Fresh Del Monte Produce Inc (FDP) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen. And welcome to the Fresh Del Monte Produce Fourth Quarter and Full Year 2011 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) I would now like to introduce your host for today's conference call, Christine Cannella, for opening remarks.

Thank you Celia. Good morning everyone, and welcome to Fresh Del Monte's Fourth Quarter and Full Year 2011 Conference Call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer. And Richard Contreras, Senior Vice President and Chief Financial Officer. Our fourth quarter and full year 2011 results were made public via press release this morning. And you can find that release or register for future distributions by visiting our website at www.freshdelmonte.com and clicking on Investor Relations. This conference call is being webcast and 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.

Before we start, please remember that matters discussed on today's call may include forward-looking statements within the provisions of the Federal Securities Safe Harbor laws. Forward-looking statements involve risks and uncertainties which are more fully described in today's press release and our SEC filings. These risk factors may cause actual Company results to differ materially. This call is the property of Fresh Del Monte Produce. Redistribution, re-transmission, or rebroadcast of this call in any form without our written consent is strictly prohibited. Let me turn this call over to Mohammad.

Thank you, Christine and good morning everyone. Our 2011 financial results showed a strong improvement over 2010. We continue to increase our market share in almost every product category, and I'm very encouraged with the strategic achievements we made in our operations. Let me describe a couple of recent key developments. During the fourth quarter, we completed the build out of our sales and marketing efforts [lecture] of our southern Europe distribution network. I'm very optimistic this change effective January 1, provides us with the opportunity to increase our market presence and gives us greater control of our product distribution and quality. The transition has gone extremely well, and we have experienced strong sales. Our products are being delivered with the superior level of service Fresh Del Monte is known for.

In addition, we continue to expand our presence in non-traditional delivery channels. These new channels allow us the opportunity to increase our distribution and marketing by targeting a wide range of new purchase products. From convenience stores, college campuses, and cafeterias to sports arenas. While we are still in the early phase of growth with these delivery channels, we are already seeing good customer response and competitive advantages in this space.

Thirdly, a key move in these efforts has been to deliver a variety of fresh, fresh cut, and prepared food products to more locations worldwide. Providing greater exposure to consumers than ever before. However, these strategic achievements were countered by the unresolved economic turmoil throughout Europe. We also experienced softness in demand in the second half of the year for all fresh produce. Particularly in Europe and Japan. And we continue to face ongoing challenges in the European banana market. At the same time, our performance was hampered by higher market fuel costs worldwide.

We recognized the impact that these difficult market conditions were having on our performance in the fourth quarter, and we saw a need to take an even harder look at every aspect of our business. We eliminated some unprofitable product lines in our prepared food business, and we further rationalized our offshore melon program as the melon business continues to be a very difficult environment. Additionally, we are closing and under utilized salad facility in the United Kingdom. Lastly, we initiated an aggressive cost reduction program during the quarter.

I am pleased to share that our efforts are paying off as we are seeing positive signs already in the first quarter of 2012. In addition, we have begun to see banana pricing improve as supply has [stipend]. However, fuel pricing remains significantly higher and economic conditions in Europe show no signs of a recovery any time soon. In the meantime, Fresh Del Monte will continue to differentiate itself within the industry by the quality and consistency of our products, and expanding our reach through new distribution channels and geographies.

As I mentioned before on these calls, we believe that investing in Fresh Del Monte produce is a long term proposition. Time and time again we have shown we know our business. We are proactive. We don't sit and wait for markets to improve. We take the necessary steps to manage our business and build on our leadership position. Our financial stability remains strong and we believe we are implementing the strategies that are necessary to drive sustained growth over the long term. At this time, I will turn the call over to Richard.

Thanks Mohammad and good morning. For the year 2011, excluding asset impairments and other charges and credits net, we recorded earnings per diluted share of $1.56 compared with earnings per diluted share of $1.02 in 2010. Net sales increased $37 million to $3.6 billion compared to the prior year, and gross profit increased $37 million to $318 million compared with $281 million in 2010. In addition, excluding asset impairment and other charges and credits net, operating income for the year 2011 was $131 million compared with operating income of $124 million in the prior year. And net income was $107 million compared with net income of $108 million in 2010. For the fourth quarter of 2011, excluding asset impairment and other charges and credits net, we reported a net loss per diluted share of $0.15 compared with net income per diluted share of $0.07 in the fourth quarter of 2010.

