Fresh Del Monte Produce Inc (FDP) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce, Inc. second quarter 2012conference call. (Operator Instructions). I would like to introduce your host for today's conference call, Christine Cannella, for the opening remarks.

Thank you Matt, good morning everyone, and welcome to Fresh Del Monte Produce, Inc. second 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 calls compliments our second quarter 2012 press release we made public this morning and you can find that release for future distribution by visiting our website at www.freshdelmonte.comand clicking on investor relations. This conference call is being web cast and 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 mentioned 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 security safe harbor laws. Forward-looking statements involve risks and uncertainties which are more fully described in today's press release and our filings. These risk factors may cause actual company results to differ materially.

This call is the property of Fresh Del Monte. 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, good morning, everyone. We were very pleased with our second quarter 2012 results.

Our performance reflected the continued momentum of a number of strategies we have put in place over the last few years, directional-ize our business and [inaudible]. We benefited again in the quarter for the changes we made at the beginning of the year whereby

we took control of the marketing, sales, and distribution of Del Monte's products in southern Europe with performance better than expected. As we discussed on our first quarter call, we reduced our supply of bananas in key markets in northern Europe to a level designed to improve profitability yet maintain our competitive position in these markets.

Due to the number of suppliers in this region and the [inaudible] with the European economy, we believe Europe will remain a highly competitive banana market for the near term. During the quarter, we saw substantial expansion of our fresh cut business. We see strong demand for our product across all delivery channels. At grocery tables, club stores, quick serve outlets and convenience stores, to prove suppliers like Fresh Del Monte to meet their customer needs.

We believe this category will remain high growth opportunity for Fresh Del Monte. We will continue to capitalize on our global leadership position and leverage our experience and distribution network to grow market share in this rapidly expanding category.

We also continue to leverage our competitive advantage and our Gold branded pineapple line during the quarter. Our Gold pineapple pricing rebounded and we continue to command top global market share of this category.

Touching on the melon business, the decisions we have made over the past few years to address the industry of our supply allows us to improve our performance in this product line during the quarter. While it's not possible to shield Fresh Del Monte from the effects of the global economic climate, we have taken strong action during the past few years to [mitigate?] market position.

Despite the challenges, we have continued to offer our products in new markets and through new distribution channels while at the same time rationalizing product supply in certain markets and closing unprofitable facilities where necessary to keep Fresh Del Monte on course to be a preeminent global fresh produce company.

In summary, I'm confident in Fresh Del Monte's underlying fundamental strength and in our commitment to meeting our goals and actively improving and enhancing all aspects of our business.

We know that by being proactive, maintaining our focus, and our strong cash flow, and balance sheet, we will continue to deliver long-term goals to our valued share holders. At this time I will turn the call over to Richard.

Thank you, Mohammad, and good morning. For the second quarter 2012, excluding asset impairment and other charges, we reported earnings per diluted share of $1.01 compared with earnings per diluted share of $0.77 in the second quarter of 2011.

Net sales $958 million compared with $1 billion in the prior year period and gross profit increased 12% to $116 million compared with gross profit of $104 million in the second quarter of 2011. In addition, excluding asset impairment and other charges, operating income for the second quarter of 2012 was $71 million compared with $56 million in the prior year and net income increased 26% to $58 million in the second quarter of 2012 compared with $46 million in the second quarter of 2011.

In our banana business segment, net sales decreased $41 million to $425 million compared with $466 million in the second quarter of 2011. Primarily the result of ongoing supply management in markets in northern Europe and lower volume in the secondary markets in the Middle East. Overall volume was 5% lower than last year's second quarter.

World wide pricing decreased 4% or $0.67 per box to $14.83. Pricing was higher in Europe and the Middle East, however, the higher pricing in these regions was not enough to offset the absence of a product procurement surcharge in North America during the second quarter of 2011 and lower selling prices in Asia due to higher industry supply.

Gross property decreased $3 million to $38 million compared with the prior year period and total world wide banana fruit cost decreased 3% compared with last year's second quarter. In our other fresh product business segment for the second quarter, net sales decreased to $23 million to $454 million compared with $477 million in the prior year.

