Fresh Del Monte Produce Inc (FDP) 2006 Q2 法說會逐字稿

Accented speakers; inaudibles throughout; transcript is best product.

[Operator Instructions] Now I would like to turn the call over to Christine Canella for the opening remarks.

Thank you, Kevin. Good morning, everyone, and welcome to Fresh Del Monte's second quarter 2006 conference call. I'm Christine Canella, Assistant Vice President of Investor Relations. Joining me today are Chairman and Chief Executive Officer Mohammad Abu-Ghazaleh and Executive Vice President and Chief Financial Officer John Inserra, who will discuss the results for the second quarter ended June 30th, 2006.

Fresh Del Monte issued a press release this morning via Business Wire email and [first call]. If you've 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 distribution.

This conference call is being webcast live on our website, and it will be available for replay approximately two hours after the conclusion of today's call.

This morning, Mohammed will review our operating performance during the second quarter, along with recent developments and our future outlook. John will then review our financial performance.

Please let me remind you that much 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 securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors, including those described under the heading Description of Business Risk Factors in our Form 20-F for the year ended December 30th, 2005.

I would also like to add that 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 Mohammed Abu-Ghazaleh. Mohammad?

Thank you, Christine, and good morning, everyone. To be honest with you, I think that some of you would say, here it is again. Mohammed is repeating himself. But still, I have to say that the second quarter of 2006 was especially tough from Fresh Del Monte Produce, as the company continued to face the same obstacles it has encountered over the past several quarters. These difficulties included higher costs related to labor and transportation, intense competition in (inaudible) as banana suppliers jockeyed to take positions in the new European market -- and this is something that we anticipated this quarter -- unfavorable exchange rates in producing countries, such as Brazil and Chile, and continued high costs related to fuel, which was 31% higher year-over-year, and up 41% since the start of 2006.

These negative market conditions made the first six months of 2006 the worst first half that Fresh Del Monte has ever experienced in nearly every (inaudible). We worked diligently to mitigate these conditions during the second quarter by implementing a range of strategic initiatives aimed at further developing our business and positioning the company for future growth.

During the period, for example, we were able to increase the price of new banana contracts in North America as well as those that came up for renewal over the three month period. This action is reversing a long cycle during which contractual banana prices have remained low due to intense competition. However, the increase in contractual banana prices was still not high enough to offset the significant cost increases that we incurred in our production and logistics operation during the quarter.

Though our North American banana business improved year-over-year, and bananas in Asia strongly rebounded in terms of volumes and sales, our European banana business remained (inaudible). We now believe that it will take longer for the European market to settle down and adjust to the (inaudible) [that is on the system].

During the quarter, we also continued to streamline our European fresh and prepared food businesses. We closely analyzed our existing markets, and developed country-specific business models, with the goal to become more efficient in leveraging our roll-out of fresh and prepared products across Europe, Africa, and the Middle East.

As a result of this analysis, we began to aggressively remove operations and functions that are not contributing or no longer fit with our long-term growth strategy, such as our (inaudible) fresh cut salad facility in the UK that we sold in the first week in July. In addition, we rejuvenated our product line with fast-growing selections, such as chilled juices and healthy snacks that are the preferred choices of today's health-conscious consumers.

Our recent introduction of chilled juices in the UK market has been very successful, and has enabled us to strengthen our market position in the UK chilled juices category. Demand for our fresh chilled juice product is growing, and we are energized by the rising popularity of our expansion into the chilled juice category. Our marked achievements in the UK chilled juice category have helped us to offset some of this stiff competition we have experienced over the last several quarters in the shelf staple juice and canned fruit product categories.

In the Del Monte branded can fruit category, we introduced several promotional packs that consisted of a variety of fruit and juice products in a single package sleeve in selected markets. Promotions like these combined with our other successes in other -- in our healthy snacks product line, have helped us again (inaudible) our (inaudible) for market share in the UK.

