Fresh Del Monte Produce Inc (FDP) 2004 Q1 法說會逐字稿

Ladies and Gentlemen, good morning.

My name is Jimmy Jackson 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's first quarter 2004 earnings results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question and answer period. If you would like to ask a question during that time, simply press star then the number 1 on your touch tone phone. If you would like to withdraw your question, press the pound key.

I will now turn today's call over to Ms. Dana Weinstein. Ms. Weinstein, you may begin.

Thank you.

Good morning everyone and welcome to Fresh Del Monte's first quarter 2004 conference call.

Joining me today are Chairman and Chief Executive Officer, Mohammad Abu-Ghazaleh, and Executive Vice President and Chief Executive Officer, John Inserra, who will discuss the results for the quarter ended March 26, 2004.

We released our results this morning via business wire, email and first call. If you have not received a copy of the earnings release please contact Eva Torres at 305-.520- 8156. You may also visit our website at www.freshdelmonte.com to register for future distributions. This conference call is also being web cast live on our website and available for replay approximately two hours after the conclusion of this call.

This morning Mohammad will review our operating performance, recent developments and outlook. Afterwards, John will review our financial performance for the first quarter.

Please let me remind you that much of 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 to our business.

These forward-looking statements are intended to fall within the Safe Harbor Provisions and Securities laws. Our actual results may differ materially from those in the forward looking statement as a result of various factors including those described under the heading, Description of Risk Factors, in the company's Form 20 (inaudible) year ended December 26, 2003.

With that I would like to turn the call over to Mohammad Abu-Ghazaleh.

Thank you, Dana.

Good morning, everyone.

As you know, the great American writer, Mark Twain, once noted that though climate is what we expect, weather is what we get. Over the last 35 years of of my career, I have learned never to attempt to predict the climate. However, the weather during the first quarter of 2004 was certainly less favorable than usual.

It was cold and rainy in several production regions, including Costa Rica, which affected the quality of supply of several of our products. And in the Northeastern United States bitterly cold temperatures (inaudible) shipping and shopping constrain our deliveries and sales. The inclement weather, combined with the quarter's (inaudible), generated sluggish (inaudible) demand and several logistics delays resulted in the first quarter that, though strong, still under performed our expectations.

During the first quarter of 2004, we increased net sales by $70 million, but (inaudible) $40 million declined net income, compared with the first quarter of 2003. When net income included $(inaudible).5 million in the one-time insurance recovery.

Overall, sales were higher compared with the first quarter of last year, which was very encouraging. However, gross profits were lower largely due to several challenges in our banana business, offset to some extent by lower interest expenses and taxes.

On the product front, our banana volumes worldwide were higher by approximately 4%. However, banana sales (inaudible) in North America and Europe were lower which contributed to gross profit reductions in the first quarter. In fact, two-thirds of our gross profit decline during the first quarter was directly related to bananas .

In Asia Pacific, banana profitability declined as a result of slightly lower volumes though selling prices increased. We are pleased to note that toward the end of the quarter we began to see pricing improvement in all the markets, the three markets, major markets, and that improvement continues even as we speak.

(Inaudible) of our melon product lines. (Inaudible) Costa Rica during the first eight to nine weeks of the quarter, which is unusual. Effected melon quality at harvest and shortened self life.

In the U.S., a traditionally strong for our melons, but profitable was lower due to diminished quality combined with lower volume that still outweighed the (inaudible).

The shining star our product line during the first quarter was our gold pineapple which continued to thrive in spite of the cold climate. While we witnessed lower production volumes, which resulted in lower supply and sales during the first nine weeks of the quarter, we also saw significantly higher pricing and gross profit in line with last year's.

Demand for the(inaudible) grown gold pineapple remains high as we continue to lead the industry in market share just as we have since as we have since 1996 when (inaudible) production of the pineapple variety.

Sales increased 4% in (inaudible) tropical base of strong sales of grapes.

Sales of tomatoes, potatoes and onions continue to improve and we are satisfied with our steady progress in these three relatively new additions to the Fresh Del Monte family of products.

We have double digit increase in product volume moving through our distribution centers during the quarter and sales through (inaudible) these increased 43% during the quarters.

We saw our greatest progress during the quarter in the expansion of our fresh cut fruit and vegetables business where we grew sales, gross profit and margins.

In the U.S., we attracted a number of new national customers and chains we delivered the product nationally and the business grew very nicely. In the U.K. as well, we continue to supply fresh cut fruit to a wide variety of customers with continuous expansion in market share.

