Fresh Del Monte Produce Inc (FDP) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's first quarter 2011 conference call. At this time all participants are in a listen only mode. (Operator Instructions) As a reminder this call is being recorded. I would now like to introduce your host for today's conference call, Christine Cannella for the opening remarks.

Thank you Holly. Good morning, everyone. And welcome to Fresh Del Monte's first quarter 2011 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 by a business wire, email, and first call, and is posted on our website. 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 the corresponding GAAP measures. This morning Mohammed will review our operating performance during the quarter, along with recent developments and our future outlooks. Richard will then review our financial performance for the first quarter 2011.

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 for the year ended December 31, 2010.

This call is the property of First 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 this call over to Mohammed.

Thank you, Christine. Good morning, everyone. Our first quarter performance demonstrated the results of the changes we made in 2010 to further strengthen the foundation of our Company. And we believe our solid first quarter results are an excellent start to 2011.

During the quarter, banana production leveled. And Latin America remains tight. Which led to an imbalance in supply and demand that drove up the average worldwide price of bananas. As the consequence of the tightness and Latin American banana supply, we continue to face significantly higher procurement and production costs along with the negative impact of unfavorable exchange rates in producing countries.

We were clearly confronted in the quarter by higher costs of fuel and containables. Which effected almost every aspect of our operations. In response to these escalations and costs we continue to manage the business prudently, as we have always done. However, we do not see a decrease in our production and procurement costs on the horizon. Our prepared food business performed better year-over-year due in part to our picking up shelf space in the U.K. market. Which was dropped in prior years to aggressive price competition.

We had a strong quarter as well in our fresh cut business, due to our continued focus on maximizing our product mix, and expansion of Del Monte branded fresh cut products in new and innovative outlets. We also continue to command our premier pricing on our leading market share for Del Monte quality Gold pineapples in the quarter. Sales on volume in our melon product line was significantly lower due to planned volume productions as we shift our focus towards becoming a specialty producer.

There remains an over supply of traditional melons in the North American and European markets at low prices, which validates our strategy of reducing our production of traditional melons. Especially in the offshore season. I could not be more pleased with our solid asset base and financial strength. The flexibility our management team has shown in today's ever changing marketplace, is a testament to their extensive experience and understanding of our business.

As I mentioned earlier, the operation of changes we put in place last year helped shape our first quarter performance. You may recall during the year we sold under performing assets in South Africa and Argentina. We ceased production in a very unprofitable Philippine banana farm. In addition, we improved the efficiencies and scale of our (inaudible) and logistics operations.

We remain committed to our philosophy of a lean operating structure and always seek opportunities to improve the company for the future. As we move forward, I believe we are well positioned for 2011. At this time I will turn the call over to Richard.

Thank you, Mohammed, and good morning. For the first quarter of 2011, excluding asset impairment and other charges, we reported earnings per diluted share of $0.96 compared with earnings per diluted share of $0.61 in the first quarter of 2010. Net sales were $974 million, compared with $943 million in the prior year period. Gross profit was $123 million, compared with gross profit, excluding other charges, of $99 million in the first quarter of 2010.

In addition, operating income for the quarter was $75 million, compared with $55 million in the prior year period. And net income was $55 million compared with $36 million in the first quarter of 2010. Before I turn to our segment performance, I want to highlight the changes we announced in our press release regarding segment reporting. Due to the phasing out of our Argentine grain and European third party freight businesses we have combined the former other products and services segment with our other fresh produce segment due to the relative size of the remaining operations. Prior period results have been restated to conform to the change.

In our banana business segment, net sales increased $25 million to $428 million compared with $403 million in the first quarter of 2010. Volume was 3% lower compared to last year due to tight industry supply, the result of flooding and unusually cold temperatures this past winter in Latin America. Worldwide pricing increased 9% or $1.31 per box to $15.28. We experienced significantly stronger selling prices in Europe during the quarter compared to the first quarter of 2010. Gross profit increased $33 million to $52 million compared with gross profit of $18 million a year ago.

Total worldwide banana fruit costs increased 4%, compared with last year's first quarter. The increase was driven by significantly higher spot market procurement costs, due to the shortage of supply, and higher container board pricing along with the negative impact of unfavorable exchange rates in producing countries. In our other fresh produce business segment for the first quarter, net sales decreased $5 million to $453 million compared with $457 million in the first quarter of 2010. And gross profit decreased $12 million to $55 million compared with $67 million in the prior year.

