thank you, Dana. Good morning, everybody. I always believed that the price of success is dedication, hard work and unrelenting focus on one's objectives. By engaging in all three at Fresh Del Monte, we have achieved another solid quarter with net sales of 579 million, net income of 23 million and earnings per share of 40 cents. These results, combined with our three successful previous quarters in 2003, added up to our third consecutive year of record financial results.

For the year, net sales increased almost 19 percent to 2.5 (ph) billion from 2.1 billion at year-end of 2002. Net income rose to 226 million compared with 195 million for the prior year. Earnings per share advanced to $3.65 -- excluding 30 cents per share of onetime gains. We delivered these results in an environment of higher fuel costs, geopolitical uncertainties, and unfavorable water conditions in Europe, Central America and the US -- demonstrating the strength and resiliency we have built into our business.

From a product perspective, volumes in increased 15 percent in melons, 9 percent in gore pineapples, and 5 percent in bananas for the quarter. Although price declined slightly in both sales categories, sales increased across all measured products quarter-over-quarter.

Our financial platform during the quarter and throughout the year continued to be more than adequate to support our growth. We had 44 million of debt, and our debt to equity ratio was the lowest in our history. We ended the year with 51 million in cash, compared with 10 million at the beginning of the year. Our outstanding financial strength positions us to see strategic opportunities. In 2003 providing our board with the confidence to double our cash dividend to 20 cents per quarter. Last month, we improved our ninth consecutive dividend and the estimated dividend in 2004 will be 80 cents a share.

Fresh Del Monte's continued success in 2003 may be credited, in part, to our consistent focus on and steady execution of our business strategy. This strategy calls for us to (indiscernible) our product line, and geography, expand our global distribution and value-added capabilities, and control our costs.

Acquisitions play a key role in our achievement of these goals. You'll recall that last January we acquired Standard Fruit and Vegetables (indiscernible) and fresh produce distribution and repacking. This acquisition made us the nation's premier repack of branded tomatoes and top repack of branded potatoes, strawberries, and onions. It also provided us with the synergistic distribution network that (indiscernible) with large supermarkets and food clubs. Stronger relationships with customers in the South Central region of the US and solid market positions in the Southwest and Southeast.

We continue to execute our position strategy during the fourth quarter by acquiring two Companies that strengthen our market positions, expanded our distribution capabilities, and extended our reach to new countries and markets. The first acquisition was Expans, a leading foreign-based distributor of fresh fruit and vegetables. This acquisition provided us with new distribution opportunities, imported and locally grown produce, that we can export to our distribution facilities and fresh cut operations in the UK and Northern Europe.

Our regional presence and strong local brand recognition position us to capitalize on the entry of several Central European countries to the European Community in May 2004.

The second acquisition was Country Best produce, a leading East Coast processor and packager of potatoes, onions, sweet corn, and other fruits and vegetables. This acquisition strengthened our market position in potatoes and onions, and adds sweet corn to our product line. It also extends our market reach on the East Coast and increases our ability to serve U.S. retail and food service customers in new markets such as Northern New York.

We're proud of our strong acquisitions record, and our success shows the best of expertise we bring to each new transaction. Going forward, our focus will be on making acquisitions that strengthen our position in select products, or diversify our product line beyond our existing portfolio.

As you know, in the U.S. fresh produce business is a highly fragmented business in which fresh produce managers buy products from many brokers and intermediaries in regional markets. Despite this fragmentation, large national retail chains are increasingly choosing fewer suppliers -- one that can serve all of their retail's needs on a national basis. Size has truly become the name of the game. We believe that there is a significant opportunity for a company with a full fresh and fresh cut produce line, a world recognized brand, consistent supply of quality produce and national distribution capabilities, to become the preferred supplier to these large retail customers. Best of all, we think that Fresh Del Monte is uniquely positioned to be that supplier.

We have worked very hard to achieve this status by creating a leading position of fresh cut produce and diversifying our fresh produce selection by adding tomatoes, potatoes, onions, strawberries and sweet corn to our lines in 2003. We have increased our appeal to retailers who regard these as essential products in a company's product line. We have also created a powerful national distribution infrastructure, with the capacity to distribute our products and add these new ones at lower incremental costs. The acquisitions that we may make in the future will solidify and consolidate our position in these products and add others that further increase the value of our product line (indiscernible) customers.

On the fresh cut front, we continue to make inroads during the quarter and the year, securing new contracts with several national retail chains. Our fresh cut business is still evolving. And that consumer demand for healthy alternatives will only propel the industry's growth.