Gross profit increased $21 million to $66 million compared with $45 million in the second quarter of 2011 excluding other charges of $800,000. The increase was principally due to higher selling prices in our Gold pineapple, melon, and fresh cut product lines.

In our Gold pineapple category, net sales decreased 7% to $144 million compared with $155 million in the prior year primarily the result of lower volume. Volume decreased 19%, unit pricing was 14% higher, and unit cost increased 3%. In our fresh cut category, net sales increased 9% to $109 million compared with $101 million in the prior year.

Volume decreased 2% net primarliy a result of the previously announced closure of an unprofitable fresh cut facility in Europe. Unit pricing increased 11% and unit cost was 10% higher.

In our melon category, net sales decreased 14% to $36 million, compared with $42 million in the second quarter of 2011. Volume decreased 35% due to planned rationalization of our melon operations. Unit pricing was 32% higher, a result of lower industry wide volume and improved market conditions in North America and unit cost was 7% higher.

In our non-tropical category, net sales decreased 3% to $111 million compared with $114 million in the second quarter of 2011. Volume increased 9%, unit pricing increased 6% and unit cost was 6% higher than the prior year.

In our tomato category, net sales decreased 30% to $23 million compared with $32 million in the prior year due to lower volume and selling prices. Volume decreased 15%, pricing was 18% lower due to an industry oversupply, and unit cost was 16% lower.

In our prepared foods segment, net sales decreased $18 million to $79 million during the quarter . The decrease was primarily the result of lower canned pineapple sales volume and lower selling prices of industrial pineapple products. Gross profit decreased $5 million to $13 million primarily due to the lower sales volume.

Now moving to costs. Banana fruit costs which includes our own production and procurement from growers, decreased 3% world wide and represented 29% of our total cost of sales for the quarter. Carton cost decreased 9% and represented 4% of our total cost of sales.

Bunker fuel increased 7% versus the prior year and represented 5% of our total cost of sales but total ocean freight during the quarter, which includes bunker fuel, third party charters, and fleet operating costs, was 21% lower. For the quarter, ocean freight represented 13% of our total cost of sales.

The foreign currency impact at the sales level for the second quarter was unfavorable by $11 million and at the gross profit level the impact was unfavorable by $1 million. Other income expense net for the quarter was $3 million compared with $400,000 in the second quarter 2011 primarily due to foreign currency rates. Our debt at the of quarter, our total debt was $42 million.

Income tax expense was $7 million during the quarter compared with income tax expense of $6 million during the prior year period. We expect our effective tax rate for the remainder of 2012 to approximate 15%. As it relates to capital spending for the six months ended June 29, 2012, we spent $34 million on capital expenditures. Capital expenditures for the year are expected to be approximately $100 million.

This concludes our financial review. We'll now turn the call over to the operator for Q&A.

Thank you. (Operator Instructions). We will go to Scott Mushkin with Jefferies & Company.

Hey guys, thanks for taking my questions. Pineapple volume has declined quite a bit, I think you said about 19%. Maybe I missed it, but I didn't hear the color on what drove that during the quarter. I don't know if you have any color on that?

Two things, Scott. Part of it was weather related. But also we had early flowering so we had a surge in flow flowering last year which actually hurt us.

So t was kind of in line with your expectations. I forget about the flowering last year.

Right.

Second question. Obviously melons continue to be turning the corner. Is this a one quarter aberration or do you think this is a path where profitability of melons will return and can you talk maybe about the mix of the melon business? I know you guys are trying to do more specialty melons. What's the mix look like in that business?

The melon business I think, has been rationalized in my opinion. The situation will be more steady going forward in the future. The steps that we have taken over the last couple of years have put us on the right track. We have seen the Arizona crop to be reasonably well. We just finished a couple of weeks ago. We look at the full crop, the offshore full crop, and the Arizona full crop as well, to be more steady than what we saw in the past. As far as the mix is concerned, I think we have varieties and market into consideration and that will be part of the whole package.

So possibly two or three years ago, it was almost all just kind of regular cantaloupe melons, right, that's mostly what you did?

Well, we have more than three or four varieties that we produce and market. And we wanted to market, as we go forward, tried to make variations and the market needs dictate. However we're working also on watermelon which is very important component of our fresh cut operations and we develop some variety that would be far better for the fresh cut operations than what we have been using before, so this is also part of the mix.

