Fresh Del Monte Produce Inc (FDP) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Fresh Del Monte Produce second-quarter conference call. I would like to remind everyone that this call is being recorded and that all lines will be muted during the call. After the presentation we will begin questions and answers. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Miss Christine Cannella. Please go ahead, ma'am.

Good morning, everyone, and welcome to Fresh Del Monte's second-quarter 2007 conference call. I'm Christine Cannella, 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 our results for the second quarter of 2007.

This conference call is being webcast live on our website and it will be available for replay approximately two hours after conclusion of this call. This morning Mohammed 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 second quarter of 2007.

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 20f for the year ended December 29, 2006.

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. We experienced very strong performance across virtually all of our product lines during the second quarter of 2007, making the quarter the best for Fresh Del Monte since 2003. Our performance generated EPS of $1.18 compared with EPS in the second quarter of 2006 of $0.29 excluding asset impairments and other charges.

This significant increase is a validation of our strategy and of the success of the performance improving initiatives we put in place last year. Our results were further shaped by better performance in our banana and other fresh produce business as well as improved performance in our global operations including our North American distribution and fresh cut centers.

I would like to cover today's presentation through geographic regions. We had an excellent quarter in North America. We experienced significant improvement in our banana business; this was primarily due to the banana contracts we renegotiated during the quarter that were more in line with our costs as opposed to last year when selling prices did not offset significantly higher cost.

Pineapples continued to perform well in North America due to stable pricing and our cost restructuring programs including the closure of our Hawaii operations and shift in sourcing to Costa Rica. Melons went from breakeven last year to strong profitability this year, primarily due to sourcing and distribution strategies. Meanwhile, during the quarter our SKU rationalization program further improved our profitability in our other fresh produce segment including Fresh Cut where we implemented price increases, eliminated unprofitable products and drove efficiency while still attracting new customer accounts.

Moving to Europe, we also saw significant progress in that region during the quarter. We benefited from higher prices in many products due to weather-related problems that impacted the supply of other locally grown fruit as well as stronger currency. Our cost reduction programs and streamlining of operations also had a favorable impact on our results. However, our banana business in local currency continued to be impacted by the [type only] system and the increase in industrial volumes in the marketplace.

Pineapples, nontropicals and melons also did well. Our Fresh Cut business stands in a better performance just as it did in North America, with solid margins for the same cost related reasons. Our prepared foods business also performed better year-over-year due to our sharp focus on reducing costs. We conducted a thorough analysis of our prepared foods business aggressively looking for additional ways to reduce costs along the way.

For example, we reduced repackaging material cost across all product lines while still retaining the quality packaging for the finished product that ends up in consumers' hands. Meanwhile we are working diligently to grow sales by getting more of our prepared food product to Western European retailers. In select countries we are now using distributors rather than our own salesforce to achieve this, allowing us to cover countries more effectively. We also gained shelf space more easily than we did last year as retailers began to recognize the quality promise behind the revamped Del Monte brand and made more room for our products in their stores, supermarkets and hypermarkets.

We are building the future of the prepared food business by expanding sales opportunities in the Middle East, Eastern Europe and Africa. Canned pineapple is our primary prepared food product in terms of sales and there is an industry shortage of the product sourced from Thailand which does not impact us. Canned pineapple is a profit leader for us, particularly in the highly competitive UK market.

Del Monte branded juice also showed tremendous promise and we efficiently capitalized on our existing infrastructure in Kenya to expand our platform for our juice in that rapidly growing market. We also introduced our juice and canned products in Asia and ice creams into the (inaudible) markets and elsewhere in the Middle East during the quarter.

As you know, we recently received a statement of objections from the European Commission regarding our Northern European banana business. We are analyzing this statement of objections as well as the Commission's file and will (inaudible) to their preliminary findings. We strongly disagree with the allegations that we violated European competition laws and look forward to the opportunity to present argument in support of our defense.