Net sales decreased $36 million to $781 million compared to the prior year. And gross profit decreased $11 million to $29 million compared with $40 million in the fourth quarter of last year. In addition, excluding asset impairment and other charges and credits net, operating loss for the quarter was $20 million compared with operating income of $400,000 in the prior year period. And net loss of $9 million compared with net income of $4 million in the fourth quarter of 2010.

Now as I turn to our segments, I'll be giving fourth quarter statistics only. In our banana business segment, net sales decreased $11 million to $384 million compared with the fourth quarter of last year primarily due to lower selling prices in Europe. This was partially offset by a significant increase in pricing in Asia and the Middle East, and increased pricing and volume in North America. Worldwide pricing increased $0.39 or 3% to $13.17 per box. Volume was 6% lower compared to the same period last year.

Gross profit improved $8 million during the quarter to a loss of $3 million compared with a loss of $11 million a year ago. And unit costs increased 2% compared with last year. In our other fresh produce business segment for the fourth quarter, net sales decreased 4% to $315 million compared with $328 million in the fourth quarter of 2010. And gross profit decreased $16 million to $26 million compared to the prior year.

In our gold pineapple category, net sales were in line with the prior year period. We did experience lower than expected sales over the holidays in Europe. Volume increased 7%, a result of higher production yields in our Central America operations. Unit pricing was 5% lower, and unit costs increased 7% compared with last year's fourth quarter primarily due to higher fuel costs.

In our fresh cut category net sales increased $8 million to $82 million compared with the prior year. Volume increased 8%. Unit pricing increased 3%, and unit costs was 7% higher, primarily due to higher product procurement and transportation costs. In our melon category, net sales decreased $13 million to $16 million compared with $29 million in the fourth quarter of last year. Volume decreased 46%, the result of a combination of plant volume reductions and lower supply brought about by poor weather. Unit pricing was 4% higher and unit costs increased 23%.

In our non-tropical category, net sales increased $4 million to $47 million compared with the prior year. Volume decreased 2%, and unit pricing increased 11% primarily due to higher selling prices for stone fruit and unit cost was 15% higher. In our tomato category, net sales decreased $9 million to $16 million compared with $25 million in the prior year. Volume decreased 32% as a result of our shift in sourcing tomatoes from growers to our own greenhouse production. Unit pricing was 6% lower and unit costs decreased 3%. In our prepared foods segment, net sales decreased $12 million to $81 million here in the quarter. The decrease was primarily the result of planned volume reductions in our canned deciduous product line, and lower volume and selling prices in our processed pineapple product line. Gross profit was slightly lower than the prior year period.

Now moving to costs and continuing with fourth quarter statistics only, banana fruit costs which includes our own production and procurement from growers increased 2% worldwide and represented 33% of our total costs of sales. Carton costs decreased 4% and represents 5% of our total cost of sales. Bunker fuel increased 43% versus the prior year, and represents 5% of our total cost of sales. And ocean freight costs during the quarter, which includes bunker fuel but also third party charters and fleet operating costs was 2% higher. For the quarter, ocean freight represented 15% of our total cost of sales. ¶ The foreign currency impact at the sales level for the fourth quarter compared to the prior year was unfavorable by $7 million, and at the gross profit level the impact was unfavorable by $8 million compared to last year. SG&A expense during the quarter was $49 million compared with $41 million in the fourth quarter of 2010. The increase was primarily due to higher administrative expenses including compensation and health benefit costs along with increased expenses associated with the expansion of our operations in the Middle East and Southern Europe. During the fourth quarter we spent $7 million to repurchase an additional 319,000 shares as part of our repurchase program. For the full year, we spent approximately $15 million to purchase an additional 2.2 million shares.

At the end of the quarter, our debt was $216 million. And as for taxes, in the fourth quarter we reported an income tax benefit of $17 million compared with a tax benefit of $5 million in the prior year period. The tax benefit in the fourth quarter of 2011 was primarily the result of a change in the tax treatment of plantation costs in a foreign jurisdiction. And we're projecting an effective tax rate of 15% in 2012. Capital expenditures in 2011 were $79 million and we're forecasting capital expenditures in 2012 to be about $95 million as we continue our expansion in new markets and products. This concludes the financial review. We can now turn the call over to the operator to begin the Q &A.

