Fresh Del Monte Produce Inc (FDP) 2007 Q4 法說會逐字稿

Good morning, everyone and Welcome to Del Monte Foods fourth quarter 2007 conference call. I'd like to remind you that today's call is being recorded and that all lines will be muted during the call. After the presentation, we will begin the question and answer session. If you would like to ask the question during this period, please press star 1 on your touch tone phone. If any participants needs assistance, please press star zero.

At this time, I'd like to turn the call over to miss Christine Cannella for opening remarks and introductions. Please go ahead, ma'am.

Thank you, Sarah. Good morning, everyone. And please let me welcome you to Fresh Del Monte's fourth quarter and year-end 2007 conference call. I am Christine Cannella, Assistant Vice President of Investor Relations. Joining 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 fourth quarter and full-year.

Fresh Del Monte issued a press release this morning by a Business Wire, e-mail and first call. You may visit our website at www.freshdelmonte.com. to register for future distributions. 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, 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 fourth 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 and 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.

This call is the property of Fresh Del Monte Produce Inc., redistribution, retransmission or rebroadcast of Fresh Del Monte Produce's call in any forms without our written consent is strictly prohibited. With, that I would like to turn the call over to Mohammad Abu-Ghazaleh. Mohammad.

Thank you, Christine. Good morning, everyone. The fourth quarter of 2007 was another outstanding period for Fresh Del Monte Produce and a continuation of our strong performance from previous quarters. We are particularly proud of the fact that we delivered this excellent performance in spite of higher costs.

Net sales for the quarter were 15% higher year-over-year at $848 million and on an adjusted basis, we generated EPS of $0.68. We also performed operationally at the very high levels. During the quarters and throughout the year, we benefited from improvements we made in all of our business segments, which enabled us to restore our track record of creating enhanced shareholder value. This significant changes that we made in our North America business during the year were major contributors to our success in the fourth quarter. We continue to improve banana contract pricing, countering higher production and logistics cost. And we gained new contracts in strategically important geographies like the West Coast and the Northeast. Our competitive position in gold pineapple category remained strong with steady sales and pricing in line with last year's fourth quarter. We continue to stay in line our fresh-cut business, driving efficiencies in our logistics networks and we secure several major new contracts to further maximize production. We also expanded our fresh-cut customer base during the quarter, adding several leading grocery store chains in the Northeast and Midwest. We continue to believe that the fresh-cut category presents a key growth opportunity for us.

In Europe, we began to benefit from repositioning our prepared food business. We continue to regain lost shelf space in the U.K. market and we made progress in restoring our position as a premium brand with major retailers. We also streamlined our operations and began to outsource distribution. A move that we believe will make us more efficient in this highly competitive category. In a related measure, we will close our juice plant in the U.K. during the first quarter of 2008, which will further improved our cost structure. During the quarters, our European banana and pineapple business performed well with remarkably strong pineapple sales and pricing during the Christmas season. We continue to see strong growth in our gold pineapple category in Europe. We anticipate that our banana business in the U.K. will remain strong as we gain new customers and continue our strategies to enter only into favorable banana contracts. Canned pineapple is a key product in our European preferred business. And as you know, pineapples from Thailand and Indonesia has been in short supply and still is. Our cut canned pineapple, however, comes from other sources, which positions us well in the marketplace.

In Asia, we experienced increased gold pineapple sales with both higher selling prices and increased volumes. Our banana business in Asia also experienced increased selling prices on stronger sales to retail supermarkets. During the quarter, we continued to expand our highland hand banana and gold pineapple production in the Philippines to meet growing demand in Asia. We also expanded our distribution and ripening center in Korea to meet this growing demand. It is important to note that the pricing increases we saw in Asia during the quarter were not enough to offset the upward pressure on cost. These samples pressures also infected our North America and European operations.