During the second quarter, we also initiated a number of ground-breaking new measures for the company in our European businesses, such as our brand image campaign to increase exposure for Del Monte brands and for more Del Monte products (inaudible) to consumer audiences in Europe and the Middle East. The multi-media campaign, which includes television, radio, and print ads, has been well-received by consumers and retainers, and we expect it to be fully rolled out by the end of 2006.

We also engaged in several promotions in North America that provided excellent exposure for Fresh Del Monte and leveraged our strategy to align and associate our world-famous brand with natural lifestyle and importance of consumption of fresh fruit and vegetables. For example, in key markets, we reached out to young consumers and their parents by partnering with the Walt Disney Company on a cross-promotion that encouraged kids to each more fruit, especially our own Del Monte Gold Extra Sweet pineapple. The promotion was so successful that we are considering other similar promotions with Disney during the latter half of 2006.

And the Dannon Company promotion in June that we discussed during our last conference call was well-received, and we look forward to doing similar promotions in the future.

In addition, in North America and Europe, we positioned the Del Monte brand in several sports-related sponsorships during the quarter, aligning the brand in the minds of consumers with an active, healthy, outdoor lifestyle.

We also established new relationships with several convenience stores and quick-serve retailers during the second quarter. For example, we began to introduce our own fresh and fresh-cut produce in many 7-Elevens in California and Utah, as well as in overseas markets. This is an exceptional new relationship with the world's largest convenience store chain. Our ability to serve 7-Eleven clearly demonstrates our ability to meet the needs of large customers.

We also forged several new quick-serve relationships, including a Del Monte branded summer fruit cup promotion with Jack in the Box. And the whole fruit (inaudible) promotion with Sonic Drive-In.

Fresh Del Monte's fresh-cut business in North America and Europe continued to expand during the quarter, as demand exceeded supply, with higher than expected volumes in many key markets. During the month of June in North America, we (inaudible) the run rate we experienced in 2005.

We also introduced a new line of microwavable vegetables in select Midwestern US supermarkets during the second quarter. This unique new product line draws on our fresh-cut and packaging expertise to provide consumers with a fresh and easy way to enjoy their daily servings of vegetables.

Microwavable vegetables have already garnered positive responses from retailers, anxious to get the product into their stores. This new product is another example of how well positioned we are to meet the health and (inaudible) needs to today's consumers.

Our (inaudible) Del Monte Gold Extra Sweet pineapple also continued to perform well during the quarter in North America and Europe due to our increase in volumes, a direct result of our ability to further expand our global production in Brazil and Costa Rica. We continue to expand our presence in the food service market and the quick-serve retailers, with our Del Monte Gold pineapple, which is unique in our industry in terms of its high quality and superior taste.

During the quarter, we launched Passion for Pineapple Week, a highly successful multi-media campaign in the UK, through which we promoted the health benefits of consuming Del Monte Gold pineapple products. These efforts, along with continued roll out of other line expansions, such as Del Monte Gold Extra Sweet Chilled and (inaudible) Juice products in select European markets are helping us sustain our real (inaudible) in the gold pineapple category.

It is important to note that during the quarter, our Asian banana operations improved as we continued to increase sales to markets in the Middle East, where demand for Del Monte bananas remains strong. We also experienced increased sales of Del Monte Highland Honey bananas as the level of popularity continues to increase with Japanese and Korean consumers requesting the sweeter banana.

As I consider the balance of 2006, I am reminded of the expression that there is a right time for everything. For Fresh Del Monte Produce, 2006 is the right time to transform our business in order to overcome the challenges of today's changing market environment. To achieve this, we decided to eliminate unprofitable product and facilities, (inaudible) strengthen our portfolio, and reposition the company to achieve our long-term vision to become the world's leading supplier of healthful, wholesome, and nutritious fresh and prepared foods and beverages for the consumers of all ages.

We are also finalizing important projects that are currently under way in such places as Japan and (inaudible), sharpening our focus on developing (inaudible) and specific products that offer strong growth opportunities. In short, we are transforming Fresh Del Monte Produce into a leaner, more profitable, and more focused enterprise.

