Fresh Del Monte Produce Inc (FDP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce first-quarter 2009 conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and answer-session. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Christine Cannella, for opening remarks. Please go ahead.

Thank you, Jennifer. Good morning, everyone, and welcome to Fresh Del Monte's first-quarter 2009 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 Senior Vice President and Chief Financial Officer Richard Contreras, who will discuss our results for the first quarter.

Fresh Del Monte issued a press release this morning via 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 on our website, and it will be available for replay approximately two hours after conclusion of this call.

Our press release includes reconciliations of any non-GAAP financial measures we mention today to their corresponding GAAP measures. The press release may be found on our website, which again is www.FreshDelMonte.com.

This morning, Mohammad will review our operating performance during the quarter, along with recent developments and our future outlook. Richard will then review our financial performance for the first quarter of 2009.

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 10-K/A for the year ended December 26, 2008.

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 would like to turn the call over to Mohammad Abu-Ghazaleh. Mohammad?

Thank you, Christine, and good morning, everyone. Thank you for joining us for today's earnings call. Without a doubt, the first quarter of 2009 has been a story of contrasting results, as progress and achievement towards future growth was overshadowed by undoubtedly a disappointing and certainly lower than anticipated performance, with our sales and profitability constrained by several factors.

While we are not pleased with our overall results, we did remain focused on increasing efficiencies throughout our operations, and we effectively strengthened our already strong balance sheet.

We continued to achieve strong sales and profitability in our banana business, in spite of extremely difficult circumstances that I will discuss in a few moments. We also made substantial improvements in our North America fresh-cut business, and we further strengthened our core product lines.

As I said, we faced several factors that countered our progress and negatively impacted our results, including above-average rainfall and colder than normal temperatures that drastically impacted our banana and Gold pineapple production and sourcing areas of Costa Rica and Guatemala. We also encountered shipping delays due to unusually heavy rains.

These factors had a ripple effect on our operations including an increase in the ratio of second-quality fruit; disruptions in the efficiency of our shipping program; and higher costs associated with banana procured from Ecuador.

Our results were also impacted by lower than expected selling prices of melons; foreign currency exchange fluctuations; and the economic downturn that prevailed throughout the quarter, along with the change in consumer purchasing patterns.

On a positive note, our banana business in North America, Asia-Pacific, and the Middle East performed well during the quarter with strong sales and pricing due to tight global supply and increased demand. We were also able to increase our profitability in this business segment by passing along cost increases to our customers. We believe these good market conditions will continue in the second quarter of 2009.

Our Gold pineapple product category benefited from increased volume from our Caribana acquisition. However, during the quarter, pricing was lower primarily in Europe. The decline in Gold pineapple pricing is consistent with what we had experienced in the fourth quarter of 2008 when we began to see decreased demand due to change in the economy.

We continue to deliver the highest quality fruit commanding a premium price over our competitors.

We experienced excellent growing conditions in our offshore melon program in Costa Rica with tremendous improvements in products and production yields. Melon volume from the acquisitions we made in 2008 also contributed to our abundant supply during the quarter. Long-term, this is a positive news for our melon category and further solidifies our focus on securing production of our core products.

However, we faced unexpected and unprecedented oversupply in the North America and European markets, which experienced record low prices during the quarter. And our results were significantly impacted by the economic conditions.

Another positive for us during the quarter, despite the economy, there were improvements in our fresh-cut operations in North America. We continue to diversify and expand our customer base.

We implemented a strategy with our customers to improve the performance of their fresh-cut shelf space by further linking our SKU offerings in this product category to their customer demands. We are also implementing the same strategy with our UK customers as we move to improve and compete more effectively in this market, which continues to feel the impact of the global recession.

Our prepared food business had a good quarter. Profitability improved when we successfully implemented price increases across several of our product categories. Also we recently launched a new beverage line and a new frozen fruit products within our snack category, which have shown early positive consumer acceptance.