We continue to grow in emerging markets as in the Middle East during the quarters. Demand for bananas and other products is on the rise and we are moving swiftly to meet that demand. During the quarter, we made progress in the development of three new distribution centers in Saudi Arabia. We recently gained approval to supply McDonald's outlets across the entire region, including the United Arab Emirates and Saudi Arabia. We continue to supply the U.A.E. national airlines. We are exploring the possibility of supplies in schools throughout the U.A.E. And in the least time, we will begin to supply Egypt and Saudi Arabia with our shelf-stable juices that are produced by copacker, which are efficient and low-cost way to gain traction in this markets. Our Jordan meat processing plant continues to ramp-up production. We believe, we will see even stronger results in 2008. The Middle East offers us many opportunities and we are well point to leverage those opportunities in the future.

A key to our success is our ability to top into the power of the Del Monte brand, to create new end-roads in these fast-growing markets. Much of our progress is due to enduring consumer faith in our 115-year-old brand, which symbolizes quality freshness and reliability. We are justifiably proud of our performance in the fourth quarter and throughout 2007. The fact that we were able to overcome the continuing effects of higher fuel procurement and food production costs is a testament to the expertise and commitment of our management team and the dedication of our 35,000 employees around the world. Our performance is also powerful endorsement of our business model. Our Mission is and always has been centered on increasing shareholder value. To fulfill this Mission, we focus on offering products and services that meet the needs of our customers and enable us to improve profitability. Why this Mission requires discipline implementation, it also falls for flexibility and resilience to inherent qualities that we demonstrated yet again in 2007. When in spite of continuing cost pressures, we delivered one of our best years and the best fourth quarter ever in terms of financial results.

As we advance in 2008, we are optimistic about our futures, in spite of the strong headwinds that we see in front of us. We continue to perform well around the world and part because of our efforts to increase pricing, improve our operating efficiencies and eliminate costs. We are ramping up these efforts, even further in 2008. And we remain confident in our ability to mitigate rising cost that are significantly impacting our industry. Meanwhile, we're positioned to perform well regardless of the state of the economy. From the [nonsell] foods like fruits and vegetables are not discretionary purchases. Consumers buy them in good times and bad times. So we tend to fair well in every economic environment. We see tremendous opportunities ahead and we remain committed to growing the company, improving our operations, expanding and to developing an emerging market while introducing new products to meet consumer demand. I would like to pass it over to John, so he can give you some highlights on our financials.

John?

Thank you, Mohammad. Good morning, everyone. As Mohammad said, the fourth quarter was the best fourth quarter ever for Fresh Del Monte Produce and we're proud we delivered significantly improved shareholder value, particularly in an industry environment of rising cost.

For the fourth quarter of 2007, excluding as an impairment, restructuring and other charges, EPS was $0.68 per diluted share, compared with a loss of $0.3 per diluted share in the fourth quarter of 2006. Net sales jumped 15% to $848 million compared with $738 million in the prior-year fourth quarter. Gross profit was $75 million, 23% higher than the $61 million in the 2006 fourth quarter and operating income grew 147% or $18 million to $30 million compared with $12 million in the prior-year fourth quarter.

Let's now review the performance of our business segment in the 2007 fourth quarter. In our global banana business, we saw a continuation of the trend we had noted throughout the year. Strong pricing across the board due to better contracts in North America and increased worldwide demand for bananas. Net sales for the fourth quarter grows 18% to $309 million with a 6% increase in volume and a 12% gain in price. Gross profit was in line with last year at this time due to higher pricing in North America around the Middle East partially offset by increased costs. Worldwide pricing for the fourth quarter increased 12% to $11.44 per box compared with $10.25 per box 1 year ago. Banana net sales in North America increased 4% despite a reduction in volume.

In Europe, net sales increased 16% with higher volumes and pricing in favorable foreign exchange rates.

In our Middle East banana operations, we saw higher volumes and pricing, a result of increased demand.

In Asia, sales decreased 3% on lower volumes and higher pricing. Although a pricing was higher year-over-year in all regions, the cost of fruit production and transportation including fuel increase during the quarter.

