Fresh Del Monte Produce Inc (FDP) 2007 Q1 法說會逐字稿

Thank you very much for holding, everyone. Good morning. (Operator Instructions.) I'd now like to turn the call over the Christine Cannella for the opening remarks. Please go ahead.

Thank you, Kevin. Good morning, everyone, and welcome to Fresh Del Monte's First Quarter 2007 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 the Executive Vice President and Chief Financial Officer, John Inserra, who will discuss our results for the first quarter of 2007.

Fresh Del Monte issued 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 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 this call. This morning, Mohammad will review our operating performance during the quarter, along with recent developments and our future outlook. John will then review our financial performance for the first quarter of 2007.

Please let me remind you that much of the information that we will discuss this morning, including the answers we get 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 29, 2006.

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 the call over to Mohammad Abu-Ghazaleh. Mohammad?

Thank you, Christine, and good morning, everyone. The first quarter of 2007 was the best quarter we have experienced in two years in terms of earnings per share. During the first quarter of 2007, we saw improvements around the globe and across many of our business lines. Our performance in North America, Europe, Asia, Africa, and the Middle East strengthened and in most regions we saw an outright turnaround.

Sales in certain products were at levels consistent with the first quarter of last year. However, because the Company was more streamlined and cost efficient than ever before, most of our costs were lower, our margins improved, and therefore, we were more cost [indiscernible - accented]. Given the tough industry environment we faced over the last 24 months, I am very encouraged by our first quarter results and where we are today. Moreover, I am proud of the members of our team who have met our numerous challenges and flawlessly executed our strategy.

As a global company, we are going to begin describing our business on these calls on a more regional basis. Our North America product lines during the quarter improved significantly. We continued to negotiate new banana contracts [obtaining] higher pricing. Our gold pineapple business in North America continues to perform well and we consistently demonstrated to our customers that we are the most dependable supplier with consistent quality and volumes to serve their needs. Melons were the same story. We have been doing well in the offshore season since the beginning of the year.

Our fresh cut product line also improved from an operations and [indiscernible - accented] standpoint. We continued to rationalize our vegetable SKUs and improve pricing to offset our costs, which provided a nice up tick to our North America results. Our results in North America were boosted even further by greater efficiencies in our distribution centers, which occurred when we eliminated underperforming products from our vegetable and fresh cut product lines.

We also increased efficiencies in our inland shipping operations, thereby reducing costs. The fresh produce business in Europe and Africa also improved during the quarter. In Europe, banana pricing was higher, driven by favorable exchange rates with lower volumes due to competition. However, these comparables are difficult because of the unusual banana shortage in Europe during the first quarter of 2006. We always believed that a shift to a tariffs-only system for a licensing system in the [UE] would benefit us as it would lead to [indiscernible - accented] competition. We believe it is just a matter of time before we become a much stronger player in the EU.

Meanwhile, we continued to be a leader in the gold pineapple business in European with higher sales during the quarter. Melons were also among our best performing products in Europe with strong pricing driven by supply shortages from our competition.

Fresh cut produce performed better with several retailer promotion activities taking place in the first quarter. Supermarket relationships grew strong, especially in the U.K. These customers seem to be realizing that the only company they can count on to supply their most consistent quality and steady quantity is Fresh Del Monte Produce. As a result, we are making substantial competitive inroads in the U.K.'s major supermarkets. In addition, we began to successfully produce our fresh [indiscernible - accented] snack product line in the U.K. schools during the quarter.

In Asia, the banana business was very strong during the quarter. [Indiscernible - accented] weather in the Philippines [indiscernible - accented] bananas to much of Asia and the Middle East resulting in lower production, which continues in the second quarter. However, the industry wide shortage helped improve pricing. Gold pineapple sales were also higher with new production coming online in the Philippines. We expect these positive market trends to continue.

Our overall business also grew at a very fast pace in the Middle East. Banana sales increased with significantly higher pricing and lower volumes, a result of the poor weather conditions in the Philippines. We believe that banana consumption will continue to grow throughout the Gulf area. And to meet the demand, we opened a banana ripening facility in Dubai during the quarter where our Middle East regional operations are based.