Again, the time for this transformation has never been better. This is a very challenging year. That's a fact. And (inaudible), we do not think that the challenges for a positive turnaround in 2006 are over. The European banana market is taking time to settle down, and we do not believe we have seen the end of high costs related to fuel, raw materials, (inaudible), and (inaudible). However, we are the leaders in terms of providing the healthy (inaudible) for new products. We have an exciting new brand image company and innovative marketing promotions that provide brand exposures and highlight the importance of healthy eating.

To sum it up, we are building momentum by actively implementing our transformation plan, along with entering new markets with new products. As you can appreciate, these efforts require time and investment. Moreover, they require patience. We ask that you continue to be patient as we execute our transformation and position Fresh Del Monte Produce to return to vigorous growth.

Thank you. I would like to pass it to John for details on the financials. John?

Thank you, Mohammad, and good morning, everyone. The second quarter was a tough period for Fresh Del Monte Produce, with the first six months of the year the most difficult since we went public in 1997. The obstacles we faced were caused by higher costs related to fuel, labor, transportation, and materials we use in our day-to-day business. These conditions significantly impacted our financial results for the quarter.

Net sales were $907 million, compared with $923 million in the second quarter of 2005. A net loss of $17.8 million, including asset impairment and other charges of $33 million, compared with net income of $47 million in the prior year period.

EPS was a loss of $0.31 per diluted share, compared with $0.80 per diluted share in the prior year. Excluding the asset impairment and other charges, adjusted earnings for the quarter would have been $0.27 per diluted share.

Let's now review our performance for the second quarter and the first six months of 2006 for our different business segments.

In our banana business, net sales increased to $312 million, compared with $309 million in the prior year period. Gross profit declined by $11 million, due to significantly higher fuel and transportation costs. Worldwide banana pricing increased during the quarter to $11.18 per box, compared with $10.96 per box in the same period last year, primarily due to the increased North American banana contract pricing.

During the second quarter of 2006, in Europe, banana sales decreased 13%, driven by lower volume and 7% lower selling prices, due to increased competition that was a direct result of the new tariff-only system that Mohammad mentioned earlier.

Banana sales in Asia were 16% higher, primarily due to increased volumes and favorable exchange rates. The increased sales in Asia were mainly attributable to increased pricing in the Korean market, increased sales to markets in the Middle East, and strong demand for our new Del Monte Highland Honey bananas. However, the price increases we experienced in North America and Asia were still not high enough to offset the increased costs that we continued to experience worldwide during this period.

On a six month basis, banana sales were slightly higher, at $591 million, compared with $582 million in the prior year. Gross profit decreased $36 million to $23 million. Results in the year's first six months were primarily constrained by volume shortages in our North America and European markets due to tight banana supplies in our traditional sourcing areas in Central America. Impacting the first half banana results were significantly higher fuel and raw material costs, along with unfavorable pricing obligations imposed by our expiring North American banana contracts.

In our other fresh produce segments, overall net sales decreased 3% to $469 million, compared with $486 million in the 2005 second quarter. The decrease in net sales for the quarter, among other things, was due to our decision to eliminate less profitable varieties in our [banana] category.

For the quarter, gross profit was $47 million, compared with $61 million in the prior year period, primarily as a result of higher transportation costs, along with decreased pricing in our gold pineapple category, net sales on the year-to-date basis were $916 million, compared with $926 million, while the year-to-date gross profit was $96 million, compared with $126 million in the first six months of 2005. The year-to-date results include significant cost increases in all product categories in this business segment.

Net sales of fresh-cut produce decreased 7% to $98 million, compared with $106 million in the second quarter of last year, with a 2% decrease in volume for the quarter. The decreases in sales and volumes for the quarter were mainly attributable to the closure and divestiture of our bagged salad business in the UK and the absence of the Wendy's business in North America.

