Fresh Del Monte Produce Inc (FDP) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce fourth-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.

And at this time, I would like to turn the call over to Richard Contreras. Please go ahead, sir.

Thank you, Jennifer, and welcome to Fresh Del Monte's fourth-quarter 2009 conference call. I'm Richard Contreras, Senior Vice President and Chief Financial Officer, with Fresh Del Monte Produce. Joining me on today's call is Chairman and Chief Executive Officer, Mohammad Abu-Ghazaleh. Christine Cannella, our Assistant Vice President, investor relations is traveling this week. In her absence I'd like to share with you that Fresh Del Monte issued a press release this morning via Business Wire, e-mail and First Call. This conference call is being webcast live on our website and it will be available for replay approximately two hours after the conclusion of this call. Our press release includes reconciliations of any non-GAAP financial measures we mention in our presentations today to their corresponding GAAP measures.

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'll turn the call over to Mohammad.

Thank you, Richard. Good morning, everyone. We are very pleased with our excellent fourth-quarter results, despite challenges associated with the historic global economic turmoil. Our Gold pineapple and Fresh-Cut performance was strong and we are very encouraged by the sequential improvement of our Fresh-Cut sales. We also benefited from higher sales in our Euro, Middle East, and North America banana business. However, banana profitability declined in both Europe and Asia. While our profits for the quarter were impacted and we are not seeing significant improvements in Europe, prices in Asia have improved, but are still lagging last year's prices. Overall, we anticipate that our banana business will continue to perform well, led by higher volume, along with increased sales in the Middle East and North America.

Before I move on to pineapple, I would like to mention that our long history as an industry innovator in pursuing new distribution channels continued in the fourth quarter. In October we broadened our market reach by supplying Del Monte fresh fruit and vegetable products for refrigerated vending machines, and natural product delivery extension for Fresh Del Monte. This extension to our distribution channel was driven by our new proprietary controlled ripening technology, or CRT, banana packaging. The packaging also assists us in expanding Del Monte-branded product offerings to our convenience store customer base.

Moving on to gold pineapples, our competitive position in the gold pineapple category remained strong during the quarter. We saw price moving on to gold pineapples, our competitive position in the gold pineapple category remained strong during the quarter. We saw price increases in both Europe and North America, supported by higher consumer demand. We plan to expand our gold pineapple production in the Philippines and Costa Rica to meet this growing demand for Del Monte gold extra-sweet pineapple and further maximize our operations efficiencies. This continued investment represents our commitment to remain the number one marketer of fresh pineapples worldwide.

We were especially pleased with the strengthening of our Fresh-Cut business. During the quarter, we realized additional efficiency improvements throughout our facilities. We increased volume with our existing customers and expanded our Fresh-Cut customer base, continuing to add new customers in North America. These results show that despite the economic environment, customers are increasing their demand for wholesome, ready-to-eat fresh fruit. We have done well over the past year, and based on demand, we believe our Fresh-Cut business offers many opportunities to grow through a variety of distribution channels.

Moving to our prepared food business, the desire for value is clearly driving price-sensitive consumers to shift away from premium-branded canned products, especially in our largest market, the UK. Even though consumers have altered their buying behavior during the current economic downturn, we believe they will return to premium-branded quality products once the economy improves. In the meantime, we continue to drive brand awareness to support our products with ongoing marketing and promotional campaigns, which we see as a benefit over the long term.

We strengthened our business around the world during the quarter, with the opening of a new distribution and banana ripening center in Riyadh, the capital city of Saudi Arabia. The distribution center opened in December of 2009 with initial sales performance exceeding our expectations. We firmly believe there is tremendous potential for growth in the Middle East region as consumption continues to rise for premium=branded products, and we continue to develop, and penetrate markets within this region. Our second distribution center in Jeddah, Saudi Arabia, is scheduled to open March of this year. When the Jeddah facility opens, it will be Fresh Del Monte's largest distribution center. Our knowledge of this region and the cultural consumers is a key competitive advantage in gaining market share as we expand in this geographic area.

In closing, I would like to reiterate how proud I am with the fourth-quarter results. 2009 was a tough year and we are a stronger Company because of it. Despite the offsetting global economic environment, I'm very optimistic about the year ahead. We see tremendous growth opportunities as we increase our core product volume, expand in emerging markets, and introduce our products to customers through new distribution channels.

At this point, I would like Richard to give you further financial details. Richard?