In Dubai, we are preparing for [indiscernible - accented] in the coming weeks, our existing fresh produce offering with fresh juices, salads, and fresh cut fruits. Our goal is to supply food service customers in the booming hotel and entertainment businesses, as well as retail customers with these products. We are also preparing to launch our [indiscernible - accented] juices--juice products [indiscernible - accented] throughout the Middle East region in the near future.

We have a customer base that is ready to buy our products, and we are well positioned for more rapid growth in this region. Meanwhile, we are ramping up [protein] production in our Jordan operations, meeting fast growing demand for our protein product line, a business that is growing steadily.

Let's turn to the [indiscernible - accented ] prepared food business. This business segment has been performing better than last year. It is more profitable and a result of our initiatives, our operations are working more efficiently. The [indiscernible - accented] food sales and gross profits were higher year over year. And margins improved. I am pleased to report that our prepared foods strategy is finally gaining traction. This combined with the 2006 advertising campaign that promoted the Del Monte brand and image, along with careful restructuring and marketing, have helped to strengthen the brand.

Beverage sales and pricing also improved dramatically, particularly in the U.K. In the meantime, we are aggressively marketing our prepared food products in such African countries as Algeria, Sudan, Kenya, and South Africa, and these markets are growing steadily.

In summary, let me say that I am quite confident that the light at the end of the tunnel is finally in view. I am convinced, and I would like to repeat this once again--I am convinced that as an industry agriculture is about to undergo a major global turnaround. We have seen rapid population growth, increasing per capita income, widening consumption, and expanding globalization. And I would like to add to this a [smaller] area to grow products across the world.

As people need food and services whenever they [indiscernible - accented], this is creating a new dynamic that I think will benefit Fresh Del Monte. Our business at Fresh Del Monte Produce, which has always been called unpredictable, will become much more predictable in the future. To benefit from these dynamics, the successful industry leader must thoroughly understand this business. And this is where I think we have a clear advantage over our competitors.

Looking ahead, I believe that 2007 will be a good year with better market conditions, including stronger banana pricing in North America. Our gold pineapple business is healthy with stable volumes. Our fresh cut business is now thriving and should continue to do so. We are starting to experience better pricing in canned pineapple in our prepared business. And we are beginning to regain lost distribution from the heavy competition we have experienced in the last 24 months in the U.K.

We are also in new markets with new products. We have successful [indiscernible - accented] savings programs and we have greater efficiency in our North America operations. All of these factors will boost our business. I believe that we have finally turned the corner at Fresh Del Monte Produce. That is not to say that we won't face challenges along the way, particularly if fuel prices continue to rise significantly. But based on our current position and improving market conditions, I am optimistic that 2007 will be a good year for Fresh Del Monte and our shareholders.

John?

Thank you, Mohammad. And good morning, everybody. We are pleased with our strong performance in the first quarter of 2007 and the fact that we delivered good results in our fresh and prepared businesses. For the quarter, EPS was $0.84 per diluted share, excluding the $0.05 per diluted share gained from the exit of our Hawaiian pineapple operations. Net sales were $836 million, half a percent lower than last year's first quarter.

Gross profit was 99 million, a 46% increase from last year's first quarter. And gross profit margin was 12%, a nice up tick from last year at this time. Operating income increased $34 million to $57 million, excluding the gain from the exit of our Hawaiian pineapple operations, with an operating profit margin of 7%. Let's now review the first quarter performance of our different business segments on a regional basis.

Our global banana net sales for the first quarter increased 3% to $288 million. For the quarter, gross profit increased $12 million to $21 million due to our cost reduction efforts. Sales and gross profit in this segment were partially offset by ongoing competition in the European market, a result of the change to the tariff-only system, as well as higher transportation and raw material costs.

Worldwide pricing for the first quarter increased 5% to $11.73 per box. Banana sales in North America increased driven primarily by higher [and practical] pricing that are more in line with our operating costs. Volumes were normalized, compared with the first quarter of 2006 when we saw industry wide volume shortages due to hurricanes in Central America and growing market demand.

In Europe, net sales decreased with higher pricing driven by favorable exchange rates and lower volumes, a result of intense competition. In Asia, net sales increased with significantly higher pricing and lower volumes that resulted from the inclement weather in the Philippine production areas. In our Middle East operations, banana net sales increased driven by higher pricing and lower volumes, also a result of poor weather conditions in the Philippines and increased demand for Del Monte's branded bananas in this region.

