Fresh Del Monte Produce Inc (FDP) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce first quarter 2012 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 like to now introduce your host for today's conference, Ms. Christine Cannella. Please go ahead, ma'am.

Good morning, everyone, and welcome to Fresh Del Monte's first quarter 2012 conference call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer, and Richard Contreras, Senior Vice President and Chief Financial Officer.

This call compliments our first quarter 2012 press release we made public this morning, and you can find the 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 the 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, retransmission, or rebroadcast of this call in any form without our written consent is strictly prohibited.

Let me turn this call now over to Mohammad.

Thank you, Christine, and good morning, everyone.

For the first quarter of 2012, we achieved solid earning results, and we made good progress in laying the groundwork to improve our business for the long term, although our net sales decreased as compared to the first quarter last year. Nevertheless, we established an impressive foothold and grew our business in southern Europe, with significant improvements since we took over the marketing, sales, and distribution of Del Monte branded products in this market. We are in now well-positioned for future growth opportunities as a result of this measured change.

Today, we are the global leader in the branded fresh cut produce business, and our first quarter performance in this product line is indicative of the growing consumer demand for convenient, healthy, ready-to-eat products. We plan to further capitalize on our performance by leveraging our existing global distribution network and diverse product line around the world.

During the quarter, we took strong steps to become more profitable in the northern European market, banana market, by deciding not to enter into sales that do not meet our profitability thresholds. This action is in line with our strategy to not sell just for the sake of selling.

Our first quarter was also shaped by the ongoing expansion in non-traditional distribution outlets and increased sales to food service customers, as we continue to expand our product line and future sources for revenue growth. We continue to invest in production capabilities and product offerings in our prepared food business during the quarters to meet growing demand for Del Monte branded products in the Middle East region as we continue to grow customer loyalty and awareness of the Del Monte brands.

These initiatives are designed to improve operating margins, grow the bottom line, and increase shareholder value. And while we progress in the right direction during the first quarter, we still have a tremendous amount of work to accomplish in 2012. Our focus during the past two quarters has been on improving the bottom line, however, we are just as focused on diversifying both our product mix and international expansion to drive top line growth as well.

In summary, I'm very optimistic about the future because, first, operationally we are more efficient, secondly, we remain committed to our sound mission and strategies, and thirdly, we have a strong balance sheet to support future growth.

At this time, I will turn the call over to Richard. Richard?

Thanks, Mohammad, and good morning.

For the first quarter of 2012, we reported earnings per due diluted share of $1.08, compared with earnings per diluted share of $0.93 in first quarter of 2011, or excluding asset impairment and other charges, earnings per diluted share of $0.96 in the first quarter of 2011. Net sales were $198 million, compared with $974 million in the prior year period.

Gross profit was $112 million, compared with gross profit of $123 million in the first quarter of 2011. In addition, operating income for the first quarter of 2012 was $66 million, compared with $75 million in the prior year period.

Net income $63 million in the first quarter of 2012, compared with $55 million in the first quarter of 2011. Excluding asset impairment and other charges, we reported net income of $62.6 million in the first quarter of 2012, compared to net income of $57.1 million in the first quarter of 2011.

In our banana business segment, net sales decreased $30 million to $398 million, compared with $428 million in the first quarter of 2011, primarily due to lower sales volume in our Middle East and Asia regions.

Sales volume was also lower in northern Europe due to our decision to not renew unprofitable business. Overall, volume was 6% lower compared with last year's first quarter.

Worldwide pricing decreased 1%, or $0.20 per box to $15.08. We had stronger banana pricing year-over-year in the Middle East, Asia, and Europe, however, the higher pricing in these regions was not enough to offset the absence of a product procurement surcharge we implemented in the first quarter of 2011 in North America.

Gross profit decrease $13 million to $39 million, compared with gross profit of $52 million a year ago, the result of the lower volume, lower pricing, and higher fruit cost. Total worldwide banana fruit cost increased 2% compared with last year's first quarter.

In our other fresh produce business segment for the first quarter, net sales decreased 7% to $421 million, compared with $453 million in the first quarter of 2011, and gross profit increased $5 million to $60 million, compared with $55 million in the prior year.