This past year I have spoken of the impact the economic downturn has had on our industry and how we have witnessed growers, wholesalers, and producers struggle. As market conditions grew worse during the quarter, so did the sustainability of a few in our industry.

Recently, one of the largest melon growers in Brazil exited the business; and just a few weeks ago a significant regional fresh-cut producer stopped operations. Many players in the fresh produce industry don't have the financial strength and lack the operating leverage needed to withstand current market conditions.

I have little doubt that we will see other competitors fall by the wayside. In the meantime, you can expect us to monitor this industry situation closely.

I said and we could not be more pleased with our financial strength and flexibility during these challenging economic times. While the competitive landscape is changing, we have no plans to deviate from our core strategy.

Before I turn the call over to Richard, I would like to say that we are very confident about the future of our business. In this economy, consumers are eating more and more at home, and their desire for value-driven fresh produce is increasing. I believe that health and wellness is still very much a priority, and consumers are not ready to abandon healthy eating habits developed over the years.

Our operations in the Middle East are expanding. We look to enter the Saudi Arabia market with the Del Monte brand in late 2009 when we open two distribution centers.

We have faced tough economic times before, and our performance in all economic conditions has demonstrated the resiliency of Fresh Del Monte Produce. While the current economic environment remains a challenge, we believe that with our core product focus, expanded production, and sourcing capabilities, and vertical integration strategy we are well positioned for long-term growth.

At this point, I would like to hand it over to Richard to give you some financial numbers.

Thanks, Mohammad, and good morning, everyone. For the first quarter of 2009, excluding asset impairment and other charges net, Fresh Del Monte delivered earnings per share of $0.56 per diluted share compared with $1.07 in the prior-year period; net sales of $880 million, 2% lower than last year at this time.

In addition, excluding asset impairment and other charges net, gross profit decreased $13 million or 14% to $84 million. Operating income decreased 18% to $47 million, and net income decreased $33 million to $35 million.

Now let's turn to our segment performance for the first quarter. During the first quarter we continued to see outstanding performance on our banana segment, including a 6% increase in net sales to $362 million. Worldwide pricing increase 7% or $0.90 per box to $14.54.

Volume was in line with the prior-year period, with increased demand for bananas in North America, Asia, and the Middle East regions. Unit costs increased at 3%, and gross profit increased to $44 million compared with $30 million a year ago, the result of higher selling prices.

The increase in gross profit was partially offset by higher costs associated with the growing and procurement of fruit in Costa Rica, Guatemala, and Ecuador due to adverse weather conditions that negatively impacted industry's supply.

In our other fresh produce business segment for the quarter, net sales were in line with last year at $419 million. We experienced strong sales in our melon and Gold pineapple product categories, driven by higher volume.

The increase in net sales was partially offset by lower volume and pricing in our tomato and fresh-cut product categories. Volume was 18% higher; unit pricing declined 15%; and unit cost decreased in 9%.

Gross profit decreased $26 million to $28 million, primarily driven by the impact of significantly lower melon selling prices in North America and lower selling prices of Gold pineapple, primarily in Europe.

In our Gold pineapple category, volume rose 20%, primarily due to the Caribana acquisition. Net sales increased 5% to $106 million. Unit pricing decreased 12%, primarily driven by weak demand in Europe and the negative impact of unfavorable currency exchange rates. Unit costs were 5% higher.

As Mohammad mentioned, we believe the decline in Gold pineapple profitability is primarily related to the economy, and this trend is consistent with what we saw in the fourth quarter of 2008.

In our melon category, volume increased 40% compared with last year's levels. Net sales increased 14% to $80 million. However, unit pricing declined 19% and unit costs were 4% lower.

The unexpected oversupply in the market and significant reduction in selling price had a drastic effect on our gross margin and was the primary reason our earnings missed expectations. The offshore melon season ends approximately the third week in May, and pricing since the end of March has increased.