(Operator Instructions) Heather Jones with BB&T Capital Markets.

Good morning. Real quick, Richard, I missed the comment. How much did you say fruit costs were of COGS for the quarter?

Banana fruit costs was 2%, I think. Let me make sure here. Yes, 2% worldwide.

It was up 2%?

Correct.

Okay. Okay. And just real briefly on your CapEx, that came in for the year lower than you all were expecting. And so the $95 million in 2012, does that include any like catch up projects, projects that were supposed to have been done in '11 and have been pushed into '12?

Not especially. I mean we always have carryover, obviously, but there's nothing significant that we pushed into next year.

Okay. Now, Mohammad, you mentioned a cost cutting program that has been implemented and we had heard talk about a cost cutting program in North America and was just wondering if you could elaborate more on specifically what you all are targeting, and just any color you could provide there.

Well, it's actually not only North America. It's worldwide. It's going to be implemented. It is actually in implementation as we speak. And this is on all levels of our activities, be it on the production level, be it on the marketing, administrative, across the board. I think from -- every once in a while one has to look again at his operation and see where can efficiencies be improved and where can [bontat] can be removed. So that's what we are doing and I think that will develop into very important significant I think figure at the end of this year.

Now, when you talk about these across the board cuts, is it just people? Or are you going in and trying to improve in productivity of your farms? Or is it just people?

That's very true. That's the mostly we are focusing on is efficiency and streamlining our business in a better way by adopting better, let's say, ways of conducting our business. I think that there are many ways and many areas that we have seen and we have improved on during the last few months.

Okay. And I had heard that you guys were possibly having some issues recently, or with some of the yields in your farms in Costa Rica. Is that the case? And is that related more to weather? And should that normalize? How should we be thinking about your productivity -- and this is banana farms -- how should we be thinking about your productivity and yields in your banana business right now?

I don't know where you heard this rumor or this story. As a matter of fact, I can tell you that our yields in Costa Rica and Guatemala has been the best ever. I think that we have an excellent yield in our farms as we speak -- I mean for the last, I would say, for the last several months this has been the case. So I don't know where you heard this from.

Okay. And as far as your other produce business, the results for the quarter as far as from a total profits was the weakest quarter that I've -- going back at least a decade. And so, I'm trying to get a sense of -- the melon business was very small during the quarter; I think only like $16 million in sales. Just wondering what specifically is driving that weakness and how should we be thinking about that in Q1 of 2012 and on a full year basis? Should we look at Q4 as a low point? Or just any help you could provide on that business.

I believe that this is a hiccup that fourth quarter that we have seen. We just -- of course it's not the kind of I would say a momentum or kind of a pattern. We know and -- we know that the fourth quarter was weak. We know the reasons why it was weak. Unfortunately, these reasons -- some of them were beyond our control like the [opium] market, like the oversupply during the summer that went throughout, actually up till end of November, early December with the oversupply that we had to dump into the Mediterranean markets at very low values. And we have suffered as well on the pineapple oversupply situation during that quarter. So there were many reasons and many factors that have actually played against us and that's the main reason for the weak quarter. But I believe that this is not something that could be repetitive.

Okay. You said pineapple oversupply. What was the other fruit that you said was oversupplied?

Bananas and pineapples, really. The melons itself was not a big factor in the sense that we have rationalized our volume. As a matter of fact, during this quarter we see a lot of improvement on the melon pricing compared to last year and the years before.

Okay. And as we're looking at Q1 do you expect pineapple profit to rebound significantly from Q4?

I think maybe slightly or maybe on the [thin line].

Okay. And then finally, one of your competitors put out to the trade last week that it was going to implement a forced majeure surcharge in the next week or so on bananas given the tight supplies here in North America. Just wondering, what are you seeing from the supply front? Does Fresh Del Monte have any intention of following suit? Or any color you could give there.