We also expanded our (inaudible) capability during the quarters our (inaudible) business in Mexico conditions to grow. We also began to export apples to New Zealand, to the U.S. and Europe extending our reach into new regions with new products.

While the first quarter was tough from a gross profitability standpoint, we are still pleased with our significant gains in sales and volumes.

Those of you who know me well, know that I do not place the same emphasis on our quarterly results as I do on our annual performance.

Therefore, in spite of the fact that Fresh Del Monte Produce has out performed expectations for the last 13 quarters, I am even more proud that we have delivered three conservative years of record financial results at Fresh Del Monte. And I can tell you that we continue to feel very confident about the company's prospects for 2004 and for our continued future growth.

At this point I would like to turn it over to John.

Thank you, Mohammad.

We've been on a winning streak here at Fresh Del Monte for some time.

As a record we're pretty proud of and it is due, at least in part, to our control of every aspect of the growing, packing, shipping and distribution process. The weather is one of the factors, however, we cannot control. And as Mohammad said, we really felt this affect in the first quarter of 2004.

Compared with the first quarter of 2003, net sales increased $70 million to $714 million compared with $644 million. With net income for the quarter of $47 million, compared to $77 million excluding an $11.5 million recovery from insurance.

Earnings per share were $.81cents compared with $1.35 per share for the same quarter last year, excluding the benefit of insurance recovery, which was $.20 cents per share in 2003. Overall, sales were up significantly by 11%, however grows profit decreased $30 million, or 28%.

Now, let's review the performance of our products.

Banana volume and net sales in the first quarter both increased by 4% bringing total banana sales to it $264 million. Worldwide pricing averaged $10.21 per box, compared with $10 .29 per box in the first quarter of 2003. Although we enjoy significant price increases in Asia, they were more than offset by soft pricing in Europe and North America.

Grows profit on bananas of $15 million was $20 million lower than last year's first quarter, primarily as a result of supply induced increases in Ecuadorian fruit costs, higher sea transportation cost and reduced pricing in Europe and North America. Banana pricing is currently improving in Europe and Asia, however, North American pricing has still not achieved last year's level.

Net sales in our other fresh produce segment increased 16% to $418 million, compared with $359 million for the first quarter of 2003. Gross profit for the other fresh produce was $60 million, compared with $70 million for the same period last year. The decrease in gross profit was primarily due to reduced melon volumes, and higher fruit cost for other non-tropical program.

Del Monte gold pineapple business continues to deliver healthy performance during the quarter in spite of a 11% lower production volume due to climatic conditions. Selling prices increased 10% for Del Monte gold offsetting the lower volume resulting in gross profit that was in line with last year's first quarter.

Melon sales during the quarter increased 1%, as we had a 5% increase in price offsetting a 4% reduction in volume, which effected gross profit. Net sales of non-tropicals, including grapes, for the quarter, increased 12%, primarily as a result of increased pricing for grapes.

Tomatoes overall net sales volume and price increased significantly as we continue to expand our tomato repack capacity in our distribution centers. Tomatoes represent 6% of our total net sales during the quarter.

Our fresh cut fruit and vegetable business grew nicely during the first quarter of 2004. Overall, net sales increased 19%, to $53 million, compared with $45 million in the first quarter of 2003.

Fresh Cut volumes increased by 14%, and prices rose by 5%. As Mohammad said, we secured a number of new Fresh Cut customers in the United States and in the U.K., and we are pleased with our progress in this growing segment of our business.

During the quarter we moved 42% more volume through our North American distribution centers than we did last year at this time. Representing a total of $154 million in sales, or 39% of our North American sales, and 22% of our worldwide sales.

Sales in our non-produce category increased 6% for the quarter with continuing gross profit improvement in our third-party plastics business in Chile. Our selling, general and administrative expenses increased due to higher selling and marketing activities related to product expansion. However, SG&A remains consistent with prior year at 4% of sales.

Interest expense for the quarter was low by $1.5 million and taxes lower by $3 million. Tax expense represents 6% of taxable income consistent with the prior year's first quarter.

On the financial front, we continue to maintain an exceptionally strong cash position at $19 million. Our revolving credit line remains undrawn and we have $40 million in other debt, down from $44 million at year end 2003.

I'd like to open up the call to questions.

Jim, are you there?

Jim?

Yes, sir.

Once again, if you would like to ask a question you may signal us by pressing the star key followed by the digit 1 on your touch tone telephone.

Again, that's star 1 and we'll pause for just a moment.