In our fresh-cut category, volume decreased 7%, primarily due to weak demand in the UK market. Net sales declined 13% to $67 million. Unit pricing decreased 7%, primarily due to unfavorable exchange rates in Europe. Unit costs were 11% lower.

We continue to see profitability increase in our value-added fresh-cut product category in North America.

In our non-tropical category, volume increased 8%, primarily in our avocado product category. Net sales were in line with the prior year at $100 million. Unit pricing declined 8%, primarily driven by lower grape selling prices. Unit costs were 6% lower.

In our tomato category, volumes decreased 14%. Net sales declined 25% to $30 million and pricing decreased 13%. However, unit costs were 17% lower.

In our prepared food segment, net sales decreased 25% to $77 million. The decrease was largely attributable to lower demand in the UK, along with the impact of unfavorable foreign exchange rates in Europe. Unit pricing increased 10%. Unit costs were 4% higher and gross profit increased 10% to $11 million.

In our other products and services business segment, net sales for the quarter decreased 34% to $22 million due primarily to our third-party freight and Argentine grain business. Gross profit decreased by $2 million.

As previously mentioned, we faced a number of weather-related challenges that negatively impacted our banana and Gold pineapple production and procurement costs. Together, these factors led to an 11% increase in fruit costs for bananas we exported from Latin America and a 10% increase for Gold pineapple costs sourced from Costa Rica during the quarter.

On a worldwide basis for all products, fruit costs increased 3% and represented 71% of our total cost of sales for the quarter. Ocean freight costs during the quarter, which include bunker fuel, third-party charters, and fleet operating costs, decreased 8% on a per-unit basis. This cost represented 14% of our total cost of sales for the quarter.

The foreign currency impact at the gross profit level in the first quarter of 2009 compared with the first quarter of 2008 was negligible, as the unfavorable impact of sales was offset by the favorable impact on costs. The foreign currency impact at the sales level for the first quarter as compared to the prior year was an unfavorable $36 million.

SG&A decreased 6% to $37 million from $39 million last year. The decline was attributable to lower administrative expenses, primarily in Europe.

Other income net was a loss of $6 million compared with income of $12 million in the prior-year period. The 2008 first quarter included $11 million in favorable foreign exchange gains.

Interest expense net decreased by approximately $600,000. At the end of the quarter, our total debt was $493 million. This year we expect our capital expenditures to be about $115 million.

This concludes our financial review, and we will turn the call back to the operator for Q&A.

(Operator Instructions) Jonathan Feeney, Janney Montgomery Scott.

Good morning. Thank you very much. Mohammad, when you look at -- I'm struck by just the Sweet Gold pineapple business in Europe. We continue to see relatively strong volume there despite the fact that pricing is a little bit weak.

I guess structurally are you in a position to maybe pull in your horns a little bit, grow that business a little bit less, maybe redirect some volume other places, in the hopes of maybe supporting pricing? Because it seems like globally pricing is in a little bit better situation and there may be better, more profitable homes for that fruit in the long run.

Is it possible to do that? Or what would your take be on the sort of price-volume relationship in Sweet Gold in this new economy?

We are analyzing all the variables. You do have a point, but we don't want to take any rushy or hasty decisions which probably we can regret later.

However, we are looking at all the variables, and we will definitely take whatever decisions that will support our market and our pricing. So we consider this as one of the variables.

Okay, thank you. Just for Richard, I guess I was a little surprised, given some of the questions I've been getting -- I know you've been getting too -- about that piece of the debt that has gone current here, that there was no commentary specifically in the release about any financing plans.

Can you comment on what your plan is for that piece of long-term debt that has now gone current, and refinancing?

Yes, we're working on it. We are in the preliminary stages and we will refinance it sometime over the next few months. Like I say, we are in the preliminary stages of negotiating.

Okay, thank you very much.

Scott Mushkin, Jefferies & Company.