In our other fresh produce segment, net sales for the first quarter decreased 4% for $427 million. The decrease in net sales was primarily due to lower sales in our tomato and potato categories, a result of the restructuring program in North America in 2006. Sales in North America were also impacted by inclement weather. Sales in Europe were driven by the increase in our fresh cut and gold pineapple product lines. Overall gross profit increased $15 million to $65 million, providing us with a gross profit margin of 15% for the first quarter of 2007. The sales decline of $18 million in this segment was more than offset by significantly lower operating costs, which is a further testament to the success of our restructuring program.

In our gold pineapple category, net sales increased 3% to $93 million with pricing in line with last year's first quarter and a 3% increase in volume. In North America, gold pineapple net sales decreased with lower pricing, a direct result of the continued competition in this product line while volumes were in line with last year during the same period.

During the quarter in Europe, gold pineapple net sales increased with pricing driven by favorable exchange rates and volume in line with the prior year. In Asia, net sales increased with lower pricing and significantly higher volume due to our planned expansion program to meet increased market demand.

In our melon category, net sales increased 5% to $78 million, with pricing in line with last year at this time and a 5% increase in volume. In North America, melon net sales increased with lower pricing and higher volume, which was the result of increased competition and inclement weather in March. In Europe, melon net sales were in line with last year's first quarter with pricing driven by favorable exchange rates and lower volume.

In our other fresh cut category, the real--rationalization in 2006 had a marked impact on our performance during the first quarter of 2007. You may recall that we scaled back our fresh cut product selection and eliminated some underperforming facilities to maximize results. Overall, net sales increased 10% to $79 million with a significant increase in pricing and a 7% decrease in volume.

In North America, fresh cut net sales increased with higher pricing during the quarter due to the diversity and quality of our product in this category. Volumes were slightly lower than last year during the same period due to the continued elimination of underperformer--underperforming vegetable SKUs. In the U.K., fresh cut net sales increased with higher pricing and lower volumes, due to the closure of an underperforming fresh cut facility in 2006.

As Mohammad mentioned, during the quarter retail promotional activities increased along with our continued focus on selling food service bulk quantities of fresh cut fruit and single serve snack bags to schools in the U.K., promoting our program "Making Fruit Fun For Kids."

In our non-tropical category, including avocados, net sales decreased 7% to $92 million with a 16% decrease in volume and higher pricing. In North America, net sales decreased with slightly higher pricing and lower volume due to the inclement weather in Chile during the last month of the first quarter. However, we did experience strong sales growth in our avocado product line, particular--partially offsetting the decrease in the other non-tropical sales. In Europe, net sales decreased with significantly stronger pricing, driven by favorable exchange rates and lower volumes, a result of the same weather conditions in Chile.

In our tomato category, net sales in North America decreased 28% to $38 million with lower pricing, an 11% planned decrease in volume. The decline in sales in our tomato product category was a result of our restructuring program that began in 2006.

Net sales in our European prepared food business increased 8% to $77 million before the elimination of $1.5 million in sales claims related to the canned pineapple recall in 2006. Gross profit for the first quarter increased to $9 million, also excluding the $1.5 million in sales claims. The rise in net sales in gross profit was the result of our ongoing initiative to address sales opportunities and increase efficiencies in this segment of our business, such as the closure of our Italian beverage facility in late 2006.

On a product basis, for the first quarter, the increase in prepared food net sales was attributed to new product and packaging innovation in our convenient snack line, which includes Fruitini for Kids and Fruit Express for adults. Selling price, increases, and promotions, drove the sales gain in our [indiscernible - accented] juice and shelf stable beverage product lines. Also, sales gains in our canned deciduous product line primarily resulted from our retail promotion activities.

Net sales in our other product and services segment for the quarter increased 2% to $46 million. The increase in net sales was the result of strong sales on our Jordanian poultry and Chilean plastics operations. These sales gains drove the $2 million increase in gross profit in this segment.

The foreign currency exchange benefit at the gross profit level was $22 million during the first quarter of 2007, compared with an $8 million benefit during the same period last year. SG&A expenses during the quarter of 2007 decreased $2 million to $42 million. The decrease for the quarter was attributable primarily to lower professional insurance fees. Other income in the first quarter was $4 million, primarily due to the benefit from foreign currency translation and a gain from the sale of properties in South Africa during the quarter.