Thanks, Mohammad. For the fourth quarter of 2009, excluding asset impairment and other charges net, Fresh Del Monte reported earnings per share of $0.36 per diluted share compared with $0.41 in the prior-year period. Net sales were $872 million compared with $831 million in the fourth quarter of 2008. In addition, excluding asset impairment and other charges net, gross profit was $65 million compared with $69 million in the prior-year period, operating income was $29 million compared with $30 million in the prior-year period, and net income was $23 million compared to $26 million in the prior-year period. For the quarter, asset impairment and other charges was a net credit of $3.5 million, primarily from an insurance reimbursement related to flood damage previly -- previously incurred in our Brazil banana operations. Also included was a gain related to the previously-announced closing of our Hawaii pineapple operations, offset by the write-off of a non-compete agreement from our Caribana acquisition in Costa Rica.

Now let's turn to our segment performance. In our banana business segment, net sales increased 5% to $386 million compared with $366 million in the fourth quarter of 2008. The increase in net sales was primarily due to continued strong demand for bananas, especially in Europe, the Middle East, and North America. We also benefited from favorable exchange rates in Europe and Asia. Volume increased 7%, principally in our Middle East, Europe, and North America regions. Worldwide pricing decreased 1% to $0.15 per box, to $12.98, the result of significantly-lower selling prices in Asia. Unit cost was 4% higher. We experienced higher fruit production costs, as we were still feeling the effects of floods earlier in the year. We were also negatively impacted by higher fruit procurement costs. Gross profit was $4 million versus $22 million a year ago.

In our other fresh produce business segment for the quarter, net sales increased 10% to $375 million compared with $342 million in the fourth quarter of 2008. The increase was attributable to higher selling prices in our gold pineapple and Fresh-Cut product lines, along with higher melon sales. For the quarter, gross profit increased 57% to $50 million compared with $32 million in the prior-year period. In our gold pineapple product line, net sales increased by 19%, to $138 million. The improvement was driven by higher volume and selling prices in both North America and Europe. Volume was 18% higher as our plantations recovered from cold weather earlier in the year, unit pricing was 1% higher and unit costs were 7% lower.

In our melon product line, net sales increased 15% to $69 million, volume was 23% higher than the prior year, unit pricing decreased 7% -- the decrease was a result of continued strong industry-wide supply that led to competitive market pressures -- and unit costs were flat. In our Fresh-Cut product line, net sales increased 15% to $77 million due to increased demand, especially in North America. Volume was 8% higher, unit pricing increased 7% and unit costs were 6% lower. In our non-tropical product line, net sales decreased 6% to $35 million, volume was 2% lower, unit pricing decreased 5% and unit costs were 10% lower. In our tomato product line, net sales decreased 2% to $29 million, volume was in line with the prior-year period, pricing decreased 2%, while unit costs were 2% higher.

In our prepared foods segment, net sales decreased $4 million to $89 million compared with $93 million in the fourth quarter of 2008, primarily due to lower sales in the UK, our largest market. The decrease was partially offset by increased sales in our poultry business in Jordan and our expanding meat operations in the Middle East, along with gains from favorable foreign exchange rates. Gross profit decreased $3 million. In our other products and services business segment, net sales for the quarter decreased 26% to $22 million compared with $30 million in the prior-year period, due to the lower sales in our third-party freight and Argentine grain businesses. Gross profit increased by $2 million.

Now, a few comments on costs. Fertilizer costs decreased 47% over the prior-year period. Fertilizer represents less than 1% of our total cost of sales. Container board costs declined 32% compared to the fourth quarter of 2008, and represents 2% of our total cost of sales. Banana fruit costs, which includes our own production and what we source from independent growers, increased 3% and represents 29% of our total cost of sales. Bunker fuel declined 1% and represents 4% of our total cost of sales. And total ocean freight costs, including bunker fuel, was 4% higher during the quarter and represents 14% of our total cost of sales. The foreign currency impact at the sales level for the fourth quarter compared to the prior year was favorable by $14 million, but the foreign currency impact at the gross profit level in the fourth quarter of 2009 was unfavorable by $2 million compared to the prior year.