Going back to Asia, we also enjoyed a very good quarter. As you know, we sell two primary products in this region, bananas and pineapples. And both products sold well during the quarter. Cold weather in the Philippines resulted in less fruit but strengthened pricing in Korea and Japan. Pineapple sales also grew due to our expansion program in the Philippines aimed at growing more and more pineapples to distribute to Asia and the Middle East.

During the quarter we restructured our sales teams in Japan, Korea and Hong Kong to position us to gain a greater share of the growing supermarket business in those countries. Our highland honey banana remained in strong demand by consumers and we brought more bananas to market to meet that demand.

During the quarter our investments in the Middle East began to pay off ahead of our expectations. Demand for bananas is very strong in the region and this demand combined with inclement in the Philippines helped to boost pricing and profitability in both regions. The Middle East is also a growth area for pineapples and we are looking to expand pineapple sales as well as sales of other fruit in that region.

Our (inaudible) business in Jordan continued to perform well during the quarter with better sales profitability and margins. This business is very strong and it is a major contributor to our success in the region. We are opening the most modern state-of-the-art meat processing facility in Jordan and we began to test five different lines of processed meats earlier this month. Our extensive Fresh Cut operations in Dubai opened three months ago and we have strong demand by quick service like McDonald's, Pizza Hut, Target, KFC to name a few. And finally the restaurant customers for our fresh cut salad and fresh cut fruit.

We are introducing all of these products to a region where products with this level of quality and consistency were not previously available which provides us with a competitive edge. With our freshly squeezed juice capability to come on stream any day we expect tremendous growth in this region.

As we look ahead to the balance of the year we are optimistic that the remaining two quarters will contribute to strong performers for the entire year. As you know, the third quarter is historically the most challenging for our business. Nonetheless, we do expect our sales in third-quarter results to exceed last years. We base this outlook on several factors. First, our stepped up cost savings programs are clearly working and we believe that they will help us to overcome the higher fuel pricing that we are forecasting for the balance of the year.

Of course there will be other uncontrollable factors to contend with, there continues to be some uncertainty about what will transpire related to the EU (inaudible) which will amount to a more competitive environment in Europe. But we see no change in the current system in the short-term and we doubt there will be any additional impact this year. Meanwhile we worked diligently in the third quarter to mitigate uncontrollable factors including those related to containerboard and raw material costs.

Second, we are making every effort to expand our customer base and marketshare around the globe and increase our revenues and profitability organically. Third, water related issues in Europe are continuing to drive healthy sales of bananas and we are benefiting from a lack of competing fruit in the North American market specifically East Coast Stone fruit.

Finally, I believe that 2007 could be the turning point for the prepared food business. I'm very pleased with how that business has developed and I'm hoping for a continued improvement. In short, I am confident that we have taken the right decisions and measures to put us on the right course and we can see the future more clearly every day. John?

Thank you, Mohammed. Good morning, everyone. We had a great second quarter, delivering strong profitability in our fresh and prepared food businesses. The fact that we made this progress underscores the strength of our strategy. It also shows that we are able to leverage these initiatives to offset the impact of higher fruit and distribution costs.

For the quarter EPS was $1.10 per diluted share including asset impairment and other charges totaling $5 million or $0.08 per diluted share. Net sales were $924 million, 2% higher than last year's second quarter. Gross profit was $120 million, a 66% increase from last year's second quarter due to operational improvements, strong pricing across all product lines and short-term currency benefits in Europe and operating income increased $80 million to $67 million due to gross profit increases and lower SG&A expense resulting in an operating profit margin of 7%.

Let's now review the second-quarter performance of our different business segments on a regional basis. In our global banana business segment net sales for the second quarter increased 4% to $325 million. Gross profit rose $17 million to $31 million due to the significantly higher pricing in North America and Asia which was partially offset by lower volume and higher fruit and distribution costs. Worldwide pricing for the second quarter increased 13% to $12.65 per box which includes a significant benefit from favorable exchange rates in Europe.