In our Gold pineapple category net sales decreased 2% to $122 million compared with $124 million in the prior year, primarily the result of lower pricing. Volume increased 4%, primarily due to recovery of Philippine production levels from last year's drought along with recent expansion in our farms in this region. Unit pricing was 5% lower and unit cost increased 2% due to the unfavorable exchange rates in producing countries and the increase in container board pricing.

In our melon category, net sales decreased 33% to $52 million compared with $77 million in the first quarter of 2010. Volume decreased 29% as we shift our focus from traditional melons to becoming a specialty melon producer. Unit pricing was 5% lower, the result of continued industry oversupply of the traditional melon variety, and unit cost was 5% lower.

In our fresh cut category, net sales increased 6% to $79 million compared to $75 million in the prior year. Volume increased 3%, unit pricing increased 2%, with increases in both North America and Europe, and unit cost was in line with the prior year period. In our non-tropical category, net sales increased 16% to $120 million, compared with $103 million in the first quarter of 2010, with strong demand for avocados and grapes. Volume increased 27%, unit pricing decreased 9%, and unit cost was in line with the prior year period.

In our tomato category, net sales increased 16% to $40 million compared with $35 million in the prior year. Volume increased 15%, pricing was in line with the prior year period, and unit cost was 5% higher. In our prepared food segment, net sales increased $11 million to $94 million during the quarter. The increase was primarily the result of higher sales in our canned pineapple product line as we continue to regain lost shelf space in the UK, along with increased sales in our processed meat product line as we continue to develop this category. Gross profit increased 27% to $16 million.

Now moving on to costs. Banana fruit costs, which includes our own production and procurement from growers, increased 4% worldwide and represented 28% of our total cost to sales. Carton costs increased 20% and represented 4% of our total cost to sales. Bunker fuel increased 19% versus the prior year and represented 4% of our total cost to sales.

And ocean freight cost during the quarter, including bunker fuel, third party charters and fleet operating cost was 5% lower despite the increase in bunker fuel costs. For the quarter, ocean freight represented 13% of our total cost per sales. The foreign currency impact at the sales level for the fourth quarter compared to the prior year was favorable by $2 million. And at the gross profit level the impact was unfavorable by $10 million compared to the first quarter of 2010.

SG&A expense during the quarter was $46 million compared with $42 million in the first quarter of 2010, which is in line with the 2010 full year percentage of sales. Other expense net for the quarter was a loss of $3 million compared with a loss of $9 million in the first quarter of 2010, due to lower foreign exchange losses. For the quarter, interest expense net was $2 million at the end of the quarter our debt was $225 million.

Income tax expense was $14 million dollars during the quarter compared with income tax expense of $6 million in the prior year period. The 2011 first quarter tax expense included $3 million in additional expense from tax audits in foreign jurisdictions. And capital expenditures for the year are expected to be approximately $100 million. This concludes our financial review, we can now turn the call over for questions and answer.

Thank you. (Operator Instructions). We'll take our first question from Scott Mushkin with Jefferies & Company.

Good morning, everybody, this is actually Mike [Ottley] in for Scott. Mohammad, I was just wondering if you could give us an update on the new proprietary melon. And how things continue to progress in the test markets.

Actually, we are in the middle of this, and what happened is that this is a new variety that we are growing in Costa Rica and Guatemala. And they are different climate conditions, different soil, and other factors involved. So we do have success in this new variety. However, we are facing some, let's say, technical issues that we have to address in each of these countries.

But so far, we are doing well, compared to the traditional melon, I mean, in terms of pricing and movement. We also are planting some in our Arizona farms which will be for the spring crop, what we call the spring crop, which will start by the end of this month. And hopefully this will turn out to be a good harvest as well.

Thank you, and in keeping with melons here, as it relates to the volume side. I know you guys continue to reduce melons in the traditional business, as you transition the business. At what point do you think you have rationalized enough, given the industry fundamentals, that you will lap some of the larger year-n -year volume declines and may start to see some volume improvement in conjunction with what you are doing on the specialty melon side?