As of the end of June, 2006, however, we have surpassed last year's run rate in our North American fresh-cut product category.

Net sales of whole fresh Del Monte Gold pineapple increased 6%, with an 18% increase in volume, offset by a 10% decrease in price, during the quarter. We believe the increase in pineapple sales underscores the increased consumer preference for Del Monte Gold Extra Sweet pineapple in all of its various fresh and fresh-cut forms.

Melon sales were 5% higher during the quarter, with increased volume and slightly lower pricing. We experienced significantly higher freight and transportation costs during the quarter in our melon category, due in part to transporting the product from our West Coast production areas to our East Coast customers.

Net sales volume and pricing for non-tropical fruit were in line with the second quarter of 2005, with (inaudible) sales the stronger contributor in this category during the quarter, due to a significant increase in our Chilean production.

Net sales of tomatoes for the quarter decreased 26% to $42 million, compared with $57 million last year at this time. Though tomato volumes were lower during the quarter, they were more profitable due to the change in strategy that I mentioned earlier.

Net sales in our prepared food business were $87 million in the second quarter, compared with $90 million in the second quarter of 2005. Sales for the first six months of the year were $156 million, compared with $169 million in the prior year period. Gross profit for the second quarter was $8 million, compared with $17 million during the second quarter of 2005. And year-to-date gross profit was $14 million, compared with $29 million in the same period last year.

Lower sales for the quarter and the first half were primarily due to continued competitive pressure in the UK market in the canned fruit and shelf staples juice product lines. Also impacting sales during the first half of 2006 were lower sales of juice concentrate in our industrial category.

In our other products and services business, net sales for the quarter and year-to-date were in line with last year at this time. During the quarter, SG&A expenses were slightly lower than last year at this time, primarily due to reductions in the administrative costs, which were partially offset by higher advertising and promotional expenses.

The foreign currency exchange benefit at the gross profit level was $15 million during the second quarter, compared to a $13 million benefit at gross profit level during the same period a year ago. On a year-to-date basis, however, the foreign currency exchange benefit at the gross profit level was $19 million, compared with $24 million at the gross profit level in the first six months of 2005.

Interest expense in the second quarter increased approximately $2 million, due to higher interest rates and higher debt levels. Tax expense for the second quarter of 2006 was $3 million, compared to $2 million in the second quarter of 2005. The effective tax rate increased as a result of the realignment of taxable income in certain jurisdictions.

Our total debt increased by $21 million since year end 2005, primarily due to an increase in capital expenditures. We repurchased 340,000 ordinary shares of company stock in the open market during the period, as part of the buy-back program initiated in March, 2006.

Also during the second quarter of 2006, we incurred asset impairment and other charges of $33 million, primarily due to underutilization and divestiture of product facilities in Europe and North America. The charges also included severance costs.

I'd like to open up the call to the question and answer period. Kevin?

Thank you. [Operator Instructions] First up, we have a question from Jonathan Feeney at Wachovia.

Yes, Jonathan.

Hello, guys.

Hi, Jonathan. How are you?

I'm well. My first question, Mohammad, is I know you mentioned pretty clearly that you don't think we're out of the woods yet on the European banana situation. But I wonder if you could give us any more color on that? Is it getting worse? Getting better here as the months go by? Because it had been my understanding that there were some irrational new competitors in the marketplace and that high cost might be driving some of them out of the business. Is that your stance? And if so, can we expect at least less worse trends over the course of the year?

We have witnessed some large growers that decided to go on their own rather than going through exporters, and they buy product several months -- you know, shipments directly into Europe. And now we see some of them ceasing to do that. So that might be a trend here.

Don't forget that we are -- we have seen a couple of months, a good two, three months, of very high prices compared to the previous year. But we are seeing them decline because of the competitive environment. Don't forget that we have very bad, let's say six to seven weeks of very high heat in Europe, which has also influenced banana sales in this market. The weather has improved in the last few days, and we believe that will help.