Banana net sales in North America increased with volumes that were in line with last year and higher contractual pricing. In Europe net sales were also in line with the prior year period with favorable exchange rates offsetting lower local currency pricing and volumes. In Asia net sales were slightly lower with significantly higher pricing on lower volumes resulting from inclement weather in the Philippines and the negative impact of exchange rates. In our Middle East operations banana net sales rose substantially, driven by higher pricing due to lower volumes, also the result of poor weather conditions in the Philippines, and increased demand for Del Monte branded bananas.

In our other fresh produce business segment net sales increased $7 million with favorable exchange rates offset by a 5% volume reduction due to do fruit and vegetable SKU rationalization. Gross profit increased $26 million or 55% to $74 million which provides us with a gross profit margin of 16%, primarily driven by our global cost reduction program and closure of our Hawaiian operations.

In our gold pineapple category net sales increased 3% to $114 million with pricing slightly lower and a 3% increase in volume. In North America net sales decreased with pricing that was in line with last year on slightly lower volumes. Sales in Europe were higher; pricing was in line with the prior year period and volumes were higher. We also continue to hold the premium pricing position in our industry in North America and Europe. In Asia sales were higher with lower pricing on higher volumes, a planned increase as we began to expand our gold pineapple to the Asian and Middle East retail market.

In our melon category net sales in North America and Europe decreased 2% to $75 million with pricing in line with last year on slightly lower volumes. In Europe cooler weather impacted consumer demand for this product which resulted in lower sales. In our fresh cut category net sales increased 1% during the quarter on planned lower volumes with significantly higher pricing. Sales and volumes in North America were down with increased pricing, the result of the success of our net across the board per unit price increase and ongoing elimination of lower margin SKUs. Sales in Europe were higher on lower volumes and stronger pricing due to the effect to favorable exchange rates.

In our nontropical category which includes avocados, net sales increased 21% to $94 million with higher volumes and significant pricing gains. Nontropical sales in North America were up sharply with increased pricing and volumes we're in line with last year at this time. The solid growth in North America was attributable in part to our avocado productline and our ability to supply the market with Chilean avocados when the California avocado production area was affected by cold weather.

Our ability to respond quickly to changing market conditions is a key advantage of our geographic diversification effort and our ability to tap multiple sourcing areas to supply market needs quickly. Sales in Europe were also strong due to product shortages which drove pricing gains. In our tomato category net sales were up 4% to $44 million with strong pricing. The increase in net sales was a direct result of the elimination of low margin varieties and for the first time in the past five quarters we're experiencing sales level above the prior period.

In our prepared food business segment net sales decreased 7% to $84 million and gross profit increased more than 50% to $13 million with a gross profit margin of 16%. The strong performance was a direct result of the rationalization of Italian and South African business's in 2006 and our ability to meet industry demand in the canned pineapple category.

In our other products and services business segment net sales for the quarter increased 10% to $43 million. The increase was driven by higher net sales in our poultry and grain businesses; gross product was in line with last year at this time. The foreign currency, exchange benefit at the gross profit level was $9 million during the second quarter of 2007 compared with a $[15] million benefit during the same period last year. SG&A expenses during the second quarter of 2007 decreased $4 million to $47 million. The decrease for the quarter was attributable to the restructuring of our sales and marketing teams in our prepared food business.

Interest expense in the second quarter increase $2 million due to higher interest rates. We recorded a tax benefit for the second quarter of 2004 of $4 million primarily due to the finalization of a tax audit in Europe which released previously established reserves. As of the end of the quarter debt, including capital leases, was $382 million, an $88 million decrease from year-end 2006. We anticipate capital expenditures for 2007 to be approximately $1 million -- $100 million, excuse me. This concludes my financial review. Jay, you may now open the line for the question-and-answer period.

(OPERATOR INSTRUCTIONS). Heather Jones, BB&T Capital Markets.

Good morning. Congratulations on the quarter. I have a couple of questions. As far as your other produce business, the improvements there, are how much of it was -- it seems like the majority of it is these cost reduction issues; but I'm just wondering if you can quantify the 500 some basis point improvement year-over-year, how much of that was pricing and how much of it was these cost reduction issues that you're referring to?