Okay. Perfect. I just have one more. Debt is almost gone, clearly you're producing cash flow, so I was just wondering what your thought process is on going forward, capital allocation, where do you deploy excess cash? Is it acquisitions? Do you increase your buy back? I think you did some last year. Where do we go? The balance sheet is, obviously, most of the debt is gone at this stage.

Yeah, we are looking at all options at this stage. We cannot grow the acquisition unless it make sense for us. We will look for the right acquisition, as well as buying back our stock. Like I always say when the opportunity is there, we will be more than willing. We haven't been seeing large volume being traded in the market recently, so it doesn't make sense. But, anyway, we take these options into consideration as we go forward.

Okay. Perfect. Thanks for taking my questions.

Thank you.

At this time we'll go to Bill Chapell with SunTrust.

Good morning.

Good morning.

Can you walk us through the outlook on the banana business and how this plays out in the next six or nine months and I'm just trying to understand both on the rationalizing Europe and also what you're seeing in the Middle East. How does it change your expansion plans in the Middle East? Should we expect volumes to get worse before they get better or how should we look at that?

Well, if we take Europe, for instance, I don't think Europe is going do to change much from what we see today or from, say, the beginning of this year. Unfortunately, Europe's economic situation is not getting better, but consumption is down and the economy is down, so I don't expect that we'll see any. Hopefully he can have more stable market as today. We will have, hopefully, a good market during the first half of the year and then just be able to, withstand the bad markets during the summer months.

So we don't see any much changes in Europe. As far as the Middle East, it's been impacted mainly by the Iran, when we say the secondary market, we say that Iran has a very big market in terms of consumption and import of bananas in general. And since the sanctions have taken place, it has affected that ability to import bananas and the volumes going to these markets are being directed to other markets which ultimately impact the pricing and the economic situation in the other markets in the Gulf.

To add this this, the far east has been impacted by the new steps that China has taken in relation to the Philippine bananas. They have put in place some conditions, guaranteed conditions to import bananas into China which has limited the ability of Philippine growers to export into China in a regular and meaningful way. So this also has been sent to other markets in the Middle East which has impacted, as well, the situation. I hope this will not long-term be, a kind of trend. But we do have an advantage being ourselves physically in the Middle East.

Del Monte office and distribution centers in the area gives us an advantage over other importers in being able to reach our customers and being able to help moving the fruit there without too much impact. The market in North America is most stable. That's a contracted business. We don't see much. On the supply-side, no one can guarantee anything. The last couple days, last weekend, we just had big flooding in Costa Rica which has affected some of our farms as well as I believe some other farms in the area which we haven't yet seen the impact, but we know that there is side affects which means we lost maybe a certain volumes and hopefully that will not be any meaningful way that will affect supplies going forward. But we should be able to quantify this maybe in the next few days. That's it.

Okay. So, it sounded like, barring the impact of a flood, which we'll get an update on, you feel like what you've done to rationalize supply is in line with what you're seeing externally?

Yes. Yes.

Okay. Have you seen any changes on your pricing since the end of the quarter, has it gotten worse, or held stable?

In what market?

Particularly in Europe.

In Europe it's more or less stable since late June it's been more or less on the same level.

Okay. And switching gears, can you give us an update in terms of CAPEX spend, and where we are on the tomato business and how this quarter impacts that outlook?

And we're done with the CAPEX on the tomatoes. That was completed earlier in the year.

Okay. So now it's just driving through that model as we move into next year?

Correct.

Okay. Great. That's all I have. Thanks.

Thank you.

At this time we'll hear from Brett Hundley with BB&T Capital Markets.

Hi, it's actually Heather Jones.

Very well, thank you, Heather.

Good. I think I missed it in your answer to Bill just now. In the Philippines/China issue, what did you say as far as pricing? Has that started to drive down pricing in the Asian market?

Definitely, yes. There are two elements here. One is the summer months which naturally drives down the prices. In the summer we don't have the prices we see in the winter. And secondly, more volume is being supplied into the Japanese and Korean market that used to go to the Chinese market. So that has also impacted the prices negatively.