SG&A expense during the quarter increased to $43 million compared with $39 million last year, primarily attributable to higher marketing and promotional spending in Europe and Asia. Interest expense net decreased by approximately $2 million in the quarter. At the end of the quarter, our debt was $325 million, and we currently have $184 million available under our credit facility for working capital needs and other general corporate purposes. Other expense net was $3.5 million, and is comprised of foreign exchange losses. Tax expense for the quarter was $1 million. Included in this amount is a tax benefit of $5.3 million, the result of a reduction in valuation allowance during the quarter due to higher-than-expected profitability in North America. We are projecting a 15% company-wide effective tax rate for 2010. We expect our capital expenditures for 2010 to be approximately $100 million.

This concludes our financial review. Jennifer, can you open the line for questions?

Very good. (Operator Instructions). We will take our first question from Scott Mushkin with Jefferies & Company.

Hi, guys, thanks. Hopefully you can hear me, I'm on a cell phone. Quick question -- two questions on the Euro. I was wondering, Richard, maybe you could run us through, remind everybody, if the Euro continues to depreciate significantly, what impact that has on you guys as you move forward?

Obviously the stronger the Euro is helpful, so it would have a negative impact. It's difficult to quantify because we can shift sales from one region to another, so we can't quantify it for you but obviously it would have a negative impact.

Then the other couple questions, as we go into the melon season, the offshore melon season, any early read? I know the last two years has been a problematic season for you guys, any thoughts on how we should look at it this year?

We see an improvement on the melon pricing in the last few weeks, and although the beginning of the season wasn't very encouraging, however we see better pricing as we move forward. And we hope that this pricing can remain for the end of the season.

And then as far as pineapples, I know it's anoth -- with the economy slowing down and I think pineapple season, or the big volume is around Mother's Day and Easter, any thoughts as we go into there? Are you guys encouraged about the signs you're seeing and pineapple profitability and the demand?

We really don't see much -- the market is stable for pineapples or at least as far as Del Monte is concerned, and we haven't seen any drastic price reductions or volatility except, of course, for the seasonal changes that we see on a regular time. But otherwise, things are normal.

And then one final one, Richard, I think you said at the close that you thought your tax rate would be 15%. That's up a little bit from where we've been modeling you guys, is that a new number that we should go to?

That is a new number. As I said, we further reduced some valuation allowances in North America so that increases our tax expense, obviously, going forward.

Okay. So that 15% is a new good number for you guys? Is that your thought?

That's what we and you should model going forward, yes.

Perfect. That's it for me. Thanks for taking my questions.

You're welcome.

We will take our next question from Jon Feeney with Janney.

Good morning, guys. Thank you very much.

Good morning, Jon.

I wanted to talk about the banana business globally. It seems as if you've had some very good results there and historically been very disciplined there, but the tenor -- it would seem to me that the tenor of contract negotiations in North America has to be at risk, because -- and that contracts have to start getting renewed at lower prices, because I know, in so many places in the world where pricing's less sticky it's coming down. Could you comment on that? And are you renewing contracts right now to your plan and how are those talks going?

No, we have renewed almost all of our contracts as we speak, Jon, and I don't know where you got the idea that the pricing is going lower, but it has been more or less stable.

That's great to hear. What I was saying -- my resources are obviously much more limited than yours, I was just looking at the terminal banana prices and I know that's very limited, but some of those have seen downward numbers. But you're saying the contract seems (technical difficulty)?

Contracts have been signed and the prices in general on average, I don't believe they have been lower. In some cases, there are certain cases that you have to consider, but all in all, I think pricing has been stable.

That's great. And just one follow up if you wouldn't mind. You recently had a competitor come public that had been private for a few years there, any change in the competitive landscape in either North America or Europe that you've seen in the past three or four months that may be related to that change in capital structure?

No, we haven't seen any changes. Things have been the same, moving the same way.

Great. Very good to hear. Thank you very much.

Thank you.

We will take our next question from Heather Jones with BB&T.

Hi, everyone, this is Brett Hunley standing in for Heather this morning. Can you hear me all right?

Yes, yes, we can hear you.

I wanted to look at the cost side in your banana business. Unit costs there up 4%, seems to improve somewhat with where they were trending earlier in the year. And you guys had talked about how you had -- you're still seeing some issues surrounding both productivity and procurement, and I was wondering if you wouldn't mind separating how those two things played into that cost increase of around 4%?

Yes, obviously the bigger increase to that, Brett, was the procurement, and that continues to go up, as we speak. The farms, as we mentioned on pineapple, and we'll be starting to see it on banana now, have since recovered from the floods, so barring any unforeseen weather we should stabilize or maybe even reduce a bit the proprietary costs, but the grower costs will continue to go up.