Our products were up on the sales side, but a lot of it had to do with the cost reduction program, the closure of Hawaii was very important and what we did in some of the other products that we reduced, our onion program, our potato program and so forth, our SKUs in fresh cut also contributed significantly to that growth and our nontropicals did very, very well.

Was this an avocado thing you're referring to?

Our avocado program is very good, very strong.

And you mentioned some logistics, distribution and sourcing changes in melons that really helped. Can you elaborate?

Yes, we were able to utilize our U.S. business better.

Than last year?

Yes.

Okay. And wondering -- I understand EU pricing is dramatically higher than last year currently because of these competing fruit issues you spoke of. But how is Asia tracking in Q3 so far? Is it up as much as Q1 and Q2 were or has it come in some? I just wondered if you could help us with that.

No, the prices in Asia are not as high as Q1 and Q2, but they are not as bad I believe as Q3 of last year.

So they are above last year?

I believe so, I'm not so sure, but I believe so.

Okay. And then this is two related questions. I was wondering what the average age of your refer fleet is and what percentage of your capacity you currently own?

Well, we own 23 ships -- I don't have the age specifics at hand.

I guess my question really is there's a significant tightening of charter capacity and I was just wondering if you have any intentions regarding new build or what your plans are for the future?

We don't know. At this time I think new buildings are going to be too expensive. It's much cheaper to charter buses today in the market rather than going and buying -- investing in new building. So we have 23 ships, as John mentioned, and we are utilizing them and we are chartering long-term charter sun ships and we do some spot charters. So we are quite covered in this area.

So you are somewhat exposed to spot?

We're not exposed to spot. When we need to have spot during for instance the melon season when we have high peaks then we do get a ship or two during the season, but we don't usually go too much for spot charter. We do have long-term and/or (inaudible) business.

Okay. This shelf registration that you filed a few weeks ago, could you elaborate on what the intended use of proceeds would be?

At this point it's a universal shelf and I think what's in the document speaks for itself and at this point I don't think we have any further comments.

Okay, thank you.

Jonathan Feeney, Wachovia.

Thank you, good morning. Mohammad, I guess -- I'm sorry, I had a little technical difficulty earlier in the call. Sorry if you've addressed it already. But it seems to me like this is the first quarter in a long time that it looks like pricing is flattish, and you said slightly lower in this week-old pineapple. Do you think we've finally reached a point where I guess pricing is kind of at an equilibrium?

I believe that the pricing now is the most -- in my opinion. First of all, let me say that we are very satisfied with the level of pricing in the market today. Secondly, I believe that this is a more stable pricing than we have seen for months so I believe that -- I don't anticipate any deterioration in pricing than what we see today.

Good, and I guess what factor do you think made it like take -- I mean, it's been kind of gradually getting less worse the past few quarters. Is it just less competitive fruit out there or what?

No, it's not less competitive fruit. On the contrary, the competitive there probably in some areas have increased. I believe that, as we said for the last seven, eight years maybe if you look at every statement we made. We believe that Del Monte is the leader; we believe that Del Monte quality is the most consistent. We believe that the consumers demand Del Monte quality and they want it and they are ready to pay $3 and $4 sometimes more than any other label on the market.

On the other hand, consumption has increased significantly in the last I would say 7,8 years on pineapples, (inaudible) consumption, so this has helped. On one side the consumption has taken over care of additional volumes on the market. On the other hand, we know that we are believers, we know that our quality is the best and we know that we will maintain and remain in this position for many years to come.

You have to take into consideration as well that we believe some of the growers that had started pineapple production three years back are pulling out this pineapple from their fields and putting some other crop there because of the sustained losses they had in getting over the last couple of years. So we know that some of the -- a lot of these growers that are producing and shipping pineapples are losing money. And we know at the end of the day that rationalization will take place.

Thanks. And I guess you made a comment in your prepared remarks, Mohammad, about the tariff potential in the EU. And I know there's nothing set in stone, but you did comment that it could change the competitive dynamics if say tariff reduction of some kind which has been talked about does happen. Could you clarify that a little bit more? Do you really think if the tariff came down it would be a net negative for you guys?