In our Gold pineapple category, net sales decreased 3% to $118 million, compared with $122 million in the prior year, primarily the result of lower volume. Volume decreased 9% with lower production in our Costa Rica growing region. Unit pricing was 7% higher, primarily in Asia, the Middle East, then Europe, a result of improved market conditions and the direct marketing in southern Europe, and unit cost increased 2%.

In our fresh cut category, net sales increase 17% to $92 million, compared with $79 million in the prior year, as we continue to expand our customer base, distribution channels, and global footprint. Volume increased 10%, unit pricing increased 6%, and unit cost was 5% higher than the prior year.

In our melon category, net sales decreased 8% to $48 million, compared with $52 million in the first quarter of 2011. Volume decreased 24%, the result of strategies implemented last year to continue to reduce our production. Unit pricing was 21% higher due to increased demands and unit costs was 10% higher.

In our non-tropical category, net sales decreased 8% to $111 million, compared with $120 million in the first quarter of 2011, on lower volumes of (inaudible) fruit and grapes resulting from inclement weather in Chile and lower selling prices of avocados. Volume decreased 11%, unit pricing increased 4%, and unit cost was 5% higher than the prior year period.

In our tomato category, net sales decreased 53% to $19 million, compared with $40 million in the prior year, due to lower volume and lower selling prices. Volume decreased 30%, partially due to the planned decrease in volume contract with the growers. Pricing was 34% lower due to an oversupply in the market and unit cost was 31% lower.

In our prepared food segment, net sales decreased $15 million to $79 million during the quarter. The decrease was primarily the result of lower canned pineapple sales volume and lower pricing on industrial pineapple products.

The decrease in net sales was partially offset by higher volume and selling prices in our deciduous product line. Gross profit decreased $3 million to $13 million, primarily due to the lower sales.

Now moving on to costs, banana fruit costs, which includes our own production and procurement from growers, increased 2% worldwide and represented 29% of our total cost of sales for the first quarter. Carton costs decreased 7% and represents 5% of our total cost of sales.

Bunker fuel increased 27% versus the prior year, and represented 5% of our total cost of sales. And ocean freight costs during the quarter, which include bunker fuel, third-party charters, and fleet operating costs was 10% lower, despite the increase in bunker fuel costs. For the quarter, ocean freight represented 13% of our total cost of sales.

For foreign currency, the foreign currency impact at the sales level for the first quarter compared to the prior year was unfavorable by $4 million, andat the gross profit level, the impact was unfavorable by $2 million compared to the first quarter. Other income expense net for the quarter was a gain of $500,000, compared with a loss of $3 million in the first quarter of 2010, primarily due to foreign currency.

At the end of the quarter, our total debt was $171 million. Our credit facility matures in January 2013, and, accordingly we have reclassified the balance to current liabilities.

Income tax expense was $2 million during the quarter, compared with income tax expense of $14 million in the prior year period. Income tax expense in the first quarter of 2012 includes credits of approximately $8 million, primarily relate to the reversal of uncertain tax positions. We expect our effective tax rate for the remainder of 2012 to proximate 15%.

As it relates to capital spending for the three months ending March 30, 2012, we spent $13 million on capital expenditures. Capital expenditures for the year are expected to be approximately $95 million.

This concludes the financial review. We'll now turn the call over to the operator to begin the Q&A portion of the call.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). Our first question will come from Heather Jones of BB&T Capital.

Good morning.

Good morning, Heather.

A very nice quarter.

Thank you.

I had a number of questions, but I wanted to start with other produce. In Q4, the profitability performance from that division was very weak, and this quarter there was a sharp reversal, and actually you were up year-on-year. So I'm trying to get a sense of how much of the reversal relative to Q4 was due to internal initiatives that will continue throughout the rest of the year and how much was due to maybe a temporary shortfall in pineapple volumes, etc., if you could just give us a sense of that.

I would say it was both, Heather. We've had a pretty aggressive cost-cutting campaign that we started in the fourth quarter, so some of it is that, but pricing improved and we were short volume in the first quarter, as we mentioned.

And in the melon and tomato category, that was a purposeful reduction I guess you continue, but the pineapple, that was more timing of harvest, is that correct understanding?

It was timing -- it was the harvest timing, I guess. It was just weather-related events.