Hi, everybody. Good morning. This is actually [Mike Otway] on behalf of Scott. I just have two quick questions year. The first of which -- with all the noise in the quarter, is there anything that you would foresee that would permanently lower or lower over the long term the cash flows from the assets? Or are these signs things more temporary in nature?

Our business is cyclical, as everybody knows, and we can never tell if this quarter is going to be better than the other we have seen through all the last 12, 13 years. But sometimes you expect this quarter to be better and it turns out to be not as good, while the one that you didn't expect to be so good turns out to be so good.

So we don't look at this business on a quarter-to-quarter model, but we look at it as a yearly operation. I believe that our business is sound. We believe we are very, very confident about the operation and the way it's been moving, and I believe that things will improve as we go forward.

Okay, thanks. Then the second question. There continues to be I guess some rumblings out of Washington and the current administration regarding tax reform and potential changes to tax policies. Mainly, taxing overseas profits, which could have a more permanent effect on after-tax cash flows.

How are you guys thinking about that possibility as it relates to FDP and the Company's current tax rate?

There's a lot of laws being proposed and talk out there. There is nothing definitive yet. All of our tax positions have held up in audits around the world and are solid. So we will see what is proposed and what ends up on the table. It's hard to say at this point.

Right, okay. Well, I appreciate the time. Thank you.

Vincent Andrews, Morgan Stanley.

Thank you, everyone. Just a question on banana volume. On the last call, you said that the floods would impact volume by about 2.8 million boxes for the year. Your volume was flat in bananas year-over-year despite the Caribana acquisition.

So is it reasonable to assume that those boxes have already come out? Or is that something in excess of the floods?

No, I think it is the floods. For the most part they have already come out. There will be a little more the first few months, but for the most part come out.

Okay. Can you comment at all on banana price trends regionally?

What do you mean regionally?

I mean US, EU. There have been reports that banana prices had been weaker in the earlier part of the quarter, and that it improved towards the end of the quarter in the EU and had gotten better following the end of the quarter.

North America pricing is consistent so far. In Europe the pricing during the last, I would say, five weeks, has improved -- six week has improved quite well. Recently in the last couple of weeks we started seeing the lowering of prices there. We anticipate that prices will continue to go down in Europe in the coming weeks or months.

Far East, the Asian markets are quite strong at this time. We believe this will continue throughout the next probably seven, eight weeks.

Middle East is consistent, and there is not much variation in pricing. However, as the norm, as the pattern, it's usually when summer comes in usually the prices start softening and we see lower pricing. But so far, this is the situation as we see it today.

Okay. Then if we think about the melon business, in certain periods of last year you hit difficult profitability there because there wasn't enough fruit because of crop failure. And now we seem to have the antithesis, there is too much fruit.

How do we want to think about this on a go-forward basis?

As I said earlier, we are redefining our strategy for next season and we will be probably putting more volume in certain windows during the season, and reducing volumes from other parts of the season. So we are readjusting our volumes in terms of the timing.

As far as Brazil is concerned, as I mentioned earlier, one of -- the largest actually producer of melon in Brazil has exited the business a few weeks ago. I mean, he just closed operations.

I don't know if they are going to restart this operation soon. But as we speak, there is nothing being done. And we are talking here about a huge number of boxes that used to go to Europe from that source.

Now that will give us hopefully a leverage in terms of our production and exports from Brazil into Europe for next season, which starts usually by end of August.

As far as the other, as I mentioned, we are restudying our strategy for next season and we will do whatever is right to make sure that we have a better operation.

Okay. Then in the Middle East it appears that the sales growth is decelerating following the substantial run you have had over the last year or so. So are we now at what you think the baseline is for that market?

No, actually as mentioned, probably Richard mentioned it, that the reason why sales have not picked up as much in Middle East, because we have a shortage of banana from the Philippines, and the markets in Japan and Korea were much stronger in terms of pricing. So volumes were diverted to other markets and the Middle East was shorted. That is one of the reasons.

Once we do open our operation in Saudi Arabia that will make a big impact on our sales and revenue in that region. These countries we haven't been selling them in any sizeable, any significant volume. And by the end of this year, this should change.