In our other fresh produce business segment, overall sales were up 4% with increased pricing and slightly lower volumes. Our Gold pineapple category performed well during the quarter with strong sales driven by healthy volumes and premium pricing, a continuation of market characteristics we saw throughout the year. Net sales increased 16% to $114 million. Pricing was higher by 9% and volumes grew 6%. We continue to benefit from cost improvements we implemented in this product and in late 2006 with the closure of the Hawaiian pineapple operations, which has helped to improve profitability. In North America net sales of Gold pineapple was strong with the improved volumes and higher pricing. Net sales of Gold pineapples in Europe also increased due to pricing gains and the benefit from favorable foreign exchange groups. In Asia, sales, pricing and volumes were also strong.

In our melon category, fourth quarter sales grows with pricing gains as we saw higher volumes than last year at this time. In North America, we experienced strong sales and higher pricing due to lower domestic industry volumes. In our fresh-cut category, our business continues to gather momentum. As you will recall, on a global basis, we have redirected our emphasis from selling fresh-cut vegetables to selling more high-margin fresh-cut fruit, which tends to be more profitable. As a result during the quarter, net sales decreased while pricing grows in North America and Europe. In our tropical, non-tropical category, net sales increased 5% to $38 million, with strong volume gains over the previous year.

This increase was due in part to a strong 2007 Christmas season, which we did not experienced in the prior year. We are aggressively growing our avocado business in the the United States and we see great potential going forward. Non-tropical sales also continued growth in the Middle East with increased sales in our grape and apple product line. In our tomato category, net sales grows 6% driven by a higher pricing and volumes. Costs were higher as independent growers reduced volumes and acreage. In our prepared food business segment, we're pleased to report that sales grows 54% to $109 million from $71 million last year at this time. Primarily driven by the outsourcing of our products to distributors. In addition, volumes increased 31% and pricing grew 18%. We also saw a gross profit of $16 million compared with a loss last year of $12 million. Our success in prepared food is primarily due to strong canned pineapple sales during the quarter and the closure of our Italian juice operation in 2006.

In our other products and services business segment, net sales for the quarter increased 19% to $57 million compared with $48 million last year. This increase was due to growth in our poultry and grain businesses. Gross profit was up 6% to $5 million, primarily due to our grain business in Argentina. The foreign currency exchange benefit at the gross profit level for the quarter was $13 million compared with $8 million in the prior year. For the year, the foreign currency exchange benefit at the gross profit level was $49 million compared with $42 million in 2006. Conversely, we were impacted by a $12 million increase in fuel during the fourth quarter and a $14 million increase in fuel for the year. For the quarter, SG&A expense decreased $3 million to $46 million compared with $49 million in the prior-year period, primarily due to a European marketing campaign that was not repeated in 2007.

Other income in the fourth quarter was $20 million compared with other expense of $7 million in the prior-year period. This increase was primarily from a $13 million gain in foreign currency due to favorable exchange rate movements in the Euro, British pound and other currencies versus the U.S. dollar. And $6 million from the sale of non-performing assets on a full-year basis other income was $32 million compared with other income of $400,000 in 2006. Primarily due to a $15 million gain in favorable foreign currency exchange rates and $17 million from the sale of non-performing assets. Interest expense net in the fourth quarter of 2007 was $4 million compared with $8 million last year at this time. As we significantly reduced our debt level to $239 million from $470 million at the end of last year. A combination of cash flow generated from our strong performance and proceeds from our equity offerings led to this significant debt reduction. Provision for income taxes for the fourth quarter of 2007 were $4 million primarily due to provisions for uncertain tax positions in the current year. Capital expenditures for 2007 were $81 million or 2% of revenues compared with $102 million in 2006. We expect capital expenditures in 2008 to be $120 million as we continue our organic growth in the Middle East, the Philippines and Costa Rica.

This concludes my financial review. Sarah, could you open up the conference call to the question and answer period.

Thank you. The question and answer session will be conducted electronically.(OPERATOR INSTRUCTIONS)

And we'll take our first question from Mark Churchill with Piper Jaffray & Co.. Please go ahead.