We'll take our first question from Eric Larson with Piper Jaffray.

Good morning, everyone.

Good morning, Eric.

A couple questions.

First one is for John.

John, in the quarter can you give us any idea of what currency benefit may have been and what you're looking for for the year and what your coverage is for the upcoming year?

Well, actually, the foreign exchange impact, it was $26 million for the quarter and, actually, if you look at the quarter of 2003, it was the same number at $26 million.

So currency, you know, impact both years of the same amount, so its really not an overall change from year-over-year.

Okay.

And are you looking to -- have you hedged forward this year at all, John, or where do you on that?

We are hedged in both the euro, the Japanese yen and British pound.

And then a question for Mohammad.

Looking forward at your business, one of the things you've been able to do fairly successfully is to acquire businesses as very attractive prices for your shareholders.

Are you seeing good opportunities still in the marketplace and is it something we should continue to expect going forward?

Definitely. This is part of our strategy and, as you know, to find the right business with the right price is not something that you can find overnight.

However, we are looking always at opportunities and I believe that down the road we will definitely add additional business to our portfolio. And it will be, you know, known in due course.

So we have confident of what we are doing and I believe the business is in a very good, let's say, condition, in terms of our business. As I mentioned earlier, I believe that the weather has been very negative to us this past quarter and hopefully that will change as we go forward.

Okay.

And then just a final question here.

Just looking forward, you know, I know that in January, or earlier in this quarter, maybe even in mid-quarter, we were seeing cane shipments coming into this country, maybe 4 million boxes a week, which is a little bit heavy on the supply side.

Can you give us -- can you take a little run around the world for us and just tell us what you see as supplies? Is Ecuador slipping more? How are you looking at the up-coming quarter or two and now that your pricing is recovering? Do we have a chance of salvaging a good second quarter which is seemingly good for bananas?

You know, the main reason for the banana pricing softness actually is mainly competitive lower pricing on the (inaudible) and that's something we haven't seen before.

We did not participate in this type of, you know, cut-throat competition, and we're surprised at this type of approach since the European (inaudible) markets during the first 3, 4, 7, 8, 9 weeks, actually, of the first quarter were strong pricing in eastern Europe, even compared to the western Europe markets. And volume could not be moved to these markets and reduce the pressure on the North American markets, however, we haven't seen that, and its not the fault, actually, of the banana volumes because the banana volumes in the first quarter were lower worldwide perspective.

As we go forward, I believe the supplies are not (inaudible) also we have to take into consideration in a few months we'll be coming into the higher season time and we can't expect anything.

I am not to optimistic about the banana business. I believe it will turn around. And don't forget in Latin America, as a general industry, they are facing the (inaudible) phenomena. We are the only company that have alternative supply routes which is Brazil, where we have been really expanding significantly in the last three, four years, and putting a lot of money in that country and in bananas and melons as well as Del Monte gold which we just started exporting since January.

And that, I think, will give fruits and show significance as we go down the road.

Okay.

Thanks, Mohammad.

And just a follow up question on the volumes in pineapple was it weather related as well which restricted your supply? I guess I was not aware of that.

Melons in Brazil you mean?

Yeah, melons in Brazil.

Gold pineapple in Brazil?

Yep.

Well, the volume was not as we started the volume was not as we forecasted. As we speak now the volume is picking up and we are reaching our target.

Okay.

Thank you.

And, next we'll hear from Leonard Titlebaum with Merrill Lynch.

Good morning.

Let me just ask a couple questions.

Is there anyway you can quantify, John, what weather cost you in the first quarter, cause I have to presume it hit your competitors the same way and usually short supply means higher profitability and I don't think we got it where I would have thought it would have come.

Can you talk to me about what weather cost you?

I think that's very difficult to state, Lenny.

When you look at banana profitability, I think it has significant problems with it and increased cost of transportation from Ecuador to the U.S. It increased the price of Ecuadorian fruit to meet contractual volumes that we had on the contract.

So those things really impacted it, but directly, it is very hard to pinpoint the dollar impact.

Going forward, do you see these contracts having a price escalator due to increase in transportation cost or other typical costs or not? Or you just can't get ---

No, I don't believe we have. It is not in the industry.

Uh-huh.

Are you bidding on (inaudible) in Italy?

We cannot comment on that Leonard.

You would say the news reports say, the news coming out of Europe says, you are bidding on it. That is their input, not yours?

Whatever news in the market, that's news in the market. We cannot comment on it.