So towards the end of this year, we will see a significant increase in revenues from that region.

Okay. Then maybe Richard on the other expense line, I know you talked about on the gross profit line what the effect was from foreign exchange, and that it was basically neutral. But there was a pretty meaningful swing on the other expense line.

Can you just remind us how foreign exchange plays into your other expense line?

It was pretty much all foreign exchange on that line, Vincent. So last year quarter you had a big gain of almost $11 million; and this year you have a loss of $6 million.

Right, but what is that related to?

That's basically primarily the balance sheet. Just recalculating the balance sheet and the foreign exchange balances of assets and liabilities.

So it is non-cash in nature?

Well, it ultimately becomes cash. It's payables and disables for the most part. But at the moment it's just not cash. At the moment it's just a translating of the balance sheet.

Okay, thanks so much.

Bill Chappell, SunTrust.

Good morning. I guess just a point of clarification. In the release, talking about severe weather for the banana and Gold pineapple production, was that something that occurred last November-December and this is just the carrythrough? Or were there actually new events that occurred in the March quarter?

No, it actually went all the way to early March as a matter of fact. We thought that we were over this phenomena in November/December but then we were hit again, as I said in January/February. Even in early March and middle of March we did have this same phenomenon. Very bad rainfall as well as very severe cold weather.

All of these actually, as I said, have affected our operations in many ways -- either production, shipping, transportation. In every way we have been really severely impacted.

Interesting.

If you look, Bill, at the first quarter, you take the average rainfall on the Atlantic side of Costa Rica over the last 35 years, first-quarter 2009 was double the average rainfall. So it's just significant.

Got you. I must have missed that information when we were down there. Moving to just FX, is there a total amount that currency is affecting the top line? Do you have that number?

The top line?

Yes.

Yes, that was $35 million I said.

Okay. Then as you look to the melon issue with the Brazilian closure and others, I assume that means you are not looking for any other capacity internally in terms of acquisitions or organic expansion?

No, I'm not looking for acquisitions in that country.

But just in general in that category, on the melon side, are you pretty comfortable with what you have?

Yes, we are.

Okay, thank you.

(Operator Instructions) Heather Jones.

Good morning. I have a number of questions. First, just real quick on the other expense line. So it's a balance sheet translation; that is your current assets and liabilities, correct?

Correct.

And it's sequential. So like I've looked at the end of March relative to where we are now, and looks like it would be roughly neutral. So you shouldn't have as big a swing -- all things being equal, you shouldn't have as big a swing in Q2 as you did in Q1 on a year-on-year basis?

It is sequential, yes.

Okay. On your pricing commentary, Mohammad, talking about EU pricing deteriorating a little recently. You mentioned something about seasonal trends. As far as the year-on-year trends, from what we understand those improved like you said over the last six weeks and continue to be better than they were in January/February. Is that consistent with what you're seeing?

Yes, yes.

Okay. In Asia, have you started to see a deceleration in the year-on-year gains? Or does that continue to be as robust as it was in Q4?

No, it continues to be robust, yes.

Okay. Now on the melon side, I may be wrong on this, but it seems like you all probably lost money on a gross margin basis.

I was just wondering why you didn't this past quarter -- and if in the future will you choose to do this -- start leaving some fruit just at the farm? Was it -- did you do the cost analysis and it still made sense just to ship it?

We did. Yes, we did lose money in the quarter on melons. And when you grow melons, when you start harvesting most of the cost is in the ground already. So still to recover that cost it is still worth to ship the melons and get some cash back.

Okay. So can you better explain to us how you're going to -- the comments you were making as far as better timing, your shipments and all? Just if you can give us more detail around that so I can understand that better.

Well, Heather, actually these are operational matters which we would not like to discuss on a conference call because we do have competition still around.

We will look for a better spread in the season. We didn't anticipate the yields, for instance, that we experienced. We were thinking about a certain number which has been historical.