Hey, it's and excellent quarter, guys.

Hi, Mark. Good to have you on with us.

Oh, yeah. Taiwan and Indonesia supply weakness continues to help your business. How long do you expect that to continue? On the pineapple business?

What do you mean?

The canned pineapple.

Are you talking about the canned pineapple business?

Yeah.

We're seeing that there are still shortages in the producing countries and that could take us today. And that could take us to the end of the year.

All the way through 2008?

Yes, that's what we believe.

Okay. And on the last call, I think you mentioned the expectation of maybe some rationalization of competitive pineapple growers in Costa Rica. Are you guys seeing that yet or are we going to have longer to wait for that?

We're really not up anymore interested in whatever is being done in these countries because we have been saying this for the last five, six years that we know where we are and where our position is and whatever additional volumes that we procure through our own production or through independent growers is being placed in the market without any difficulties. So, it means our price has been have or our ability to distribute this volumes. So, really, the question of more acreage or less acreage is not anymore, you know, kind of a worry for us.

Okay. Thanks a lot. I'll jump back in the cue.

Thank you.

Thank you. And we'll take our next question from Jonathan Feeney with Wachovia Securities. Please go ahead.

Hi, good morning. This is...

Good morning.

Hi, Jonathan.

This is John [DiMarco] on behalf of Jonathan Feeney.

Jonathan, you're not coming through.

Can you hear me?

No.

Can you raise your voice a little bit, please?

Sorry, this is John DiMarco on behalf of Jonathan Feeney.

Yes, go ahead.

Sorry about that. Can you quickly detail how today's inflationary energy cost environment, mostly the income statement and specifically, sir, how it looks today versus two months ago? It looks though like it has got a little bit more inflationary and for the last detail, whether you would anticipate pricing to keep phase with the acceleration and bunker fuel costs?

Yes, as we stated, the fuel impact in the fourth quarter was $12 million negative and for the full-year it was only 14. So, you can see how fuel is beginning to impact the big and less bunker fuel. By the way, is beginning to impact the business and we have to take steps to overcome that. So, yes, we are seeing that as an issue.

And you feel like you're playing catch up with those cost, you're in front of it or just on pace with it?

Well, as I motioned earlier, we're always on top of our cost and we always make sure that, like I said, even in the worst environment, we have still did better than anyone expected, and we still performed better than the industry. So, I believe that this is a testament that we can handle whatever challenges that we face in the future.

And one quick - - one more quick one, if I may. Could you please discuss the magnitude of this, the impact you would expect to see in, I guess globally-speaking, banana prices relative to some of the plantation destruction that's being reported in Ecuador?

This has been, the shortage that we see today actually didn't happen overnight. It's being developing over the last maybe two years. And I mentioned that earlier in one of my conference calls, that I see shortages and I saw less production going forward. And this still, I stand by my belief that production is going to stay probably tight. What we see in Ecuador, actually is only - - it's not a huge distraction of funds. There is, of course, distraction of some of the funds, there were some acreage being flooded. But, I think the major element here is that demand has been increasing and consumption has been increasing and production hasn't been going up in the same ratios. And the reason for that is because suppliers were losing money and [we might] propose as well. We're losing money. So, in either case, nobody was interested to go further and that I believe that if pricing does not improve significantly in the future, we will not see much bigger supplies as well in the future. So, this is something that you do day-by-day and you allocate your volume and your supplies according to the supply situation and the market situation.

And allocation on Fresh Del Monte, I believe that we are the only company really that understands this business and know how to handle this business and to manage our business. This is a produce and perishable business that you cannot manage. It's difficult to explain to somebody how do you handle these situations if you're not in the business. And we're in the business and we know how to handle these challenges and supply shortages or oversupply and that's what makes us different from everyone else.

Well, thank you very much for the details and congratulations again on this quarter.

Thank you.

Thank you, we'll take our next question from Vincent Andrews with Morgan Stanley. Please go ahead.