So do you feel that the productivity issues are largely getting better at this time then?

Definitely.

Okay. And I had a quick question on the Saudi distribution centers. I don't know why, but I thought that they were expected to come on slightly earlier than they have. Am I just misremembering that or did they get pushed back slightly?

No, there were delays by the contractors but they were not significant, a couple of months delays I think, on the Riyadh -- on the distribution center that opened in January -- early January. And the Jeddah distribution center has been delayed by about a couple of months yet.

Okay. And Mohammad, you said that you were very happy with how the first one has started out. Can we read into that that -- previously you guys have put out that target that we've all talked about, the $500 million in sales for the Middle East, and I'm wondering early on if you guys think you can get to that number sooner, if you can give some more color around how things are going in that area of the world?

Well, we put that figure, the $500 million reaching in 2012, I believe, but we see very, very positive signs, but maybe it's too early. And we are already have been only two months in operation, so it is really too early to give an accurate picture of how things will -- hopefully we can do that in the next quarter or two, we can give you a better picture.

Okay. And then just real quick, I was just curious, with the terrible events that have happened in Chile if that has affected you guys from a Company standpoint at all.

No, we are -- I think we -- thank God we have been lucky in that respect so far. We haven't had any significant damages or losses in our operations there. Our infrastructure has been impacted and our operations are actually back to normal as we speak now. So I think that the damage was mostly in the south where we don't have much operations there.

Okay. Well thanks for taking my question, guys.

Pleasure.

We will take our next question from Bill Chappell with SunTrust.

Hello, this is [Linda Gooseman] in for Bill. I was just wondering how much -- it looks like, according to our math, the extra week added roughly 7% to 8% to total sales, would you agree that this is right or is that a little aggressive?

I think it was about $40 million.

Okay, $40 million. And then, because the pricing in Asia had such a negative impact on gross profit for bananas, roughly how much of your sales in Asia are contributed to bananas? I know it's only -- it's roughly -- it says 84.3%, but how much of that was towards bananas?

The majority is -- it's mainly bananas and pineapples, but the majority is bananas.

Okay. And you said you had seen the pricing improve a bit in Asia, do you feel comfortable giving us a number? You said it was down -- the decrease in price, 1% was $0.15, is it up $0.05 or --?

No, we have -- for the last three, four weeks we have seen improvement in the pricing in Asia and Japan, Korea, but as I said, it has not reached the same pricing year over year. Last year at this time we were selling still higher than what we are selling today.

Okay, so it's just more sequential improvement?

Yes.

How does that look going into the first quarter of 2010? Is it -- do you think it's going to improve or just stay where it is at right now?

We haven't seen yet any -- if we see any improvement it should be coming during the next few weeks, and we haven't seen that. We see more a stable price, rather than the usual increases that what we see this time of the year.

Okay. Thank you for your questions.

(Operator Instructions). We'll take our next question from Vincent Andrews with Morgan Stanley.

Thanks and good morning, everybody. Richard, I'm wondering if you can just give us a sense of how you see costs trending in 2010? And I don't know if maybe just sequentially out of 4Q or how much visibility you have, but any thoughts there would be helpful.

Well, the most we'll give -- Vincent, like I said earlier, we should see the proprietary costs come down, barring any unforeseen weather, the purchase group costs maybe go up even a little bit, so overall, we may see a slight decrease overall.

Okay. And then if I could also ask you, just for an update on your share buyback program, I noticed you didn't buy any stock back in the quarter, if you could just give us a sense of how you're thinking about that authorization?

Yes, we're still looking at this and we will -- we have to look at our capital expenditures as priority, and we will look at the opportunity when it arises.

Is there any particular reason why that opportunity isn't now?

As I said, we will have to look at where we can allocate our capital or our cash flow more efficiently, and we do have some investments right now going into Central America and the Middle East, and before we take other steps we would like to make sure that we are doing the right thing.

Okay, fair enough. Thank you very much, I'll pass it along.

We will take our next question from Eric Larson with Soleil Securities.

Good morning, everyone. Just so -- Mohammad, you mentioned that you're adding some capacity -- pineapple capacity, I think both in Costa Rica and the Philippines. Is that basically in response to your strong new sales opportunities in the Middle East, and is it something you're seeing generally across the industry? How much production are you actually adding?