But it's summer. It's vacations. It's not a good time to really judge the market. I think by the time people come back, September, October, then we can have a better picture of where the market is going. But as we see today, it's not yet a rosy picture.

Okay. And I guess if I could just ask about the Sweet Gold pineapple business. My concern is that costs are coming up for you guys, no question. And pricing across the board in retail seems to be pretty strong right now. And I think it's more -- the pendulum swung more to the inflationary environment for consumer goods, yet you look at your great Sweet Gold pineapple business, and you're finding this continued I guess price war. And I guess I wonder what's causing you to have to bring down net pricing? And when do you think that ends?

I don't think that we are cutting our pricing. We are -- in the market stage in North America, we have a more relative stable price. Very little variation in price week over week. Europe probably is the place where we see a big variation in prices.

Okay.

And we can see -- at one time a few weeks ago, we saw 6 euros a box -- or even less. Or even 5 euros. And now we are seeing twice that price today in the market. And we have the dominant position in this market. So it's -- we don't see the price (inaudible) really to be so significant. We want increases, yes. We see that we can sell more volumes in these markets and new markets.

So as far as the Del Monte Gold, we -- as I always said before, I still believe it's the same today, that we are positioned. We have the stability. We have consistency. We have not only supply, but also the quality. And that's really what's driving our customers to stay with Del Monte, because they know that they are the right product, even though they pay a higher price. And we have seen this on many occasions, that they prefer to pay the higher price and stay with Del Monte rather than going to a competitor and face unforeseen difficulties.

And would it be fair to say we're still on schedule with the Honey Gold?

Yes. As a matter of fact, the last week or two, we have received just a few products. These are the first production, commercial production. And nothing significant. But what was really important is that we have showed it to very selective customers, and their reaction was extremely positive. And that's what really makes us very excited about this. We will not see volumes until some time next year. But these, we will be receiving a few pallets here and there. And we have been testing the market with these products, with the fruit that we've been receiving. But so far, it's been good.

And just one last question, if you would, Mohammad. When you look at the comparable period last year, you had some alternative sourcing costs for bananas that were -- I guess I should say, not just the comparable period, but through the remainder of 2005. And I guess -- or now that banana supply in Latin America seems to be a little bit better, are you seeing some of those alternative sourcing costs come down a little bit?

Of course we do. However, there will not be a South American season (inaudible) we will not have the same weather challenges that we had last year. But if things are more stable, we don't see there is a need for any alternatives. We do have supplies more than enough (inaudible) as we speak today.

Great. Thank you very much.

Thank you.

We'll continue now with a question from Heather Jones at BB&T Capital Markets.

Thank you. Good morning. I just wanted to go to the banana business. And you mentioned that your pricing was up for the quarter. I was just wondering -- two parts of this question. How much was pricing up in the US and Asia? And of the US piece, I was wondering if you could break out for us how much of the -- how large increases are you getting on the contract side, and how much is this fuel surcharge that I believe you, Dole, and Chiquita have put in? Just to try to get a feel for how much is permanently put into the contracts and how much is the surcharge.

Well, overall, our North American pricing is up about $0.70 a box quarter-over-quarter. So that's a nice increase. But as I said in my remarks, it certainly doesn't cover all of the high transportation costs that we're experiencing. And in Asia, we were able net -- net (inaudible) an increase of about $0.66 a box. So both markets did very well for us, but as I reported before, we don't see the covering of the transportation. Fuel and transportation have gone up significantly in our business.

Right. Right. Now did -- from what I'm seeing, is in Q3, and Mohammad alluded to this, the EU banana market has gotten substantially worse than Q2. So my question is has Asia stayed strong, up $0.66 a box? And if so, what you're seeing now in Europe, do you think it'll be able to offset on the price side what's going on in Europe in Q3?

I don't believe that the Asian market is going to be strong to compensate for the European shortfall.

Okay.

I don't see that, especially during now the rainy season in Asia, and the hot summer months.