Interest expense net in the first quarter increased $4 million due to higher interest rates and higher debt levels. Tax expense for the first quarter of 2007 increased $2 million, primarily due to higher taxable income in certain jurisdictions. As of quarter end, debt including capital leases was $484 million, primarily due to seasonally high working capital requirements. We anticipate capital expenditures for 2007 to be approximately $100 million.

This concludes my financial review. Operator, could you now open the line for the question and answer period. Kevin?

Absolutely. (Operator Instructions.) Our first question will come from Jon Feeney at Wachovia.

Well, good morning. Congratulations.

Thank you, Jon.

John, I would have ordered more Chinese food if I knew it was going to be such a great quarter for you guys. But the--I wanted to dig into a little bit on the Europe side. You talked about higher pricing in bananas in terms of just a currency benefit. Can I read into that that in local currency terms, pricing was still down?

Yes.

Yes.

Good. And bigger picture, Mohammad, when you look at the Middle East, I guess, it seems like this is the most exciting part of your business going forward. Can you talk a little bit about the competitive advantages that you have? Or, I mean, maybe this is too simple of a question, but are--is the population aware of the Del Monte brand? Are they receptive to it? And is that one of the advantages? Or could you just talk about what your competitive advantage is in this sort of fast growing region?

Well, I think our competitive advantage is really we are--is Del Monte is a very well known brand in the Middle East for so many years--I mean, it's not like yesterday. But it's been over the last--since the 80s, early 80s, that Del Monte has been present in the--and especially in the banana segment. Recently, I mean, in the last couple of years, we have introduced our, of course, other products, which is the prepared. If you--if I can tell you that within probably eight months of our introduction of other products in the different retail--especially retail at this time since we have not yet gone into the full service and [indiscernible] sectors in any significant way.

But I can tell you in the retail sector now, probably we are the number one brand on the shelf. And that's why if you go back to my conference calls in the last maybe two or three quarters, I have been emphasizing on the Middle East as being our future growth market. First of all, our advantage as being--as management, as being from the area that we know the culture and we know the market and we know the client base with all the different factors that go along with that.

But putting this aside, I think we are the only multinational now in our segment that has a physical presence in the area with distribution centers, with ripening facilities, with--we are the only multinational on our level that is introducing fresh cut salads, fresh cut fruits, and [ultra] fresh juices into the market.

And I can tell you that I have been recently there and the kind of interest and demand that we are receiving right now is phenomenal. I can tell you that McDonald's on a regional level is very interested in the salad, Starbucks on the regional level, interested in juices and fresh cut fruit. So we have a very--very, very big let's say interest of many parties--by many parties to our products. And in my own perception, I see the expansion and the growth in these markets to be really very, very, very interesting. And I think that Fresh Del Monte is in the position and the timing to capitalize on this and will become the leader and benefit from this, let's say, factor that I just mentioned.

Thanks. And just one other question, if I could, Mohammad. The--in the U.S., it seems like you were--for a long time you talked about building out that sort of distribution infrastructure, those facilities, and you saw some nice growth. I'm going back like '03 and '04 in the onions and tomatoes. Now, we're sort of going the other way, rationalizing that--those products towards more profitable ones. You must have a lot of available capacity out there. And if you do, do you plan to push more vegetables and fruits of different kinds through that distribution? I mean, how are you going to handle that big investment you've made?

I think the big investment we made--I still believe and I will continue to believe that we have done the right decision. However, we went into an area that nobody had entered before. And we went through some [indiscernible] period. I think we now have I wouldn't say mastered the trade of the operation, but we have a very good leverage and control of what we should do and what we should not do. We don't have too much--I mean, unutilized capacity in the--especially the VCs and the fresh cut. What we did actually is reduce SKUs and have taken out items that really did not make any sense for us to produce. And that really through the teamwork and through the initiatives and hard work of people in this plant and fresh cut operations, has contributed to these improvements. And I believe that this will continue.

And I can tell you right now that our sales and our penetration in the market is continuously expanding. I am very confident that we will continue to do, as I said a few minutes earlier, that we will continue to do so in the future.

Okay. Thanks very much.

We'll take our next question from Heather Jones at BB&T Capital Markets.

Thank you, and congratulations on the quarter.

Thank you, Heather.