Now, beginning next month we have some new entrance coming into the EEU. What do you think, or what is your guess as to how that's going to be handled regarding quotas and licenses?

In what respect. Len?

Aren't you adding (inaudible) companies to EEU in May?

There will be 10 new countries, yes.

Have you decided how is the industry is going to handle that in terms of licenses and quotas?

The EEU already established a (inaudible) system for these 10 countries and the volume on a quarterly basis and it will be just like western Europe, the same way it was handled.

How is that going to effect you in terms of anticipated volumes from, let's say, this May until next year, versus what you did last May until the end of the year.

It would be the same thing. It our volumes.

So you are not looking for any help or hindrance from the new agreements?

No, no, we continue with our volumes as we have been doing for --

Okay.

And one final question, obviously we are aware that McDonald's is using fresh fruit and we expected an announcement, hopefully in January, from Wendy's and we're further hoping for an announcement coming out of some school boards in Ohio and some other states.

Can you update us on where you stand with that both domestic as well as in the U.K.?

Wendy's has been testing. So you will have to go and ask them how long they will take to finish that test. With McDonald's we are supplying them with salads, different types of salads in the U.K., which has been successful as a matter of fact.

As far as -- the U.K., you know, speaking about the U.K., we have been supplying (inaudible), you know, stores, which is a (inaudible). We have been supplying some airlines, we've been expanding our business. As a matter of fact, if you look at the number they increase in our sales year-over-year or quarter-over-quarter, you would see a significant, as John mentioned, a huge increase in sales and that is going to continue.

As far as the U.S., we have made some big national contracts with some of the big chains. We have expanded our business with Starbucks, for instance, including new geographical areas, so I would not like to mention names on the conference call, but we have made every stride in this regard.

And I think this is a phenomenon is going to increase as we educate the retail about the management of the Fresh Cut which is the most important (inaudible) The management of the Fresh Cut fruits. We see even bigger results as we speak. Every day we are seeing new opportunities. So we are very confident about this.

All right.

You said you are more concerned with annual numbers than quarterly. You want to give us what you feel is an achievable target for this year on an annual basis? In terms of earnings?

I think that it has been a policy we can't give, but I can tell you one thing that, in my opinion, we will have a very solid performance. We cannot look year over --- one year to the next, let's be (inaudible), and we have seen it in so many blue chip companies. We are not blue chip yet, but hopefully one day.

And we have seen it (inaudible). Name it. And we've seen that one year not making as much money as the previous year or losing money on some years that doesn't mean the business is bad. It is a cooling period in my opinion and we are going to pick up again.

Let's not talk semantics, but you thought you had a good year and anytime you come in with $.81cents, versus $1.35, I don't think some of the analyst don't consider that a good year. So maybe we ought to talk about what's good and what's bad.

Wish you good luck the rest of the way.

Thank you.

And next from Bear Stearns we'll hear from Terry Bivens.

Good morning everyone.

Hi, Terry.

Just a couple of things.

John, you gave us an average price on the bananas, I guess, overall.

Can you give us some dimension how much pricing was down in the first quarter both in your North American and European markets?

Well, in North America, pricing was down at least 10% and in Europe, pricing was down a similar amount, 11%.

Okay.

And I think, Mohammad, you made the comment it was coming back a little bit. Has that (inaudible) improved as we moved into the second quarter?

Yes, pricing is moving up in Asia and in Europe and has moved up in the United States as Mohammad said it hasn't gotten back to last year's level and that's one of the comments that I made.

Okay, so it is moving up in North America, not back to year ago levels.

How about in Europe? Are we back to where we were a year ago?

No, no. The prices last year was record year in our opinion. Last year all the markets were performing extremely well simultaneously. Weather conditions were almost perfect. All the variables were 100% in our favor.

Unfortunately, this year we are we haven't seen this situation, so the variables do not work as well as last year.

Okay.

With regard to melons, I know you've come off a period where the pricing was very good. Has -- I do understand the weather constraints there during the first quarter -- has your melon business come back both in terms of pricing and volumes you are able to get up here?

Yes, that's true.

Okay.

Volume and pricing has improved, you know, quite nicely in the last few weeks.

Okay, so that is definitely on an up swing then, we should say?

Yes.

Okay.

As you look at the tax rate, I know we always talk about that, John, where do you see that going the rest of the year?

It was a little bit lower than where I expected.

I would say in the 6% range at this moment. If you look at it, if you round out the percentages , I saw you (inaudible) it is about 6%, 6.2% last year, 5.8, that's roughly a 6% rate and that's what we see right now. It depends on profitability in the different markets, as you know.