Okay. And then staying with the EU banana market, I've heard some of the I guess more important importers in the EU banana market have mentioned that they don't think '07 will be much better. And basically, just that the (inaudible) was decided so late in the year that some of the bigger players weren't able to position themselves correctly for '06, but yet they'll be able to do that for '07. And I was just wondering if you would give us an idea of what your viewpoint is on how long this'll take to stabilize?

As I said in my -- what I mentioned a few minutes earlier, that we see that this is going to be a longer transformation than what we expected before. So I believe that there might be also turbulence in the year ahead.

Okay. And what was the other income? Was it FX gains, or --

Yes. Some of them were FX gains, and some other earnings that we had. Primarily, it's foreign exchange.

Okay. And then my final question is do you -- are you doing ongoing review of your business, and should we expect further asset impairments? Or do you think you're done with that?

We keep reviewing our business, and we won't comment now on what we would see in the future. But it's an ongoing process.

Okay. Thank you very much.

Okay.

[Operator Instructions] We'll continue now with Eric Larson of Piper Jaffray.

Good morning, everyone.

Good morning, Eric.

A couple of questions. Coming back to the Asian banana market, you had a very irrational competitor there earlier this year, late last year. Has some of that pricing negativity started to abate a bit?

Well, actually, right now, it's the weather. It's the over-supply. So it's not a good time to really judge the market, if importers are acting rationally or irrationally. But I believe that come September or October, we should really start seeing how this market is going to develop. If the (inaudible) will be coming into the market, so there will be more rational let's say supply [reaction].

Okay. Good. Then on the asset impairment charge of -- John, this is probably a better question for you. What -- how much of that charge is cash related?

Probably about -- somewhere in the neighborhood of $3 million in cash. A few dollars more or less.

Okay. So it's mostly assets, then.

Yes. It's mostly in assets.

Okay. And then Mohammad, on the prepared food side, again, the UK competition, it's been a big stickler for you. And I know you're in it for the long term. Can you give us a little bit better color for how you might see that view progressing going forward?

Yes. Let me be very clear. The canned business itself, canned fruit and -- traditionally is not a growing business, as you know and everybody (inaudible). So when we are focusing our efforts and energies on new product, like I mentioned (inaudible) more than once, on the chilled juice.

And I'll just give you an example. We started about a month ago in the UK, or about five, six weeks ago, actually, with (inaudible). And recently, with (inaudible) as well. But we have discovered -- our projection was we're going to send X number of cases of bottles per week. And we built our model on that assumption, and contracted also (inaudible) [packers] on that assumption. And fortunately, unfortunately or fortunately, but once we started the sales, we discovered that we need twice as much that volume, because the demand was outstripping supply. Now we had a problem with supply other than demand. And our problem now is how can we satisfy demand in the market?

Really, the products that we have developed are super products that are unparalleled in the market. And this is the (inaudible) that we are working on. We are working on several products. (Inaudible) we are looking and investing in growing markets, which has less competitive environment, where margins are much better and the relationship with supermarkets or retailers in general are much easier to develop. And that's where our focus is, is really on new products, on growing markets, and developing the existing markets with new innovations and not on the really existing business of the Del Monte food that we acquired over a year ago.

Okay. Good. And in your prepared comments, you didn't talk much more about supply constraint for bananas in Central America. I'm assuming that you're back to more normal growing and supply conditions in your Central American production areas?

Yes. Yes, we do have enough supply. We don't have a problem. As I mentioned a few minutes earlier, if the weather (inaudible) and if we don't, God forbid, get hurricanes in the producing countries, then I don't believe that we should have the same problem we encountered last year.

Got you. Okay. Thanks, guys. I'll follow up off line.

This will conclude the time allocated for the question and answer session. I would now like to turn the call over to Mr. Abu-Ghazaleh for closing comments.

I would like to thank everybody for his patience. And hopefully, we can give you better news at the next conference call. And I thank you for your patience.

Thank you.

Thank you, everyone. That will conclude today's conference call. Again, thanks for joining us. Have a good day.