Good morning, everyone.

Hi, Vincent.

Good morning, Vincent.

Could you, in terms of - - let me start with your tax rate. Your tax rate, we calculated on a reported basis to be 11% in the quarter. How should we think about the tax rate for 2008?

I was saying that that time rate should be something like maybe 8% or so, 8, 9%. You know, as I said before, it's probably the most simple thing to predict where it's going because of the new tax rules and I voiced my concerns about estimating taxes for any business in the past, but I would use something like that. This was an anomaly having at this high when overall the tax rate was 1% on a full-year basis.

Okay.

It's going to swing around on us.

Sure. Now, appreciate that. And then, in terms of that $13 million related to foreign exchange and other income, is it a reasonable to assume if that's related to hedging gains that you had on foreign currency contracts?

The foreign currency gains are up in gross profits. These are on after we've committed our contracts and we turned them into receivables. There is that lag period. We also have a lot of activity within our concentrating activities between countries, which can affect the differences in exchange and quick movements in the rate can impact our business and basically with the Euro, the pound and other currencies that we benefited from in this case.

Okay. And then in terms of the prepared food segment, would you be interested in quantifying how much you benefited from the closure of the Italian facility versus how much you're benefiting from the canned pineapple issue?

No, at this point, we really don't disclose that kind of information, but both of them did have an impact and we see that, those trends continuing through 2008. The benefit from the closure of Italy will continue indefinitely.

Okay. And how should we think about where where you're hedged on foreign currency for 2008?

Well, to our policy as stated that we hedge around 50% of our currency exposure and that is what we usually do. Well, sometimes we hedge more, sometimes a little less, but we have currency hedging in 2008.

And no change to your bunker fuel hedging strategy?

Not at this time.

Not at this time. Okay. I will leave it there.

Thank you.

Thank you.

Thank you. And just as a reminder, if you'd like to ask a question, please press star 1, star 1 for questions. And we'll take our next question from Diane Geissler with Merrill Lynch. Please go ahead.

Well, good morning.

Hi, Diane, how are you doing?

I'm good. I just have a question on the components of other income that relates to asset gains, sale on assets. I'm wondering why those are left in the P&L when you call out after the impairment restructuring charges of extraordinary items.

Well, primarily, and especially in the fourth quarter and even in the full-year, the non-productive assets had nothing to do with the one-time, if you will, asset impairment charges. It was a sale of that so this quarter as a primary item in there and some farm assets that had nothing to do with the asset impairment. But, we did put $3 million, if you notice, in the attachment to the press release, and as a benefit enclose the sales for insurance recoveries related to the charge that we took last year for the fertilizer issue in Kenya.

Great. But, are the asset sales considered non-recurring items?

No, they are actually, there's a normal a counting. We have sales of assets all the time.

Okay. So, when we think about what we're going to plug into our models in the other income line in 2008, would we put in asset sales? I mean is that what you're.

We never know what told us that they're going to be at this point.

Right.

And if you looked at the plan we have done basically we have 0 in this.

Yes. i guess to me, asset sales should considered non-recurring because they're not considered part of the operations. They're just - - they happen periodically.

But, from a technical accounting, I can do that.

Right. Right.

I mean that is why we explained to you what they are in the uphaul and left it with aphaul. you can make your make a decision on that. But, that is why we explained it in detail in our conference call so that you would know what that represents.

Okay. I appreciate that. And then can i just say kind of more the general question about growth rates. You know since I have been working on the stock.

I'm sorry, Diane, you're starting to fade out. We have a terrible connection.

I'm sorry, can you hear me now?

Go ahead now. Yes.

I guess working on the stock over the last eight, nine years, what drives earnings? Obviously, been pretty volatile over that time and a lot of volatility has been linked to bananas. So, if we assume sort of bananas regulate over the next couple of years in terms of getting Europe, the situation in Europe worked out, et cetera, can you give us some idea? I mean you're seeing more in your Cap Ex budget on expansion in the Middle East, in fresh cut, et cetera. Kind of what is your internal target, your EPS growth?