As we speak we are adding like 500 hectares in the Philippines and we are adding about 1,200 hectares in Costa Rica. And to answer your question it's actually across the globe, we see more demand. Even in North America we are expanding our market share and customer base. As you said, the Middle East, and the Indo-Asian in general is also expanding rapidly. We do have new markets that we have not been in before in Asia, as well. So there are many opportunities there that we look to fill in and with our present capacity it's a little bit tight.

Okay. Mohammad, when you enter new Middle East countries, what are the product lines that seem to resonate the best first? Is it really -- does it start with bananas and then move to pineapples and melons? How does your product mix look as you develop new markets like that?

Bananas, of course, is the pioneer, it's number one. Pineapples. We do have a lot of other products that we may not handle in other markets, like apples and citrus and other products, like potatoes and produce that we don't usually handle in Europe or North America. So it's -- the basis is actually the traditional items, which is bananas, pineapples, but we do have a lot of other products that come into these markets that make a big also portion of our operations base.

Okay, okay. And then the final question is back to Asia. I think that Japan has probably been one of the weaker markets, is that true? That economy seems to be sliding back into a more significant downturn. Well, maybe not even -- it seems to be struggling more than most of the Asian economies, is that a fair assessment?

Yes, I guess you are right. Even Korea was struggling during the last several months and we have seen, throughout the summer, until like a month ago, a very poor market in these two regions and just recently started seeing improvements in pricing. But I agree with you, we have seen some tremendous pricing there in 2008 because of the diet craze that was going on. And that has faded, that's faded away and we see now more, like you said, a struggling market.

Okay, then just one final question. For the last several quarters, maybe even longer, the general supply/demand balance globally for bananas has been favorable generally for the producers, such as yourself. Mohammad, do you still see a relatively-favorable supply/demand balance in bananas and is there anything forthcoming that would change that?

I agree with you that it's more in balance than it used to be before, but we will definitely see periods where we have oversupply because of the seasonal pattern. Like in the summer we will see a lot more supplies than what the market can take, and that hopefully will not be as bad or negative as a normal year. So that's a critical period is really from July through to, let's say. October, November of each year. That's where the make it or break it period.

Okay. Thank you, everyone.

We will take a follow-up question from Scott Mushkin with Jefferies & Company.

Hey, thanks, guys. Thanks for taking a follow up, had a couple. One was going back to that tax rate thing, Richard. Is that -- do you expect your cash taxes paid to actually increase, as well, or do you think cash taxes will stay the same?

Roughly, Scott -- and obviously, this is a moving target, but roughly we would say that about 50% of that would be noncash.

Okay.

To give you a rough number.

Okay. So there will be some cash tax increase?

Correct.

Okay. Second thing is, going to --

I'm sorry, that's 2010. So for the year 2010 about half of it would be noncash.

Half of it will be noncash. And then going forward, what is your expectation?

Well, going forward, after 20 -- in 2011, then most of it is cash.

Is cash, okay. Second question, going back to the increase in pineapple planting, how much do you expect that to increase your volumes, the extra 1,700 hectares?

(LAUGHTER) I think -- it's early. We can give you this number maybe on our next -- or Richard can give you this later on.

So is it significant though? Is it 10%, or is that --?

Of course it will be significant but let's give you some more accurate information. Maybe later on. Richard maybe can supply it to you.

Okay. And then startup costs associated with this? Are they significant?

Yes, that's why I just mentioned it a while ago before. We have to allocate our funds, or our resources to where we need them most, and that's why I said when I was asked about the repurchase, or the stock repurchase. It is significant to plant pineapple in Costa Rica or in the Philippines.

And just so you know, Scott, as I think you know, some of this has been ongoing so it's not all -- the investment is not all starting now, it's been ongoing in the last year or even more.

So Richard, where do you think you -- are you 60% of the way through the startup costs or is that too high an estimate?

That's a little high.

A little high. And then once we get through the investment period, I would think your incremental margin on that fruit must be fairly high. Is that a fair assessment?

It's the same as it is on all of the pineapple from a margin standpoint.

So I guess that's it. I have more but I'll talk to you guys later offline. Thank you very much for taking the follow ups.

Thank you.

With no further questions in the queue, at this time I would like to turn it back over to Mr. Mohammad Abu-Ghazaleh for any additional or closing remarks.

Thank you, Jennifer. I would like to thank everybody for participating on this call with us and wish you a good day and I hope to speak to you on our next call. Thank you very much and good day.

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