Yes, we have seen that in the market, and that's not the intention of Fresh Del Monte actually, because we don't really see that shortage of supply to justify us to put a surcharge. Because, I think what is happening is that we see more demand than what we have seen in the previous years and especially in North America and in other markets. But not to the point where we have seen a very severe, let's say, shortage in volume or a cut in production. Right now we -- truly in the last three, four weeks we have seen very high prices in Ecuador. You know going from $9 to $16 at the highest of these fall prices. But today if we look at today, Ecuador it's about $8.75, $9 a box, fall. Which is for this time of the year it's expected, it's very reasonable. And we really have no justification whatsoever to go in the market and put a surcharge there.

Okay. My final question is if you look at 2012 versus '11, some of the headwinds include a weaker year-on-year euro exchange rate. You've got some difficult comparisons in the first quarter with strong EU pricing last year. But some of the positives are the comparisons with the EU last year in the banana side should be very easy. You've taken these cost cutting efforts. I know this is a difficult business to predict, but here we are at the end of February. Do you believe that it's realistic to believe that your 2012 should be better than your 2011?

As we continue we believe that could be if not -- we could not be worse than 2011, let me put it that way. And we should improve on 2011.

Okay. All right. Thank you very much. Sorry, go ahead.

But as far Europe is concerned, you know because you are touching on Europe. I think Europe, in my opinion and I have said it over the last several calls that Europe, I don't see a very big turnaround in Europe to be honest with you. And I think that the Europe market will remain weak. As we speak today, we see weaknesses in the market in Europe today. The movement of volume is not as strong as we expect. So I am worried about the European market going forward into the summer.

Okay, okay. Thank you so much for that color.

Scott Mushkin with Jefferies and Company.

Hello, guys. Nice to be back on the calls. So I just kind of had a broad question because I think Heather's right. It's very hard to predict the earning stream near term. And we've always looked at it from a longer term basis. You know what -- the assets, and you guys are a fairly asset-rich Company -- can produce from a cash flow perspective. And I guess as I step back and look at things -- I think you talked about the melon volumes are down. And I kind of remember my visit to Costa Rica and being on your melon properties, which I think your own. So I guess, what's going on with that land? And is -- what do you think of the cash flows off the melon business? What do you think of the cash flows off the banana business? And then maybe to an extent the tomato business, although that's being redone. Have we stepped down almost permanently on what we expect these assets to throw off? Or do you think we can get back to a normalized level maybe where we were three or four years ago?

We are rationalizing our business. When we see a kind of product or a segment of our business is suffering and we continue seeing it suffering for several quarters, of course we take action to mitigate this losses and we take whatever action that is needed be it to cut down on production, or to phase out of that product line, or to close down these businesses, because that's the one rational way to do. So it doesn't mean that we are closing or if we are cutting down on one line that means that our cash flow will be severe because we are concentrating on other areas where we believe we can compensate and make up for this shortfall into certain areas. And like for instance in Costa Rica, we will just be -- very soon now, within the next couple of weeks we'll start shipping our sweet peppers from our greenhouses. This project which is just completed recently. So this is an area where we are going to be adding a new area of cash flow -- positive cash flow compared to the other areas. So it's an ongoing, let's say, process and replacement.

So just a follow-up on it. Like what -- again being down there, like seeing the fairly large melon operations you guys were running three or four years ago. What's happened to all that? Is it still there? What's happened to the land? As the volumes have come way down, is it still being planted? Is it moth balled? Do you have to take a write off? I'm just trying to kind of conceptually understand what's happened to all those assets?

To start with, you have seen during the last probably two, three quarters, we have written down a lot of our melon efforts. So it's been already taken care of. Secondly, some of these lands have been on lease. I mean, they are not ours. Thirdly, the lands that we have, and we don't need and we don't expect to use in the coming future, if we find the right value, of course, we would dispose of them with the right value. But this is what's happening right now.

All right. That's really, really great color. So in pineapples, I know it had tough quarter, but you still believe that's a very strong vertical for you. Is that correct?

When you look at Fresh Del Monte having about 45%, 43%, 44% of the North American market and market share, and looking around the world, more or less it's the same story in different markets, and even more in some other markets. That shows you the strength. I know that there is an open supply. I know there is competition. I know there are 100 or 200 small players, different brands, God knows what, that shows up in the market. But I believe this business, long term, is a business for the professionals like Del Monte for instance.