Okay, so when we look at Q2, assuming the harvest normalizes and all, doyou think you should be able to turn in a performance comparable to Q1 or up relative to Q2 of 2011? How should we be thinking about that?

We do our best, only God know our world events, but we see the weather-- I mean, the turnaround of the production is improving than the first quarter. We see better yields now than what we saw in the first quarter. So we expect and we hope, but that, of course, is something that we cannot control if the weather changes or if any event takes place that is beyond our control.

I'm not trying to belabor this point, but given the things that are in your control, the restructure in tomatoes, the restructure in melons, I guess the changing and the southern European marketing arrangements, do you feel like it would be reasonable for us to believe that Q2 results could be comparable to Q1, or is that too optimistic?

We do our best. I believe that we will do well, but we still, you know, we are just one month into the quarter, so it's too early to really tell. But I believe that this quarter is looking reasonably good as we speak now.

Okay. And as far as southern Europe, this change with the relationship with Orsero,what are you anticipating for that impact for the full year? Are you realizing better prices than you had under the previous arrangement?If you could give us a sense of how the profitability impact of changing that distribution arrangement.

Well, we do have a better pricing, definitely, better return. To start with, there was a sharing agreement on results, and we are quite happy with what we see right now. Don't forget that we haven't been in this market ourselves as Del Monte in sales and distributions, so we've been depending on a third-party for the last 30-something years. I think that getting into the market right now, going forward will be even hopefully better because we will get to know better about the market, have a better handle on the market, and penetrate it in a different way than it used to be done before.

Okay. EU, did you say -- was your local price -- you said pricing in Europe was up, so I don't know what your forex positions were last year versus to this year. Was local pricing higher in Europe for you for the quarter?

Local pricing was down about 2.5%.

Okay. And then my final question is recently we saw where the courts ruled in favor of you guys relative to Del Monte regarding produce offered in the produce section. I know there is a financial award, but are you planning on making any changes to how you market, etc., to take advantage of that decision? What are your plans there?

First of all, the lawsuit still has not finalized, it's not finished yet. Of course, we have a jury ruling but still the case is in the court and the judge will have to make decisions as we speak maybe in the next few weeks. So it is really too early to predict or make any comment on this until the case is finally concluded and we see the final ruling.

Okay. All right. Thank you very much.

Our pleasure.

Our next question comes were Bill Chappell of SunTrust.

Good morning.

Good morning.

Just trying to understand both on the tomato and on the melons, when do we start to kind of lap, both on the melon side, the real declines in that business and the right sizing of that business, and then on the tomato side, when will we start to see signs of kind of the initiatives you put in are generating top line growth?

Well, are you talking about top line?Because on the bottom line, there has been a significant improvement in the melons. If you're looking just at --

Sure, no. Yeah, melons it was more on top line. It was just trying to understand when the right sizing of that business really starts to end, and we see stabilization on that.

I think it would be towards the end of the year because still in the summer months in the US production, we should see a decline as well as over last year. So I think when we get into the winter season, again, in the fourth quarter is when we should see it lap in melons.

And on the tomato side, just trying to understand the timeline for that project.

The tomato side, this business has been going through turmoil. The tomato industry, in general, for the last two years in the US has been going through very difficult times, there is an oversupply situation and too many companies are really suffering at this time. So I believe that we are in good position. We are not producers in US;we produce outside offshore. And we are monitoring this very carefully. But I think at the end of the day, we are in a position that will be beneficially when the time is right.

Okay. And then, Richard, can you remind us just both on bunker fuel and then on currency, are you fairly locked in for the next two quarters? I imagine the comps get a lot tougher over these next two quarters.

On bunker fuel, we have very, very little hedge.

Okay.

On currency, we have -- typically, we're about 50% hedge.

Okay, so that's --

At least on the Euro and the Yen and Pound.

And last question, and I understand there are a fair amount of investments on CapEx, and the business is a little bit of a transition, but I'm surprised there has not been greater share repurchase over the past six, nine months, especially if you feel like business is going to be getting better and things have stabilized, it seems like a pretty good use of cash.

We said before that we buy shares whenever the time is right, and we will do that when we see it is in the best interest of the shareholders and the Company.

And I'm just -- maybe I missed it, did you repurchase any shares during the quarter?

No, no, we did not.

That was just being more opportunistic.

Correct.