A recent survey of people between 25 to 49 years showed that most indicated that they would be very likely, or somewhat likely, to eat fresh fruit when choosing an on the go snacks. We think that those preferences will grow even stronger when fresh cut ready to eat fruit and vegetables are more broadly available.

We expect Fresh Del Monte's fresh cut produce and to become increasingly attractive to retailers and fast food Companies who are striving to meet consumer needs. Fresh Del Monte has grown (indiscernible) pineapple market leadership continues. And as we enter 2004 we began to export the Del Monte gold extra sweet pineapples from Brazil to Europe. The pineapple has an excellent reception by consumers, and we are very satisfied with its performance.

On the legal front, we announced on January 20th that the New York Supreme Court dismissed the Eastport lawsuits. Ordering that all court costs be awarded to Fresh Del Monte. The Florida action is still pending, though we hope that the dismissal of the New York case will have some bearing on a speedy and favorable resolution in Florida.

As we review on our achievements over the last 12 months, we recognize that we have benefited from reasonably positive industry trends. We also fortunate to operate in a sector of the food industry that is and always will be viewed as helpful. We do face challenges that include the weather, geopolitical instability, fuel costs, and other factors that are beyond our control. However, by establishing the foundation that are within our control, such as a diverse geographic food plate, and broad product line, a national distribution network and a strong financial platform. We have positioned ourselves as industry leader and as the produce company best prepared for future growth in the months and years to come. At this point, I would like to turn it over to John.

Thank you Mohammed. Though the fourth quarter of 2003 was challenging due to lower banana pricing and lower demand for melon, to Fresh Del Monte turned in a solid performance.

Net sales rose to $579 million compared with $487 million in the fourth quarter of 2002, as a result of several new product offerings, specifically tomatoes, potatoes and onions. Net income was $23 million compared with $35 million in 2002 fourth quarter. EPS was 40 cents compared with 62 cents in the fourth quarter of 2002. These matrixes reflected the fact that the fourth quarter of 2002 was a record quarter during which a combination of favorable factors enabled us to achieve dramatic increases in sales and net income. As a result, we're pleased with our fourth quarter 2003 performance.

In addition, our financial platform remains strong, our revolving credit facility remains undrawn and we had $44 million in debt at year-end 2003 compared with $87 million in 2002.

Before we turn our attention to our product lines, I would like to remind you that we announced and completed two acquisitions during the fourth quarter. These two acquisitions were in addition to our acquisition of Standard that we completed in the first quarter -- which contributed so significantly to our success in 2003. Given our growth objectives and strong balance sheet, we will continue to make strategic acquisitions in 2004 across a range of geographies, and product lines.

Let's now review the performance of our product lines. Banana net sales for the quarter paralleled sales for the same quarter last year, while volumes were up 5 percent -- primarily due to increased production in Asia. Banana pricing declined 3 percent, which negatively impacted quarterly gross profit by $10 million. In the fourth quarter of 2003, worldwide banana prices averaged $8.58 per box, down from $8.88 per box in 2002. For the full year, banana net sales and volume were up 1 percent and gross profit was down $11 million from the prior year due to higher costs relating to (indiscernible) fuel, containerboard, and inland transportation costs. Worldwide banana prices averaged $9.52 per box compared with $9.60 per box in 2002. Bananas now represents 39 percent of total net sales, down from 46 percent in 2002.

In our other fresh produce segment, net sales for the fourth quarter increased to $320 million compared to $235 million in the prior year's fourth quarter. Primarily due to our new product offerings. Gross profit for other fresh produce was $47 million compared with $59 million for the same quarter last year. The decrease in gross profit was primarily due to lower pricing in melon and higher crude costs from our domestic nontropical program.

On a full year basis, other fresh produce net sales rose to $1.4 billion from $1 billion in 2002. Primarily from our new product offerings. Gross profit for the other fresh produce was $249 million compared with $253 million last year, primarily due to lower pricing and higher fruit costs in melons due to adverse weather conditions.

Fresh Del Monte's gold pineapple business continues to perform well during the quarter. Net sales were in line with the fourth quarter of 2002, due to a 9 percent increase in volume, offset by lower pricing. The year was a very good one for gold pineapple -- particularly in Europe, where sales were higher due to an increase in volume and favorable pricing. Melon sales in the quarter were up by 10 percent with an increase in volume partially offset by significantly lower pricing, due to sizing problems caused by adverse weather conditions. For the year, melon net sales were consistent with the prior year.