Things that we're reading are suggesting that Philippines volumes are actually getting into China, they're just down substantially. Could you put a figure on that as to how much are volumes into China down year on year? And, I understand that pricing weakens seasonally, but I'm thinking in terms of a year on year basis. What kind of year on year declines are we seeing in Asia in present?

In Japan, for example, price is up slightly over last year in local currency, but obviously it would be up even higher if it was not for these issues. We don't know industry wide how much volume is up but there's certainly a lot of volume that is not getting into China.

But, I mean, would you concur with what we've read that some Philippines volume is making its way into China or is that just inaccurate?

Yes, some volumes are going to China, definitely. We sell some volumes, but compared to what we used to export into this market earlier, I mean, it's very little really.

Okay. One detail question, given the issues with SUPERVALU, do you guys have a substantial receivables exposure with them?

No, not much.

Okay. Good. Moving on to southern Europe, our work shows that southern Europe is far weaker than northern Europe and wondering if you could comment on that and what your outlook is for southern Europe in particular?

In our case I think that we have a strong southern Europe pricing. As pineapples, as far as bananas are concerned, we have had decent and nice pricing since the beginning of the year. So I don't know, maybe different information but from our side like I said, we had very favorable situation in southern Europe during the last several months.

Okay. What is your view of Europe? If I think of like three to four years, you've got a severe pressure on the Euro, you had greater fragmentation of the market over the last two years, some of that is reversing with the line of services somewhat backing off. What is your view on that market? I would think that you would need to get tighter supplies into that market to lift local pricing so that everyone can make decent margins. But how long do you think that will take? Where do you think we are in the process? If you could give like a three to five year outlook on that market?

You're asking me for the one million dollar question. But, anyway, I think that Europe will not improve in the near term. I believe that three, five years from now, hopefully whoever is still standing there will be able to continue and enjoy a better market in the future. The problem that we are facing is not only the market in Europe, but it's the oversupply situation in the producing countries. We are seeing more logistically anyone can bring bananas or any type of fruit into the market by just loading a container or mixing a container.

It's more a competitive environment than just the market. Unless the supplies are gone. Unless the shipping means are limited. Not limited, at least, the pricing is higher. The container today, the freight is very competitive. So people are encouraged to buy fruit at the best prices like in Ecuador. And take the fruit into the markets and trying to make some money. But, unfortunately, all this is helping to press the market further and keeping it under depressed conditions. And I don't see how this can change unless, as I said, the supplies have to be rationalized which I doubt that can be done. And that the containers or the shipping lines will start to understand that they cannot continue doing what they are doing. This also is a difficult question because more ships are being built and more containers are being produced, so all in all, I don't see that in the next two or three years that anything will change.

Going back to the comment about Ecuador, we're reading stuff that talks about farms put up for sale, government starting programs to put banana production into alternative uses. Is that the production that you believe is most likely to be rationalized, is in Ecuador?

I hope so. This is the right course to go. There's no question about it. Ecuador has been a determining factor in the oversupply situation in the world. And unless supply is more rationalized and more controlled in a way that growers would be able to survive, that's the most important thing. But don't see that happening soon, really. I don't believe that the government nor anybody can stop people from producing bananas and selling bananas. Unless they, themselves, get to be able to put other products in the land that would be more profitable to them or at least give them the same income that they're getting from bananas. I don't see how this is going to change.

Okay. My final question is on avocados. That's actually one of the big bright spots in the produce aisle. Very strong demand growth, good pricing, you guys have been in that business, I don't know, for like five to ten years, and just wondering if you have any plans to become a more meaningful player there?

We are definitely working towards that. We are very much making end roads. We have already started some presence in Peru to compliment our mix. We do have a Chilean avacados and we do have a steady business from Mexico, as well as California. We think that this is a huge potential for the future, but let's not forget that supply is increasing as well in all different regions. Peru is growing very much, Chile is growing a lot, and as we speak now, there's overproduction in all these countries. The price that we're seeing this year so far is nothing compared to the prices we have seen last year, for instance. So we need to be careful also about the demand and supply. People can get excited and they kill the goose before it even starts to run.

Okay. Thank you very much.

At this time we'll move to Jonathan Feeney with Janney Montgomery Scott.