Great. I think that's all I have for right now. Thanks.

Thank you.

Our next question comes from Jonathan Feeney of Janney Capital Markets.

Good morning, guys. This is Mark on for Jon. Mohammed Abu-Ghazaleh: Hi, how are you.

Good, thanks. My question is related to banana supply demand. You noted local pricing in Europe was down 2.5% in the quarter. What are you seeing now? Our sources indicate that year-over-year that trend has gotten better in Q2, but would like to see what you're seeing now and in North America also, what are you seeing as you lap the fuel charge there?

As far as North America is concerned, we see a stable market, a very normal trend, which we see every year at this time in the banana market are good and stable. We are in transition between the winter -- the offshore season and the California season. So there's not too many -- too much fruit to offer in the market besides bananas and the traditional items, apples, oranges, things like that. So this (inaudible) bananas in general.

As far as Europe is concerned, we keep our fingers crossed that they will not deteriorate the way that they did last year in the beginning of the second quarter, but we are monitoring this very careful. And as I said in my call just a few minutes ago, we will not go and sell fruit for the sake of selling fruit and losing tons of money on that. We will have other options; we'll have other markets. We will really take the decision that is best for us, sowe will be taking it one step at a time.

Okay, thank you very much.

Our next question comes from Diane Geissler of CLSA.

Good morning.

Good morning.

I wanted to ask you about the European market just from a macro perspective, and I appreciate your comments about northern Europe and reducing your supply into that market, justgiven the pricing situation there, but I guess two questions. One, what is your all in -- what's your best guess about how much volume you will ship in 2012 versus 2011, given your decision not to take unprofitable sales there?And then to the extent that it seems like the news in Europe continues to worsen, inthe last two weeks, we've had a lot discussion about the French and the Dutch and some of these areas where it seems like they were stable while everybody was worried about southern Europe are now kind of cropping up on the political fronts. I guess I'm just wondering can you give me your viewpoint on Europe and what you see there from a macro perspective and how that is going to effect the consumer there?

Well, from a macro perspective, I think Europe, and I've been saying it for several quarters now, maybe over a year and half that I have been predicting that Europe would be in tough situation there, and I don't see it is going to improve very soon. But as far as our business is concerned, we have been monitoring this very carefully. I as I said earlier, we will not send fruit and lose a huge percentage or huge amount of money on that fruit just to be in the market for sake of the market. So I cannot give you an indication of how much fruit will I sell.

My total fruit -- our total volume will stay the same. We are not going to go and that volume will disappear, but we will have probably other markets to find a home for this fruit. So it's too difficult to tell you how much fruit we will be shipping in that market at this time. But as I said, we will always monitor the situation. We're not going to get out of Europe, definitely, but we are not going to, as well, dump our fruit there at whatever price that is offered because that will not make sense.

Well, I'm just curious about the volume for bananas were down 6% in the first quarter.

It's by design.

By design.

Yes.

So should we assume that obviously you're not reducing production on your own acreage for long-term contract. I'm assuming what you're reducing is the kind of third-party spot purchases, which I have to assume are sort of the higher-priced -- the higher cost supply that you send into Europe. Is that the best way to say that?

We do have a different structure in 2012 than 2011, which I cannot disclose on a conference call, but we do have difference structure this year than last year. Definitely, we will have fruit to sell or to find markets for, but I think we will not, as I said, dump that fruit in a market where losses -- definitely, there might be a loss but there is a loss between losing $1 a box or $5, $6 a box. That makes a big difference between how much is your loss during that period of time which everybody is suffering.

Right, okay. So you don't see a decrease in production off your own farms this year?

No, no.

In volume coming off your own farms?

Our production is normal as we speak. Of course, we don't know what is going to happen in the next four, five, six months.

Sure, because of the weather, I understand that. You can't predict it. I also wanted to ask about the disclosure you have on the sales by geographic region, and just I'm curious about the decline from the Middle East. I know that's been sort of a target focus for you guys.

Are you talking about bananas?

I'm just talking about the disclosure about your big business segment where you say net sales by geographic region where Middle East was 81 versus 95 last year, and I was just curious about --

Actually it's was mainly because of production. We had less volumes to send to the Middle East, unfortunately. Because the Middle East is supplied by the Philippines, and the Philippines were short this year compared to last year.