For the quarter, net sales of nontropicals, including grapes, was up 19 percent due to a higher sales prices. For the year, nontropical volume was up 2 percent and sales were up 10 percent with higher pricing.

Tomatoes contributed $34 million in sales during the quarter from 1.3 million boxes. For the year, tomato net sales were up $132 million from 5 million boxes. We're very pleased with our first year's performance in the tomato category, and we will continue to expand our tomato operations throughout North America.

On fresh cut product lines -- continue to perform well during the quarter and throughout the year. During the quarter, sales increased to $51 million, a 9 percent improvement over the fourth quarter of 2002 -- primarily due to higher volume and selling prices. Fresh cut sales represented 9 percent of the company's total sales in the fourth quarter. For the full year, fresh cut net sales were $213 million, representing 9 percent of the company's total sale for the year -- up from $147 million in 2002.

As Mohammed said, the fresh cut business is showing signs of strong growth but is still evolving. According to the international fresh cut produce association, consumers purchased -- purchases of fresh cut fruit and vegetable products accounted for approximately 38 percent of sales in the $2.8 billion value added produce in the United States today. We expect Fresh Del Monte's fresh cut products to become increasingly attractive to retailers and fast food chains who are striving to meet consumer needs.

During the quarter, we sold $147 million in product through our distribution center, and for the year we sold $492 million. For the quarter, our integrated distribution centers represented 40 percent of our North American sales, compared with only 10 percent in the same period last year. In 2003, 37 percent of North America's volume sold was processed through one of our 28 North American integrated distribution centers, compared with only 14 percent in 2002.

Sales in our non-product category increased 15 percent for the quarter and 16 percent for the year, with marked improvements in gross profits of $9.5 million compared with $4 million in 2000. This was due to improved performance at our plastics operations in Chile.

Net sales benefited from foreign exchange by approximately $13 million during the quarter, and by $73 million for the year -- primarily as a result of the strong Euro. Consistent with our policies, we are currently partially hedged for our foreign currency net sales in 2004.

Selling, general and administrative expenses for the fourth quarter of 2003 decreased by $4 million due to continued cost-cutting initiatives. And for the full year, SG&A increased by $5 million due to business expansion, new marketing efforts in Europe and higher professional fees.

Interest expense for the quarter and full year were down from last year due to lower debt levels. Tax expense in the fourth quarter of 2003 was $3 million and for the full year was $16 million. On a full year basis, our tax rate of 7 percent was in line with prior years. We now open up the lines for questions. Wanda?

Thank you. (Operator Instructions). Leonard Teitelbaum, Merrill Lynch.

Just a couple of things -- could you give us a specific update on Wendy's and Starbucks in the fresh cut?

Wendy's, at this stage, still (indiscernible) -- they haven't made up their mind yet regarding packaging and the mix of the product that they need -- we hope that within the next four to eight weeks that they can make up their mind. As far as Starbucks, we are expanding our distribution with them. We are in much more places than what we were a quarter ago. So it's going very well with Starbucks.

Weren't you expecting Wendy's in January, Mohammed?

Not really. Because, you know I mean, they keep -- they would like to be more specific. I cannot discuss this on a conference call. But trials are still ongoing.

John, would you remind me, please, what foreign exchange was last quarter -- a year ago, fourth quarter, sorry?

A year ago fourth quarter?

While you're looking it up, Mohammed, the poultry operation, which I think I am guilty of probably not paying a whole lot of attention to, has got to be having a -- by circumstance, a pretty good year. Do you have any idea how much that can -- or you could you tell us how much that contributed this quarter, if anything?

(multiple speakers) I think for the year I can tell you probably around 10 cents gross.

About 10 cents per share came from poultry this year?

Yes. In gross.

In growth?

Gross profits.

Gross profits. Okay how about on an earnings per share basis? Did you work it down that far?

I would say around 6 cents.

6 cents a share. Okay. Last year was virtually nothing right?

No, we did -- we did have a very good year. I think even 6 to 7 cents as well.

I've messed it up, I'm sorry, thank you.

Nobody wanted to hear about (indiscernible). Now people are becoming interested in that company.

Yeah, well, okay. Now, if I could just proceed on one more thing. If we look at the expansion plans for fresh cut, we had thought that it was quite a -- obviously, going to continue to grow. And you had given us some growth projections at the end of last year. Can you give us some kind parameters around where you see fresh cut growing and what percentage of sales and how fast something like that?

One second.