I don't believe so. No, I didn't say that. I believe that in the short-term I don't believe there should be any change of what system is on the ground today. On the second hand, I believe if there would be tariffs it might encourage other producers or other players to come into the market. However, we have to take into consideration that the banana supply itself -- if you look at the macro picture the banana supply itself is not increasing. On the contrary I believe in some areas it is decreasing.

So we have to take this also very, very carefully focus on this going forward. I feel -- I've been in this business for over 40 years and I know that the banana business is going into a different direction from what it is used to be in the last seven, eight, 10 years. The banana, unfortunately the competition did not realize that they were losing hundreds of millions of dollars because of (inaudible) that could have them. And we were hit as well ourselves by sometimes adopting certain actions that have been taken.

We have decided since last year to take a different course, and that's why you see our pricing has improved. I mean, in many areas, especially in North America. But I believe that the banana supplies will definitely come to a point where demand will -- supply will just be enough for demand.

Thanks. And just one detailed question, probably best for John. I don't know -- could you give us a sense -- there's obviously a huge margin increase in both bananas and other fresh produce. What impact fuel costs had if any on those two segments?

Actually this quarter the impact on fuel was very minimal, John. Almost nonexistent, but the pricing was not that different than from the previous period. So going forward we'll have to see. Basically it was about a $1 million negative impact, about a $10 a ton difference in price. So almost no impact there. We did pick up some benefit from inland transportation due to the way we move our product around, some of the efficiencies we gain in our U.S. business from redirecting our inland transportation.

Great, thanks so much, guys. Congratulations.

(OPERATOR INSTRUCTIONS). Eric Larson, Piper Jaffray.

Good morning, everyone. Congratulations on a great quarter.

Thank you.

I'd like to focus on really your strategies and your new business initiatives in the Middle East which I'm surprised that the returns are coming as quickly as they are. And it seems to me that you do have a competitive advantage with knowledge in your Company in those areas and it just seems that you also may have more time before competition can maybe catch-up to you in those areas. How do you view that? How big could those -- and equally as important, it's sort of incremental demand; it's where product hasn't been before so it also maybe has a tendency of tightening up supplies around the world to help your other businesses. Could you talk a little bit about the Middle East initiatives and how big that could be and what that's doing elsewhere?

As I mentioned in earlier conference calls, we believe that the growing market, the Middle East and some countries in Africa as well as some ex Soviet Union countries like Kazakhstan, Azerbaijan and all these countries, but almost they have one thing in common which is a lot of petro (inaudible). And petro (inaudible) has created a huge, huge boom in these countries and comes along with that everything that they need.

So I think we have come into the market as Del Monte as the very right moment to invest and to start putting our product in this market. And the kind of improvement in growth that we see literally week over week or months over month is phenomenal, be it in the canned business, be it in prepared, be it in fresh salads. And as I mentioned in my prepared statement, that within a couple of months we had almost every quick service chain had been approaching us -- we haven't been approaching them, they have been approaching us -- to give them our products in salads and cut fruit.

We have been asked to start supplying them with other prepared items that we are producing in the UK or the North American operation. So what I'm trying to say is that the potential for growth and the potential for expansion in these markets -- and when I say these markets, not necessarily just in the region and the Gulf region, but I'm talking about North Africa which is a very huge market as well, where we are gaining a tremendous marketshare there -- especially in Algeria.

These markets in my opinion are going to be very important for us in the future. Our cold markets will remain our rock, but where we believe our additional revenues and additional income will be coming from these developing markets. And you have to take a very important fact that the margins there are far let's say attractive than what we see the in the developed markets like Europe or North America -- first because the competition is much less; secondly, because the demand is exceeding supply.

So in short we believed when we started the poultry business in Jordan people doubted what we were doing and there was a lot of skepticism -- skeptics about sales, but now I think it's one of our most profitable businesses as a division in the world and it's continuously doing that and expanding on that. And I believe that the other businesses that we are starting in the Gulf, be it in the whole fruit or fresh cut or salads or prepared meals, we'll do the same thing as we go forward.