As I always say, we look at our business from the bottom line perspective. And as far as we are concerned, if this business does not perform well and does not really turn a decent returns for the products, we might as well phase out whichever products that are not proving to be viable. And that's all policy, and that's going to be our target. Regardless if the bottom is going to be more or less, our actual interest is really to turn profit, and to make this product feasible. So we are rationalizing the melon business as we go forward. And we will do whatever is right for the Company. That is our policy.

Great, thank you very much.

Thank you, next we will hear from Dianne Geissler with CLSA.

Good morning.

Good morning, Dianne.

Congratulations on your quarter.

Thanks.

So it seems like Europe has strengthened in bananas, looks like volumes were down primarily because of the Euro, could you talk about how sustainable you think that is? Seems like everybody has gotten religion on that. And then can you talk about is there any lingering impact from the earthquake in Japan. I know Japan has always been sort of a higher priced Asian market for you. Have you been able to get product in there, and if not, what has that done to the pricing scheme in Asia on bananas?

Touching on Europe, Europe has been performing extremely well during the last, I mean the first quarter of this year, and as we speak, the markets still higher year-over-year in terms of pricing and we see a good movement on the fruit in the markets. Now, how far this can go on, we don't know. I believe that we will see this market until the end of the second quarter which we are in. But I do believe that the markets will not deteriorate as previous years in terms of pricing during the summer. Because I still see some tightness in the market and less supply. So we do hope that the pricing will not deteriorate as in previous years in terms of the summertime.

As far as the far east is concerned and Japan in particular, we have definitely seen the earthquake and the tsunami situation, but the supplies haven't been interrupted as a matter of fact. And consumption and supplies have continued as usual. However, we don't see the strength in pricing as in previous years. The pricing has improved, definitely, compared to two months ago, but that is not as strong and solid as it was in previous years. So that might have a connection to the earthquake, and hopefully that this price can continue for at least the next month or two. But we don't see a very strong pricing in Japan going forward.

Okay. And then I guess Richard, maybe you can talk about the cost side and in particular the impact from currency? I know you noted in your prepared comments, I think $2 million benefit on the revenue line, but $10 million negative on gross profit. I'm assuming that's the Latin American currencies against the dollar. Doesn't look like they are -- it looks to reverse any time soon, so can you talk about maybe give us an idea about what a full year impact? Would we just do simple arithmetic, 10 times four equals 40 or is there some -- walk us through what the maybe the seasonality is that we should expect if the currencies stay where they are today.

It's hard to give you a simple number like that, because there's so many countries involved, but the biggest impact was, you are right, Latin America and the yen had an impact as well. And then some smaller numbers in other countries. But you can't do it that way. I mean, keep in mind if you look at Costa Rica last year it strengthens throughout the year.

I'm sorry, you broke up there.

Keep in mind that Costa Rica last year strengthened throughout the year, and then really hasn't moved too much since the beginning of this year. So you can look at that. But it's hard to tell. But as Mohammed mentioned earlier, we don't see any relief on the costs going forward for the year. Certainly coming down. We may have some positives because we had the hurricane in Guatemala last year, but if you take the increase in distribution and fuel costs, we shouldn't see the costs going down too much from where it is today.

Okay. All right, and then.

[Inaudible].

I'm sorry, did it interrupt you.

I'm sorry I just said in total.

Okay. Then just quickly I would like to ask on the prepared foods. You saw a nice lift there on your margins. I'm assuming that's, you did a lot of work last year to restructure that business, is the 200 basis point improvement what we should be thinking about for this full year? Or, again, is there something seasonal that you think it will expand or contract in the balance of the year?

No, we hope to meet those stats for the rest of the year. Yes. And a lot of the changes that we made, if you are talking about the South Africa movement to Greece and so on, we should see more improvement next year in 2012. So that full impact has not hit yet.

Okay, great, thank you.

Our next question comes from John Feeney from Janey, Montgomery Scott.

Good morning, thank you.

Good morning, John.

I was -- I got the really strong performance, I was very impressed with the execution, but I was surprised particularly at the cost performance around the banana side of the business. Given everything I read in the trade rag seems to indicate it is very difficult to source bananas favorably in this environment right now. What explain -- why were you able to hold unit costs roughly flat it looks like year-over-year? Is this primarily great performance at your -- better than expected performance at your Company farms? Or did you just sign some really good contracts some time ago?