Yes, we are probably looking at about another 8 percent growth. We're looking at probably for '04, we should see some significant improvement in the fresh cut business moving forward. I think we've got some very good (multiple speakers)

We have some several key contracts that have been signed recently with national desk -- on a national basis with (indiscernible) retails that will start kicking off in the next few weeks, couple months, three months, depending on the readiness of the product lines. But I think as we go forward -- from the second quarter onward -- I think we will see a very significant implement in the fresh cut business in 2004.

And just a final question -- just to clarify for me, you'd made some remarks about the expansion of countries coming into the common market in the midyear. Could you be a little more specific as to how you see that helping, hurting it -- John, I -- my guess is, maybe it winds up to be -- you know, status quo, I don't know. Could you give us some feel for that in a much more of a financial terms rather than a philosophical one?

No, I think financial terms will not -- should not have any significant impact on the immediate spot financial gain or loss. But what I meant by mentioning that, is that it positions us -- the reason for our entry into Poland is actually to position us in Central Europe to take advantage of the location of the country in relation to its neighbors; as well as -- once these become members in the community, there is a lot of opportunities in terms of interchange of goods. And especially from country like Poland, which has traditionally been an agricultural country. Even during the Communist regime, Poland used to be a very big supplier of food stuff to the rest of the other countries.

So I think that we have a plan from there which we're going to capitalize on. To go from there -- as a matter-of-fact, we're doing already some business and it's small-scale going to Poland and other countries. And export, especially to the other eastern European countries around them.

So we believe that over the next year or two we're going to build a very nice base from that country to go into the neighboring countries (indiscernible) hopefully by physical presence in neighboring countries as well. So that's what I meant by what I said.

And just come back to (indiscernible) on foreign exchange, it was also 13 million, the same as 2003.

Very good. I thought that was (indiscernible) I couldn't remember. Thank you very much.

(Operator Instructions) Terry Bivens, Bear Stearns.

Just a couple of quick things, and then I had a more general question on fresh pineapples. As we look into next year, or this year, I'm sorry -- '04 -- what kind of tax rate do you think is appropriate?

Well, somewhere between 7 and 8 percent. We had about 7 percent this year -- 6.5, 7. So I think it would continue on in this similar fashion.

Okay. How much would you say that acquisitions added to your fourth quarter sales?

Our fourth quarter sales?

Yes. I know you had standard in there, but I'm just curious if there were pieces of the other business?

About 60 (ph) million or so is the increase for the acquisitions in the fourth quarter (multiple speakers) from our vegetables. 60 is a rough number.

(inaudible) for the company best was (multiple speakers) almost minimal. Nothing.

More than one or two weeks and the other one was one month.

Okay. Your 5 million in other income, could you -- what did that derive from?

In the quarter or --?

Yes, in the quarter.

The other income is from foreign exchange and the -- pretty much from foreign exchange was most of it. So we had a little bit of miscellaneous in there also.

Okay. Now, just a little bit more broadly, can you give us your outlook on banana pricing going forward? And also, you did have a bit of pricing erosion, it looks like, on the golden pineapple line. That always seems to be a lively topic on the calls. Could you kind of bring us up-to-date on where we stand there with the competitive set?

(indiscernible) erosion that you're mentioning from the fourth quarter -- we did have some decline in pricing -- a slight decline. And the reason for that is that during the last eight weeks of 2003, we had tremendous volumes production -- and then farms just exploded in production. Unfortunately, it combined with very bad weather conditions in Costa Rica at that time and the growing, and where we grow pineapples -- which effected our quality. So we have a lot of quality problems, actually, on arrival in Europe and in the States, which has impacted our average pricing. The pricing itself was good. But when we had a lot of quality problems, it has created an impact on our pricing. As well as so much volume unanticipated. So these are actually the reasons, in my opinion, for the slight erosion of the pricing on pineapples.

Okay, and that's as opposed to any sort of competitive activity you felt you were forced to make?

No, no -- as a matter-of-fact, we had in this period volumes that were like 17 or 18 percent -- 50, 60 percent more than our normal volumes on a weekly basis. Which actually translates into less volume, now, that we are going through the first period of 2004. Because we have so much production. We cannot control the mother nature, but that's a fact of life.

And as far as the future, we are confident about the future. Just to give you an idea, we are eliminating our (indiscernible) in Hawaii, because we believe that (indiscernible) has no future anymore, and we're replacing it with of course another variety -- which is gold or equal to the gold. I think that was just a testament for what is going on in the market.

And just going back to banana pricing, Mohammed, how would you see that evolving as we go through the year?