Okay, so that's not having anything to do with the health of those markets, it was a supply issue.

Oh, no, no, no.

Okay. All right. Those were the questions I had. Thank you.

Thank you.

(Operator Instructions). We'll go next to Eric Larson.

Good morning, everybody. A quick question, Mohammad, you've been very aggressive -- it's sort of a follow-up to some of the questions that have already been asked, but you've been very aggressive in restructuring your tomato business,very aggressive in restructuring your melon business, and now, basically, making a decision in northern Europe to walk away from some really low margin or maybe even unprofitable business, for all we know. Are there other strategically other places for you to go, or have you taken the major steps here to right size the sales distribution points of your products?

I think we have overcome the major hurdles. During the last two quarters of 2011, and as we speaks now, we have done a lot of streamlining on businesses albeit on the -- on all levels of business and all divisions, be it on production, be it in management, on logistics, on every aspect, and that has resulted in a very big improvement in our business. Secondly, I think Europe was the measure -- let's say kind of loophole that we addressed in the last couple of quarters, and I feel a lot better today than I felt, let's say, six months ago. So I look at the future in a much more promising than what I saw last year. But, of course, Europe is not going to change overnight.

Europe is going to go still into further deterioration and more difficulty. We see it every day. We see the consumption is going down, the purchasing power is less, and this are the facts of life. We cannot just walk away or hide and say that this is not happening. And we need to address that, and we are addressing that the way we see fit for our Company.

Okay. And then, Mohammad, just a little follow-up on -- the reason why I'm stuttering on these questions, I'm getting feedback, and it sounds like you guys are trying to ask me a question or something here, too, so sorry about that. Follow-up on your prepared foods business, I think the one surprise was that sales were relatively weak in prepared foods. Is that a timing issue on your canned pineapple side or whatmight be a way to think about the performance of that business last quarter?

No, it is the time issue. Actually, we had less -- the crop was delayed and we had less volume to ship into Europe during the quarter. Hopefully, that is turning around, that production is coming back.

But on the industrial side, on the other hand, which is the juice concentrate, the market has weakened in Europe, the European market is really getting weak. There is oversupply coming from Thailand, as well. So that has also impacted the situation. But I would say the shortage or the timing of production was a major factor.

Okay. And then just one final question, and maybe this is your cash reallocation process. Obviously, you've reclassified some debt from long-term into current, is it your intention to pay off all that debt this year or refinance part of it? How do you view the capital structure?

We -- obviously, we'll refinance before the end of year, so we'll start looking at that in the third and fourth quarter. As we speak, we don't have huge cash needs, but we will look again at share repurchase, we'll look at acquisitions as we have been, and allocate accordingly. But cash-wise, we're in a pretty good position right now.

Yes you are. All right. Thank you, everyone.

Thank you.

(Operator Instructions). We'll go next to Gary Albanese of Auriga.

Good morning, everybody. I just wanted to ask you about the ocean freight. Obviously, it's down, I think you mentioned 10%, bunker fuel is up. But I know there is such excess capacity right now with the freighters. Is this something that you're envisioning that is going to be perpetual for the next couple of years, is it going to get even softer, which could be more beneficial to you?Also, how quickly can you enter into new arrangements to possibly take advantage of some lower costs?

As you can see, the bunker has increased, fuel has increased, and our freight has gone down, and thatcan tell you one thing, that we are very efficient in running our business. I cannot tell you how we do it, but we definitely are very (inaudible) company.

I mean we have demonstrated over the years that we (inaudible) and create opportunities for ourselves, how we can improve our business even with challenging times, and this is one of the challenging times thatfuel is going up and our freight is going down. That's a testament for how our people and our management are addressing this issue.

Okay. Just lastly, with the legal settlement that was mentioned earlier, do you expect to book that in the second quarter?

It's too early. We cannot comment on that. This lawsuit still has not finished and it's still in the court and when the time is right, it will be a public announcement.

Okay. Thank you.

Thank you.

There are no other questions at this time. I would like to turn the conference back over to Mohammad Abu-Ghazaleh for closing remarks.

Thank you very much, everyone. I appreciate your attendance and listening to us, and I hope to give you better news next conference call. Have a good day. Thank you, everybody.

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