No, I mean obviously we have a relatively high mix of Company farms, so we wouldn't have been as impacted by the high prices in Ecuador and so on then what you are reading, but you know it still was up, and as we say, we have made minor changes and looked at rationalizing farms here and there, we have looking at everything across the board, as we always do.

So sounds like it would be primarily internal, like you said don't rationalize, and you just really performed well off your Company farms?

Yes. Primarily.

I'm trying to get at the sustainability, Richard.

It's survival, it's survival. We have to work hard to survive, Jonathan, and that's exactly what we are trying to do here. Because it's very difficult with all the head winds that we are having in terms of fewer costs in terms of money exchange in the countries. We are facing a difficult situation in Costa Rica, Guatemala, Chile, everywhere we are go, we are facing, especially in these developing countries or the smaller economy countries, they have extremely strong currencies. Extremely strong economy going on, and that is really a very negative for us as producers in this country.

And these are issues that we are facing. Labor costs is increasing. Containers -- every aspect of our production -- post elements. We are facing increases. And we need to continue, and that's what Richard is saying. That we keep working as much as we can to reduce our costs and try to minimize the impact on our operations. Otherwise, we cannot really achieve what we have achieved.

Wouldn't you just -- one follow up to that, Mohammed, thank you very much. The follow up I would have is everything you just outlined would seem to disproportionately impact a local marginal player in the business, than you. Because you have global markets for these products in currencies, especially the euro right now, that have been strong relative to the dollar, and of course you are reporting earnings in dollars. Wouldn't you say that this inflationary environment to the extent it creates a positive pricing trend, it gives you pricing power around the world, is more positive than a deflationary environment? Say as weak local currencies would be?

It shouldn't be the case. Yes, I agree with you, and some cases it can be the case. But don't forget, in some countries you have resistance, you would be surprised. That they want to regulate even pricing on your products. They don't want you to keep inflating or increasing your prices because -- especially in prepared food. We have seen this in similar markets that governments are so much involved into controlling prices, not increasing prices, and adding inflation to their index. So, in total, what I would like to say, Jonathan, is that we really address our business on a day-to-day basis. We are very much hands on and in order to survive in this environment we need to be very alert.

Okay. Thank you very much.

Thank you, our next question comes from Heather Jones with BB&T.

Good morning.

Good morning, Heather.

Congratulations on the quarter. Very nice.

Thank you.

I'm going to try to tackle Jonathan's question again. First I'm sort of confused because in your release you talk about unit costs being flat in bananas. And also if you just look at your sales, your gross profit numbers, you can back into flat unit costs, but in your prepared comments you are talking about costs being up 4%, so I'm wondering if you can help me resolve those two statements?

Banana fruit costs is up 4%, Heather. Just the fruit costs.

So your unit -- Okay, -- well then your carton costs were up, your bunker fuel costs are up, the only thing you noted that was down was ocean freight. So I guess, what was down dramatically during the quarter on the costs front that you were able to get total unit costs flat? Clearly this is great, I'm just trying to figure out what drove it.

It's ocean freight and distribution.

Ocean freight and distribution?

Correct.

Okay. Okay, and I was wondering if you can give us a update on your own production. From the last we heard of you, I believe on your Q3 call, then on your Q4 call, you talked about cutting some of your own production, and working aggressively to cut costs on even those farms that you did keep open. And so I wonder if you can update us on how much you have cut and your progress in cutting costs on your own farms?

We did, Heather, this is an on going profit, really. As I said on the previous call, that we do have some farms that we are going to look at by the end of this quarter, and we will decide if these farms will be continued through, -- starting to (inaudible) or will be phased out, depending on how much improvement that they have done in these farms during the last several months. So it's an on going process. I cannot tell you how much we cut, how much we did do, but definitely that is our intention and our objective, is really to remain with the viable farms. Farms that can really meet our criterias in terms of production and costs.

So to date, you haven't shut any. You are saying, though, you will make a decision on how much you will cut by the end of this quarter?

No, we did, we did shut some farms down in the last ---.

Oh, you did shut, okay.

Yes. But, as I said, it is an on going process. I think that this process will terminate in the next three to four months.