Banana pricing -- we see a soft banana pricing going into -- starting the year, we see banana situation where it is soft. Going forward, I see a year with a soft pricing on bananas. Last year this time, we saw the markets in a completely different mood. Japan was at a much higher prices -- the Far East in general was much higher pricing. Europe was at a much higher pricing than what we see today. Even the U.S. was in a stronger position.

So the banana, in my opinion, for the -- unless something happens, you know, -- we're talking -- if everything is constant -- if all the conditions -- the weather, everything, is perfect. But you never know. Anything can happen at anytime during the year, that can change the picture. But if everything prevails, I believe we're going to have a very flat market in the bananas.

Okay, well, if that's true, just one last question. Consensus has you basically doing kind of a flat year in '04 over '03. Do you think that's a realistic expectation for your earnings picture this year?

I really cannot speculate. You know, we are in produce business. Our job is to focus and do the best that we can. We have been doing very well. We have been growing. I do not want to continue thinking about bananas and pineapples and melons. We are growing our business. We are going to continue growing our business. We are going to make acquisitions as we go forward this year. And we're going to diversify our product line and make this company different from any other company, produce company, in the market. That I can promise. I cannot promise the gross. Because there are variables that are not in within our control.

Heather Jones, BB&T Capital Markets.

I was just curious on the banana pricing side -- you mentioned, I think, that pricing was up in Europe -- and what did it do in Asia?

Are you talking about the fourth quarter?

Yes, Q4. Sorry.

Yes in Q4 pricing, I believe, was down in Asia.

Down significantly, or like --?

Not -- in dollar terms, we were okay. In local currency, we had a little bit of an issue. Yes, we were up about -- our pricing was up in Asia.

Okay. So -- because Fleiss (ph) and Chiquita talked about how the E.U. market actually was pretty -- not strong, but flattish in local currency, and that you see (ph) in dollar terms relatively strong. So I was just wondering for the quarter, was the problem in the North American market?

Yes.

Yes. Various problems in North American market for the quarter and Europe. Pricing as well -- it's not upfront (inaudible) year-over-year.

E.U. pricing in the quarter wasn't strong as last year?

The E.U. pricing was good in the quarter in local currency, yes.

In local currency.

Okay, but North America was a problem. Now going to melons --you said -- far as sales were up 10 percent, volumes down -- I mean, up 15 percent. So could we back into pricing was down about 5 percent for the quarter?

Yes, pricing was down.

Okay. And I guess I was just -- I know you don't give exact numbers, but get a feel for what pineapple gross profits did for the quarter, because you said sales were flat from the prior year, but yet volumes were up 9 percent -- so you know back into a nine percent price decline. Were you able to keep gross profits flat there? Because I'm looking at your other fresh produce business -- gross profits were down about 12 million -- you know, even with Standard being a new addition to that segment? I'm just wondering -- I know you emphasize melons. I'm just wondering if pineapple played any role in the gross profit decline?

No, it didn't.

Were gross profits flat?

Pretty much.

Okay. And we've noticed a strengthening in the spot market on pineapple price in the last few weeks. But -- just talking to people in the trade, but also at the retail level have seen pricing come down on pineapples -- stay down for three to four months. Have you all seen any decline in pricing on your contracts, like with your Kroger, Safeways, whatever.

We don't have (ph) contracts for the pineapples.

Okay. Well, with your big retail customers -- are you seeing any decline in price?

We cannot disclose who our big --

We sell to all major retailers, Heather.

(OPERATOR INSTRUCTIONS) Pierre Buell (ph), DP Holdings.

Thank you very much. My question has been answered. The question had to do with the commenting on the First Call estimates (indiscernible) this year.

Separately, I would like Muhammad, if possible to thank all of your employees -- not only the top guys that we see, but all of them on behalf of retired people like myself (indiscernible).

That's very nice. I'm thankful for you to mention this. And possibly that we -- all of our (indiscernible) are so much confidence of your trust and your devotion to our company. Thank you very much for your nice words.

At this time, there appears to be no further questions. I will turn the conference back over to you for any closing remarks.

Thank you, and I'd just like to thank everybody for attending this call. Hopefully, we believe that we can still continue doing our job that we have been doing for the last several years, and we will outperform the industry and prove to everybody that we are a company that has to be looked at -- as the leader (ph) in this field. And hope we can speak again on the next quarter with better news and more future growth. Thank you very much. Bye.

That does conclude our teleconference for today. We'd like to thank you all for your participation. You may now all disconnect.