The agricultural practices has been changed during this past season. We used certain products or certain fertilizers and other products that we didn't use before. We did use some agricultural practices that we didn't use before. New varieties that we did not use before. And they all turned out to be actually very positive.

On top of the market deterioration, let's not say that there has been an oversupply. There has been an oversupply and it really was the reason also for lower pricing. But I think the markets themselves were not as robust, as strong as they used to be in the years before.

So it wasn't like two reasons for that. There was oversupply on one side and the weak markets on the other side. So.

Okay.

But we are looking at this now very closely, and we will take whatever action that needs to be taken to rectify the situation.

You mentioned that April pricing was better than March and this season is over in roughly three weeks. So I mean would you expect melons to be as weak in Q2 as they were in Q1?

No, there the pricing is better than Q1, but not that much better. We will see better pricing definitely, but we are anticipating even better pricing than what we are seeing today.

So it is better, but it's not as good as we anticipated.

Okay. On the banana side, results were dramatically better than last year, but were not as good as I had expected. The costs, I had not expected costs to be up.

So I guess going into Q2, these weather-related issues that you mentioned -- was wondering if you think those are going to moderate and at what point this year. Because I mean you've got a significant tailwind as far as lower fuel. We've talked about lower fertilizer, lower containerboard. And aren't any of your spot needs, you know, lower charter rates.

So at what point in the year do you believe that these lower costs will offset higher production costs?

I think that once we start coming back to our normal yields and our normal ratios in terms of quality, export quality and second quality, I think then by that time -- which probably will take another couple of months, two, three months to reach this.

But don't forget that once we reach this, we come into the middle of the summer and usually there is a soft market then. But definitely the cost will improve and because of all the reasons I mentioned.

So do you think in Q2, because of the lingering effects of this weather, do you think your costs are going to be net up for bananas in Q2 as well?

I believe it's going to be a little bit improved, but still be up compared to normal.

Okay. So maybe down some from last year, but just above normal.

Yes.

Okay. Then finally, well, two final questions. It may be too soon to ask this question; but are you concerned at all about potential impacts of swine flu on your business? Not necessarily from the demand side but restrictions or whatever on imports of things, product from Latin America?

Have you heard any rumblings or whatever that would concern you on that front?

No, we didn't hear anything actually in that respect. If there will be any restriction and if the situation deteriorates further, it will be mainly from Mexico.

So our main production comes really from Costa Rica and Guatemala. We don't have -- we just have the avocados coming and some tomatoes coming from Mexico. But that is not going to be determinental, you know.

Okay. Then my final question is on your ship. I believe the last time I asked this I think you owned close to 50% of your capacity. But some of your ships are old, and I think you had scrapped some. But given the collapse in the container market and now the knock-on weakness in the reefer market, just wondering are you going to scrap further? Are you taking more of a longer-term view, like just take advantage of these very weak rates to lock in some longer-term lower cost? Just wonder if you could speak to that.

Yes, that's a very good question. Yes, we are restructuring our fleet as we speak. We already scrapped one vessel last month, and we are on the way to scrap the old ones as well or to sell them. From now to the end of the year, we are going to have at least five or six being out of our fleet.

We are going to restructure our shipping arrangements in terms of either chartering container ships, which are very effective at this time, or taking conventional ships. Ultimately, I believe that will be -- and we are in a period now there where it's very advantageous to us and we are taking -- to take advantage of this.

We are going to leverage the situation we are in, in order to get better shipping arrangements for ourselves.

Okay, all right. Thank you very much.

We have no further questions at this time. At this time I would like to turn the conference back over to Mr. Mohammad Abu-Ghazaleh. Please go ahead for any additional comments.

Thank you very much, Jennifer. I would like to thank everybody for joining us today. Hopefully we can speak again in July, I'm sure with better news. Thank you very much, everyone. Have a good day.

That does conclude today's conference. Thank you for your participation.