In your logistics system, Mohammed, right now is the demand for these new markets significant enough that you can match well he tightened supplies in certain products in certain of the developed markets?

What do you mean by that -- sorry?

Well, if diverting an additional ship of bananas or whatever per week that would normally have been put into the European or -- I'm just using bananas as an example, into the European or Asian or North American markets that can go into these new markets that doesn't show up in the developed areas and help the supply situations in your developed countries.

Exactly, this is very true. We are leveraging that very, very much especially from the Philippines. I mean I can give you an example. A couple of months ago we had an oversupply situation in Costa Rica and we immediately sailed one ship from Costa Rica to the Gulf and we sold that food without any problem over there just like that. So on the production side we eased their situation. On the market in North America or Europe we did not overload them with bananas and we found a market with a nice price -- with a profit.

And the same happens with the (inaudible) for instance. When we see the market (inaudible) is a little bit saturated we divert some of the fruit to the Middle East where we can sell it and still make more money. We are the only company in the Middle East that we have our destiny in our hand. We have our own distribution; we have our own salesforce, we have our own whole markets. We are not a company that depends on distributors or Asians. We are the only company, and that's very important to know, that we are the only company in our field that we have our own infrastructure, our own salesforce and everything we sell is ours.

Okay, great. Thanks, guys. I will follow-up off-line.

Heather Jones, BB&T.

Thanks, just a couple of quick questions. One, going back to your comment about you're seeing lower banana supplies out of certain countries. I was wondering if you could identify those countries where you're seeing -- I guess the one that would be most relevant would be those with permanent declines in banana supply.

I believe that Colombia is on the decreasing side. I believe that Costa Rica is more or less static. Ecuador hasn't been increasing. Panama probably is static or going down. So if you look at the whole picture and don't forget that the costs are increasing tremendously in these markets. Unless the selling prices in the market respond to this nobody can survive. And that's why I said we need to make sure right now we almost breakeven on our bananas in North America on the (inaudible).

This is not satisfactory for us. We believe that we should be fairly compensated for what we bring into the markets, it takes a lot of time and effort and investment to produce these bananas. And I believe that we have made definitely a tremendous effort in the last 12 months to bring the price up and to at least cover or come near to our breakeven point in costing, but I believe that this is still not enough to justify millions of boxes of bananas into the market and not being able to make a decent return on that.

So I believe that we have a challenge as an industry on one side the cost of the producing country is on the -- going up and that's a fact. And the prices in the market are not yet reflecting that additional cost. And I believe that there will be room for that and that's the kind of thing that we at Del Monte, we will continually applying.

When you say almost breakeven in the U.S. are you talking about on an EBIT basis or a gross margin basis?

I'm talking about our cost related to our selling price.

Okay. And then finally in the Middle East, what are you defining as the Middle East? Because Chiquita has a pretty significant relationship with retailers in Turkey and I believe they're selling into other markets. So my question there is have you seen any increase in competition say over say the last two years and just a few could speak to that.

First, (inaudible) used to be our customer before and we dropped it. So I'm not so concerned about that. The second thing, Middle East, as I said a few minutes ago to Eric, we are the only company that we are operating ourselves in that region. We don't have distributors or agents that sell our food there. So I cannot compare myself to others. We do have our own business there and it's a different concept, it's a different way of doing business. We make our decisions ourselves we don't depend on someone else to make a decision for us.

When you say your own distribution -- are you talking about what you've done in the U.S. where for instance Chiquita and Dole sell directly to wholesalers or to the retailer and you have this DC network? Are you talking about that?

Yes, exactly. We do have our own (multiple speakers) distribution centers and distribution fleet and salesforce.

Okay. All right, thank you very much.

And that concludes the time allocated for the question-and-answer session. I will now turn the call back over to Mr. Abu-Ghazaleh for closing remarks.

Well, I'd like to thank everybody for being with us on this conference call. And as I always say, we will look forward to talk to you soon in the future and hope to give you better news as we go forward. Thank you and have a good day.

Once again, that will conclude your conference for today. We do thank you for your participation. Everyone please have a wonderful day.