We can not speculate on the EPS growth, but we can definitely say that we're putting this capital expenditure to expand our business and revenues and, of course, that net income at the end of the day. But, as we mentioned earlier probably on the previous conference calls, we estimate that our business in the Middle East could be up to 500 millions about three to four years from now. And that is what we said earlier, I believe.

Right.

So, that's the kind of growth. We believe that the growth will be coming not only from our traditional markets but from the emerging markets and we believe that growth will be significant.

Okay, but just in terms of the company as a whole?

What about the company as a whole?

What are your internal targets for growth on the EPS line over time with all of the what, you're doing in terms of these new markets.

Well, we had said it's too early to give you figures at this time. Hopefully, sometime in the future we can further list some guidance in that respect.

Okay. Well, that will be very helpful.

Thank you.

Okay, thank you.

Thank you. And just as a reminder, if you star 1 for question. Star 1 for questions. We'll take our question from Heather Jones with BB&T Capital Markets. Please go ahead.

Hey, guys, this is Bret Hundley. I'll be speaking on behalf of Heather. How are you doing today?

Good, Bret.

Mohammad, can you please address the performance in your other produce category. Last year, you performed around 63 million and I guess we were expecting a higher number. Would you mind comparing it year-over-year for me?

Yes. The gross profit in our other prepared food category in the 61 versus the 56; we're just talking about, primarily was a drop off in some of our other products. The pineapple was very strong in that category and our non-topicals were also good. We saw some define due to higher costs in melons and some of our vegetable category that was planned by us and also a little bit of additional expense in our fresh-cut operation and our tomato business was one of the major factors. So, it's a combination, very difficult to look at that category because of the mix of fruit, but I think everyone always asks the question how is pineapple doing and that outperformed the previous year. But, in the other categories that I mentioned, is where we have seen a decline.

Okay. Thanks for clarifying that for us.

Sure.

And then also, we understand that one of your competitors is invoking a force majeure and racing pricing by $2 a box in U.S. temporarily. Do you intend to follow that and relatedly, can you give some commentary on the pricing environment that you're currently seeing.

Well, as we motioned earlier that pricing in the bananas, especially in North America has been so much depressed over the years, and I think that it's logical that the prices should go up because the present pricing structure doesn't cover costs for bananas in the United States, so if one of our competitors is raising the prices and using the force majeure, that is demonstrating that that is reason for that. However, in our case, we are studying this situation. We conduct our business differently, and we will look at how we can work closely with our costumers and trying to what is the best formula for them and for us.

Ok, thank you, Mohammad. And i guess ,lastly, your competitor outlined cost increases in excess of $150 million. Are you seeing a similar cost environment there?

No, as I said earlier, they definitely on higher cost environment. We do feel it, I mean, be it on the field or on the fuel, be it in the ships and every aspect of our production profits, but we and our, you know, we mitigate our costs of production cost through other means and tools that we use. So I don't want to compare myself to our competition and what they do. As I said earlier to your question, we are a different company, I think we're the only company that understands this business and we know how to handle our business.

Right, okay. Okay. And then, I'm sorry, one last quick one, if I may. Jumping on the back of what Vincent was asking, do you have any of your fuel hedged into 2008?

No, we don't.

No, okay. All right, well, thank you so much for answering my questions.

Okay, thank you.

Thank you, it appeared we have no further questions at this time, Mr. Abu-Ghazaleh, I would like to turn the conference back to you for any additional closing remarks.

Thank you, Sarah. In conclusion, I think we would like to thank everybody for their attendance and their patience with us and I would like to just make sure that our investors and shareholders realize that we are doing the best that we can to grow our business and the company and to enhance shareholders' value and I believe that this is going to be our Mission for going forward, and I believe that we have very high confidence in achieving this. Thank you very much and hope to go and speak to you on our next conference call. Thank you.

Thank you, that concludes today's conference. We appreciate your participation, you may now disconnect.