So I'm not worried that we would definitely have some up hill going forward in the next year or so. But I think long term this business will be rationalized again. And I think small players, small producers, or even medium sized producers will not be able to support the kind of pricing that they are realizing in the markets. I don't believe that this business can continue the way it is. It's not like bananas. It's a lot more capital intense and it needs a lot of more let's say technical know how that I don't think it's available to many people around.

So it's perfect. I'm sorry to take a lot of time. And bananas you talked about a year ago, that you were worried that the long term -- (multiple speakers)

And in addition to that I would just like to throw a piece of information. That Fresh Del Monte within the next few years will be coming up with new variety in pineapples which would be I think very significant.

Oh, that's interesting. I'm going to yield because I've been taking too much of the time, and I'll just follow up with you guys up off line. But I appreciate all the candor in the answers. Thank you.

Diane Geissler with CLSA.

Good morning. Mohammed, I just wanted to get back to your -- the question earlier about the level of earnings you had back in the peak years, sort of pre-credit crisis. And it sounds -- you know I've heard quite a bit over the last couple of years about rationalizing businesses whether it was melons taking out some production assets and growing areas in the prepared foods business as well as production facilities, the processing facilities. And I guess my question is, is it possible, given the asset base you have today fully rationalized to reach that level of profitability again? Or do you feel like you've pared away some things and will never get back to that level again? I guess I'm just confused because we've heard about rationalizing over the last couple of years because of how difficult the industry has been. And just if there had been just a step change in the level of profitability you can expect from the assets that you have today?

I'm always positive, and I always believe in the good times. So I believe that -- we have in the last couple of years, especially in the far East and Europe, these markets have been -- especially Japan, I'm talking Japan and Europe -- have been extremely difficult. And very unfortunately negative in terms of returns to us. But that -- we cannot write out -- write off these markets. We just have to keep them and maybe rationalizing our volumes into these markets and improving our efficiencies to be able to weather the storm. But if you ask me what do you think about the future, nobody can predict the future except God, and we are doing our best to do the right thing for our shareholders and for the company. And I'm very positive that we will be able one day to return to where we were. We are working on many projects, new projects in different parts of the world which I believe is going to pay off handsomely in the near future.

Okay, but I guess I'm just thinking about for instance the melon business which actually used to be pretty profitable. I mean obviously it wasn't your biggest business, but it was generally fairly profitable. And it sounds like you've pretty much rationalized that almost out of your portfolio. So I guess the question I have is have you added other things into the portfolio that will not only make up for the -- what you're missing there in the profitability from the old melon business but actually get you to position where you'll have higher earnings? Because you know it's all about earnings growth, right? I guess that's my question, is are the things that you've added into the portfolio enough to make up for what you've taken out of the portfolio?

Yes, that's exactly what I said a few minutes ago. I said we are replacing whatever assets that have not producing cash flow into new projects or new products that are replacing this and helping to offset any shortage in cash flow that we have. (multiple speakers) are phasing out.

Okay. I guess the question then is when can we expect to see that because it's new product development, et cetera. It just takes time. Is that the message?

That is the message, yes.

Can we just talk a little bit about Europe and the prepared foods division? I know you've done a lot of work there. I know it's been a little bit of a struggle with some of the competitive issues, particularly in the UK, et cetera. Can you talk about your expectations for that business for '12? Just what you're seeing on the competitive front there and how you're thinking about the prepared division for this year?

I can tell you that our market share in the UK for instance, is improving year-over-year. That's for a fact. We are doing extremely well in southern Europe in the food sector -- I mean the food segment of our business. And the same thing in almost every market that we are in. We have just started introducing our products into some parts of Africa, where it's meeting very good reception and demand. So it's not going to be overnight. But I can tell you that the food segment of our business has improved tremendously over the last several years and I expect that business to even improve further as we go forward.

Okay, terrific. And then maybe just one for Richard on the -- fuel prices are up pretty aggressively here, when -- I know you guys sometimes do some hedging and bunker fuel, et cetera. So could you just talk about how you would expect your freight costs to track through 2012 if we keep fuel costs where they are today on a spot basis?