Okay. And could you give us a update on the force [measure] surcharge? How long you think you are going to keep that in place in the U.S.?

I think this is a question that depends on how normal the situation will return. If all the factors normalizes, I think that surcharge will go up. But it all depends on how the different variables work. There is still tightness in the market. There is still, Columbia has been really hit hard with weather conditions and production has been down significantly as well as quality has been effected. Ecuador still is with lower production level than the previous years.

Costa Rica, more or less is stable. Guatemala is stable. But we don't know yet what is going to happen the next couple of months regarding facing any climatic event. A hurricane, a flood, a wind damage, all these factors are on top of what we are facing now with the oil and carton exchange rates. So many other factors that are effecting. So we will monitor this situation and go along with what we see on the ground.

Okay, and I have two more quick questions, first clarification on Japan. You say the pricing is up compared to two months ago. Is it up in local currency on a year-on-year basis or is it still below last year?

No, I think it's below last year. Even though the yen is quite strong, but still it is lower than last year.

Okay. And my final question is, I've been reading a lot about this arrangement between Fresh Del Monte and Orsero and it's been in place for decades, and just wondering if you can give us a sense of -- are you going to plan on staying in the southern Europe market or you've been tight fruit for quite a while, are you going to divert that fruit to other markets where you have been tight? If you can give us a sense of your strategic plans once that contract ends?

Well, we are in the, already in the preparation phase of putting on our sales offices in these different countries in the southern hemisphere, I mean Europe hemisphere, which is Italy, France, Portugal, Spain. These markets wouldn't be serviced by Del Monte Europe, so it's not going to effect us in any significant way.

Okay, thank you. Congratulations again.

Thank you.

Thank you, next we will hear from Eric Larson with Soleil Securities .

Yes, greetings everyone. Nice quarter given the tough environment. Quick question on the Middle East environment. The last quarter, of course, that was pretty difficult. You had some tough pricing, have you seen improvement in the Middle East in your new markets there, in particular with all the various turmoil that is going on, how has your performance been in the Middle East region?

Our performance has been very encouraging, very significant improvement in the last two or three months, actually. You have to realize that we operate in markets which are not effected by all the disturbances that you see in the Middle East. We are mainly present in the United Arab Emirates and Saudi Arabia and the Gulf countries. And these countries are very stable, aren't fighting as we speak. We did have a very good season so far, and a very strong pricing in the last few months. So we are very, very hopeful that these markets will become a very important part of our business.

Okay, good, thanks. The next question is probably for Richard. Richard, obviously fuel is a concern, it continues to be a new concern with where oil is, et cetera, have you had the ability, and I know it is difficult, to hedge any of that fuel forward? How may or may not you be hedged on currencies at this point?

We have not hedged any fuel for this year, Eric, or going forward. So right now we have no hedges for fuel. We are just relying on those markets and those countries where we are able to pass it on to the customers through fuel surcharges.

Okay.

And as far as currency, I mean, we're typically about 50% hedged, give or take. That's the case for this year.

Would that be for both the euro and the yen?

I think the yen is a little bit higher than that, and the euro is about right.

Okay.

[Inaudible].

No it's a good point. With the strong pricing, global banana pricing and the shortages, and this probably is more of a question for Mohammed, are you starting to see production come back in? The cycle for bananas has typically been relatively short, relative to a pineapple. So I'm surprised that we won't at some point, maybe even as much in the next quarter or two, see some global banana production coming back in, what are your thoughts on that Mohammad?

In our case, we see some shortage actually in June/July going forward. That's what we see from our production estimates. So we don't see really -- I personally believe that we will not see the peeks that we have seen the previous years in terms of production during the summer period which might be a blessing for our industry. So I hope that what I see is going to turn out to be right.

Okay, okay, good. I'll pass it on to someone else again, good quarter, guys.

Thanks.

(Operator Instructions). And at this time we have no further questions in the queue. I will turn the conference back over to Mr. Mohammed Abu-Ghazaleh for any additional or closing remarks.

I would like to thank everyone being on this call. Thank you very much for your presence and support. Hopefully we will speak again on our second quarter conference call with good news as well. Thank you. Bye.

Thank you, and that does conclude our conference today, we thank you all for your participation.