Good morning. I wanted to spend a little more time with the Middle East growth opportunity. Obviously you had some very good results and very, very consistent cash flows for four years, now really five, but the magnitude of that Middle East opportunity you seem to have barely scratched the surface of what I thought was possible, and still think may be possible with, the growth of some of those countries over there and your logistical presence. So combining that with your extremely strong balance sheet, whether is your updated outlook on growth for the Middle East, packaged foods, juices, specifically? And are there opportunities to do acquisitions in that region to augment your presence there already? Thank you.

Thank you, Jonathon. As you can see, we have been growing steadily in the Middle East. And we are increasing our market share into the fresh segment. We just started, matter of fact, we have started in Saudi Arabia literally in about less than two years. So you can say this is a soft start, a soft opening. Right as we speak now, we are getting very strong into the fresh cut business in these markets. We are producing juices that will be manufactured in the countries.

We're starting a lot of added-value products that will be meaningful as of end of this year, hopefully. So I think that, as you said, these markets are very promising, these markets has huge potential, and we were capturing this. But we're a very careful people, we like to be cautious and look at the opportunities in a very, let's say, sensible way. So you will see growth. You will see continuous expansion In these markets and you will see continuous increase in revenues as well. So we are very encouraged and optimistic and time will tell.

Great. Thank you very much.

My pleasure.

(Operator Instructions). We'll move to Eric Larson, CL King.

Thank you for taking my question, everyone. Mohammad, kind of based on the last question, looking at your scenario for excess supplies in quite a few fruits in quite a few countries going forward, obviously that puts pressure on pricing over time. It challenges your desire to have profitable, when I say profitable I mean profitable growth. You don't just want to give product away. Does it mean that you actually have to be more aggressive in adding more value to your product, I.E. your juices and fruits, and does it mean that you have to take even a broader global approach to that and can you acquire to get that capability?

When you look at your P&L, obviously you've rationalize a lot of businesses, but you look at your P&L this quarter, terrific gross margins, but basically your sales are down across the board. Again, there are specifics to each market. How do you really look to get that top line growing modestly again with really profitable growth? Is it going to be focused on fresh can cut and valued add elsewhere than just the Middle East and UK and elsewhere?

Yes, definitely. Just the start of the sales. The sales decreased. That was our intention. It wasn't just because of any other reason except our own rationalization of the business. I always say its bottom line rather than just showing more revenues and losing more money.

Yes, agreed.

We start with that. Secondly, from the inception of our operation, 15 or 16 years ago, we were very clear our policy and our direction. We haven't changed from that course. We have learned from mistakes, we have and done some decisions that might not have been the best for our business, but we have learned from that but we haven't changed course. We, from day one, we believe in [inaudible] integration. We believe in adding value to the chain through all the operations. The fresh cut that we have, we almost started from zero really at the very beginning, and now you see where it is and how it has grown. And that is going to grow further. It's not going grow only in North America but it will grow hopefully in Europe, it will grow also in Japan, it will grow very well in the Middle East.

We have other areas, like you said. We're not talking about juice. We are actually building our own plans, be it in the Middle East, be it in Africa, or other places and that's what we will put in stream by the end of the year. We will see movement in that direction. We, as a matter of fact, we have gone into frozen French potatoes. That's a new item that we have gone into recently in Saudi Arabia and that's one of the projects that we look at in the future. Looking at projects that will add value to our portfolios. We're a food company, we're not just as a fresh produce company, and that's what we are transforming Fresh Del Monte to be in the coming years.

Yes, well, it's very encouraging. You've delivered what you said you were going to deliver. You've got, I think it's the first double digit, gross margins, the first in some time. The reason for the question is and obviously you have purposely reduced your sales in low margin or products that are losing money, etc., and that is very encouraging. If you could tailor on some growth and maintain the margins that you have today, it would be very encouraging. So that was the reason for the question.

Thank you.

And at this time it appears we have no further questions in the queue. I will now turn things over to Mr. Abu-Ghazaleh for any closing remarks.

Thank you, ladies and gentlemen. Hope to be with you on the next call with better news. Thank you and have a good day.

Once again, this concluded today's conference call. Thank you all for your participation. You may now all disconnect.