We have very, very little hedged. We have some small hedges, but very little. So we'll see where it goes. Obviously, we have a natural hedge in the US with our bunker fuel surcharges, but in the rest we'd have to see where pricing goes.

Okay, and historically has that -- has the pass through been fairly immediate in terms of when you see the rising fuel prices you see it -- (multiple speakers)

You know there's a three month lag.

Three month lag. Okay. Okay, I think that's it. Thank you very much.

Scott Mushkin with Jefferies and Company.

Hello, thanks for the follow-up. So wanted to get back to the melons just to try to understand a little bit more of what went wrong and kind of a strategy where I think we went -- you went kind of vertically integrated, and the idea was to produce a superior quality product at the same price or even lower prices than your competitors given the advantage of that vertical model that you were deploying. Anecdotally, and at retail, I think the quality of the fruit, the melons, cantaloupe has really decreased in the last couple years. And I was just wondering, was the strategy wrong or is it just the wrong economy? In other words, are people just going for lesser quality fruit? So like that whole strategy you were deploying just didn't work? Or do you have any thoughts on what went wrong?

I think what went wrong is that the economy has made a very big impact on the sale of melons. Melons as I said before, I've said it before but it's the cheapest maybe type of fruit on the shelf. And it's not the primary, let's say, item on the supermarket list. If you go into supermarket, maybe there will be of course bananas and pineapples and other fruits during the season. But that's one of the items. The other, it's less consumption and less demand. The third most important, in my opinion which really made this business even more difficult, is the all the cases that have happened, especially in the last few months, remember in Colorado with the Listeria, and people stopped eating as a matter of fact. They stopped buying the melons. At supermarkets, different large and small supermarkets, stopped even stocking melons in their supermarkets.

So you can imagine what effect that can happen on the [configurie]. On top of that, additional to that, the FDA has been very strict and very difficult in terms of sampling and allowing and approving entry of melons in the US. So it's been a battle on all kinds of fronts. So that's the reason why the melons category has been suffering from an economic point of view, from a technical point of view, from a health point of view. So all these factors have really taken a toll on this segment of the business. And what we have done actually is the right thing that to address this issue.

No, that makes a lot of sense. And if you were going to look at the economy, maybe the retailers you deal with, because I guess melons were primarily North America. Is there, broadly speaking, a trend with these retail partners to basically go to the lowest common denominator from a quality perspective? So I guess what I'm getting at is you transfer and try to get the peppers and I think you talked about tomatoes. Is the basic philosophy of a lot of the retailers in North America friendly to higher quality products where they're not going to just be pushing on price all the time and go to the lowest common denominator?

No, I think that let's be very honest. The retailers are looking for the highest quality in the market. I mean they are very strict in terms of quality and condition of the fruit and vegetables that they see. Of course, it's a buyer/seller relationship. So everybody tried to get the best deal for himself. But that doesn't mean that they will have to go and -- if you, as a buyer, if you keep squeezing me and killing me, at the end of the day, I cannot deliver to you neither top quality or low quality. We'd be out of the business. It's an mutual relationship, I think. And I believe that the retailers are realizing that if they need the highest quality and the top kind of fruit or vegetables, there is a price for that.

But most of the growth in North American retail has been in guys, I'd say, dollar stores, Walmart. I should send you a picture, Mohammed. I that I took a picture of the world's smallest green pepper at a Walmart the other day. So I just wonder if those trends actually hurt what you're trying to do?

It's unfortunate. But as far as we are concerned, Del Monte, we have our standards and our quality you know specs that we cannot move from. Safety, hygiene, all these matters for us and we cannot compromise on them. We have a brand that we have to protect and we will not be able to do that if it's not to meet our standards and our quality in terms of safety, hygiene, freshness. I think the consumer at the end of the day will decide where to buy and what to buy.

Yes. Let's hope they get a little bit more money in their pockets. Standard of living -- nice if they rose for a change. But thank you for all your commentary. Really appreciate it.

And there are no further questions in the queue at this time. I would like to turn the conference back over to Mr. Mohammed Abu-Ghazaleh for any additional or closing remarks.

I'd like to thank everybody for attending this call and I hope to talk to you soon on our next call. Thank you very much. Have a good day.

And that concludes today's conference. We thank you for your participation.