I have a number of questions, but one just real detail type question. Going back to Q4, what was the amount of the--I had forgotten to ask then--the amount of the inventory write-down on the Del Monte Europe piece. I think it's for the canned pineapple or something. Just wondering, just so--for modeling purposes what that number was.

I believe it was about $16 million roughly, if I can recall the number.

16 million?

Yes.

And is that--that's the gross profit impact, so that's essentially 16 million that we shouldn't expect--in costs that we shouldn't expect to continue again this year in Q4?

Yes. We took basically--if you look at the elimination of the one-timers, that was on a separate line above gross profit. You could see that number. And we took--we basically took that out. We showed that above gross profit.

Okay. Sorry. I thought it was embedded in the numbers. On your cost savings initiatives, I was wondering, you mentioned the inland transportation - eliminating or I should say rationalizing SKUs. I was wondering if you could give us some more color on when you began this process in earnest. And if you could--don't want a specific--very specific number, but some kind of idea of what that contributed to the improvement, both in Q4 and this quarter.

In the elimination of SKUs? We don't--we haven't given that detail--.

--Just your cost savings--.

--But the SKU elimination started in the third quarter of last year. And it is ongoing and we keep looking at the different products that we make in our fresh cut facilities and that we put through our distribution. It's an ongoing process now.

Okay. And what about the inland transportation--the streamlining of that?

There are several initiatives in that regard, Heather, which we cannot actually discuss on the conference call because we have really proprietary information. However, we have--we are taking several--we started this actually in the early part of last year. But to execute and to put into place, it took us several months.

I think that really the real turnaround and the real outcomes started showing in the last quarter of last year, and forward into the first quarter. I think this will also accelerate going forward in the next year or so. So we--what we have tried to do is make sure that our capacity is fully utilized and this can happen in so many ways and means. And that's what really contributed to our--even though we have increased fuel costs and labor costs and you name it, still we have been able to maintain and to reduce our inland costs. So that has been an achievement for us.

Okay. So on the U.S. distribution business, just so I make sure I'm understanding this correctly, it sounds as if you're still just as committed as you always have been to distributing pineapples, bananas, et cetera, through your DCs. It's just you were rationalizing the potatoes, tomatoes, the less profitable part of the business. Is that correct?

Actually, the potatoes and onions because the tomato is doing very well. And I think that John when he mentioned--he mentioned about lower volumes and less revenues, but he forgot to mention that we made more money during the first quarter on tomatoes. And I believe that tomatoes are going to become a very important contributor to our bottom line now and in the future.

Yes, since we don't give that--but, yes, tomatoes did make a major contribution.

Okay. So you downsized tomatoes, but you rationalized potatoes and onions.

That's right.

That's right.

Right.

Okay. And then, on--how do you--where do you put Middle East as far as your geographical breakdown? Is it in other or is it include in Asia Pacific?

It's in Europe right now. But we're giving that information because we believe that the Middle East is a significant growth area for us.

Okay. I mean, is it greater than 100 million in revenue at this point? Or just, again, you don't have to give specifics. Could you give us some kind of idea--?

--Not on a quarterly basis but--.

--It's greater than 100 million, yes.

On an annual basis?

Yes.

Yes.

Okay. And then, finally, just on your banana price in the U.S. on a spot basis from what we understand it's down significantly from last year, which benefited from the hurricanes. But you definitely had bullish comments on banana pricing. And a two-part question. One, a rough estimate of how much of your business is under contract here in the U.S. And secondly, I mean, to have offset the declines we're seeing in spot, I mean, you must have had dramatic increases on your contracts. I'm just wondering if you could address those questions.

We have about--right now about 70% of our volumes on a contract basis in North America.

But don't forget, Heather, that we had significant cost reductions also, as well as profitability in bananas. So, yes, but a lot of it comes from the product line also.

Were your bananas--were North American banana prices up or were you trying just to say that North American banana profitability was up?

Well, it works both ways. But our pricing improved a little bit, and our cost improved also [to us]. So it was let's say a double effect.

Okay. Thank you very much.

Okay.

(Operator Instructions.) With that, we will conclude the question and answer session. I'll turn things back over to our speakers for any additional or closing remarks.

I would like to thank everybody for being with us today, and hope to be with you on the next conference call. And I can assure you of our commitment and dedication to make Fresh Del Monte the best company in its field globally. Thank you very much, and talk to you soon.

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