Okay.

And just two non-financial things.

I get questions on that whole SEC business going back to December. Gosh, I guess it was December '02, now.

Is that over as far as we're concerned? Is that a dead issue at that point?

We haven't heard a thing from the SEC and you would be the first to know. No new news.

So then we've had a period of how long would you say since you got any communication from them?

We didn't get any communication from them. There has been a misunderstanding and this is unusual that this has been in the market.

We never been notified, we never been asked, we never been investigated or any information (inaudible).

I don't know where the information comes from.

Okay. Fine.

And just to add my comments to Lenny, Mohammad, I know it is a volatile business, but it is very difficult, you know, when you don't have a very good handle on, at least on our side of the business externally, it is very difficult value the business when we're shooting in the dark with some of these things in terms of where the year might end up.

So maybe if you could take that into consideration when we get closer to the end of the year and maybe at least provide some range of guidance, that would be appreciated.

Well definitely look at that.

Okay.

Thank you very much.

Once again I would like to remind our audience that is star 1 if you would like to ask a question.

Next we will hear from Heather Jones from BB&T Capital Markets.

Thank you.

Good morning.

Going to banana pricing, when you said EEU was down 11%, was that in dollars or local currency pricing?

That was in dollars, Heather.

Okay.

And what is -- you said it is improved now but below last year. Are you referring to dollar pricing as well?

Yes.

Okay.

Is it down 5-6% or is it, could give us an idea how much it is down now?

Yeah. It is in that range.

Okay.

And going back to the currency impact, when you said $26 million, is that what it added to sales for this quarter compared to the quarter last year?

Yes, it was 26 million in this quarter this year, '04, and in '03, same amount.

$26 million compared to last year, right?

$26 million compared to last year. And '02 versus '03 was also $26 million.

Okay.

Now, why do you think EU pricing was down so much if worldwide volumes were down? I mean, was the Asia/Pacific region volumes down more than, say, the Western region or why would pricing have been so weak? You mention contract pricing in the U.S. but what do you attribute EU to?

It's consumption (inaudible), Heather. It has nothing to do with the pricing.

Sometimes you find that more consumption on items. It is actually consumption has to do with maybe some cold weather in Europe during a period -- that period of the quarter.

But there was no reason, in my opinion, why the pricing hasn't been as good as last year.

Okay.

Some have attributed retailers are pressuring importers because they know they're making money on the currency side so they are pressuring them on local side.

Have you all seen that?

I don't believe this could be -- it is not a leverage, you know.

Sometimes when banana is short or abundant, the market is more demand and that's our feedback from our own (inaudible) in Europe. They don't have the same demand that they had last year, for instance, and that was, in my opinion, one of the major reasons we did not reach the prices of last year.

Okay.

Going back to Lenny's question on eastern Europe, I think they set the quota was 460,000 metric tons for the year.

Do you anticipate looking at, once it is instituted, do you think your volumes in eastern Europe will increase or will they stay flat with what they were (inaudible)?

They will stay flat.

Stay flat? Okay.

And what are you anticipating as far as impact on EU pricing, the core EU?

It might affect in short-term, it might affect it negatively in our opinion but that is something we have to wait and see. We believe it might affect the EU, the core market in the short-term.

Okay.

And then final question is going to banana profits. They were down about I think you said $20 million, but average pricing, I guess with the impact of currency and all, was flat, almost flat . I don't understand, cause I went back and looked at your prior years and this is the weakest quarter by far, weakest first quarter you've had that I can find. I am trying to figure out why results were so week, even though --

Bananas?

Bananas.

It is a difficult time.

We said that. And pricing overall was down 8%, Heather, $.08 cents on $10.29 is 8%.

Okay.

Okay?

Okay.

Thanks.

I think there is also another factor here.

Ecuador, don't forget, during the first quarter of nine, ten weeks of the quarter prices were extremely high which affected market prices. Also the cost of goods mainly going to the West Coast and East Coast. So that had an affected on the costs.

Okay.

Thank you.

Thank you.

And at this time, that does conclude the time allocated for the question and answer session.

I will turn the call over to Mr. Mohammad Abu-Ghazaleh for closing comments.

Thank you very much.

I thank everybody for joining us on this conference call. I hope to be with you again on our next quarter conference call.

Thank you very much for joining us today.

That does conclude the conference.

We thank everyone for their participation.

You may now disconnect.