Fresh Del Monte Produce Inc (FDP) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's Third 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 now like to introduce your host for today's call, Miss Christine Cannella, for the opens remarks. Please go ahead, ma'am.

Thank you, Leah. Good morning, everyone, and welcome to Fresh Del Monte's Third 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 complements our third quarter 2012 press release we made 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 in 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 over to Mohammad.

Thank you, Christine, and good morning, everyone. The third quarter of 2012 was another excellent period for Fresh Del Monte Produce and a continuation of our strong performance so far this year. Our commitment to our core operating principles was key once again to this quarter's performance. The ability to adapt to ongoing economic and political challenges in certain parts of the world, our strategic focus, and the consistent commitment of our employees led to solid improvements in operating margins in many of our product lines. I will address a few contributors to our third quarter performance.

First, our fresh-cut business delivered another strong quarter. Global consumer demand for Del Monte branded fresh-cut products is expanding rapidly. And we are intensely focused on extending our reach into existing markets and entering new markets and creating new channels to amass greater market share.

Secondly, earlier in the year I discussed how we had achieved full control of the marketing, sales and distribution of Del Monte's products in Southern Europe. Since that time, despite the European economic crisis, we have experienced growing sales and customer relationships. We have made inroads into cementing our strong leadership position and are poised for future growth in these markets.

Thirdly, our results were positively impacted by an industry shortage of bananas into Europe that drove the average selling price higher. However, the reduction in supply was short-lived and banana selling prices have since declined, though, still higher than last year at this time. During the quarter, economic conditions remained depressed in Europe and banana performance in Asia was hindered by trade disruptions in some selling markets.

These global events reinforce one of the keys to our success at Fresh Del Monte. Our readily integrated infrastructure -- over the past 16 years we have continually diversified our products and serviced, extended our presence into new markets, expanded our global production and sourcing areas, and driven flexibility in our logistics operations, while maintaining our focus on cost savings and efficiency problems. There are many other reasons for our success;our well-recognized brand, our dedicated employees, our long standing relationships and, of course, the strength of our asset rich balance sheet.

In summary, as we look to the end of 2012, our strategy remains the same. We will continue to seek opportunities to build upon our strong business, our strong business model identify opportunities to leverage the presence of Del Monte brand and increase returns for our shareholders. At this time, I will turn the call over to Richard.

Thanks, Mohammad. For the third quarter of 2012, excluding asset impairment and other charges, we reported earnings per diluted share of $0.45 compared with earnings per diluted share of $0.22 in the third quarter of 2011. Net sales were $789 million, compared with $795 million in the prior year. And gross profit increased to $75 million compared with gross profit of $63 million in the third quarter of 2011. In addition, excluding asset impairment and other charges, operating income for the third quarter of 2012 was $31 million compared with $18 million in the prior year. And net income increased $13 million to $26 million in the third quarter of 2012 compared with $13 million in the third quarter of 2011.

In our banana business segment, net sales decreased $15 million to $360 million, compared with $375 million in the third quarter of 2011, primarily a result of lower sales volume in our secondary Middle East markets and planned supply reductions in markets in Northern Europe. Overall volume was 6% lower than last year's third quarter, worldwide pricing increased 2% or $0.30 per box to $13.21 with higher selling prices in all regions. Gross profit increased $13 million to $12 million compared with a loss of $1 million in the third quarter of 2011. And total worldwide banana unit costs decreased 1%.

In our other fresh produce business segment for the third quarter, net sales decreased $2 million to $335 million compared with the prior year. And gross profit decreased $1 million to $51 million compared with $52 million in the third quarter of 2011.

In our gold pineapple category, net sales were $123 million compared with $129 million in the prior year, primarily due to lower selling prices in North America. Volume decreased 2%, unit pricing was 3% lower, and unit costs increased 4%.

In our fresh-cut category net sales increased 6% to $98 million compared with $93 million in the prior year, driven by the increased number of venues in North America and the Middle East in which our fresh-cut products are offered. Volume decreased 4% as a result of our previously announced closure of an unprofitable fresh-cut facility in the UK. Unit pricing increased 11% and unit cost was 6% higher than the prior year.

In our melon category, net sales decreased 46% to $7 million compared with $13 million in the third quarter of 2011. Volume decreased 47% due to continued rationalization, unit pricing was 3% higher and unit cost was 8% higher.

In our non-tropical category, net sales increased 14% to $61 million compared with $53 million in the third quarter of 2011. The increase was primarily attributable to higher sales of apples in the Middle East. Volume increased 16%, unit pricing decreased 2% and unit cost was 7% lower than the prior-year period.

In our tomato category, net sales decreased 3% to $16 million compared with $17 million in the prior year, volume decreased 1%, pricing was 3% lower and unit cost was 2% lower.

In our prepared foods segment, net sales increased $11 million to $94 million during the quarter compared with $83 million in the third quarter of 2011, primarily driven by stronger sales in our Jordan poultry operation. The gross profit was relatively flat as compared to the prior year.

Now moving on to costs. Banana fruit costs, which includes our own production and procurement from growers, increased 3% worldwide and represented 32% of our total cost of sales for the third quarter. Carton costs decreased 9% and represented 4% of our total cost of sales. Bunker fuel decreased 1% and represented 5% of our total cost of sales. And ocean freight cost during the third quarter, which includes bunker fuel and also third-party charters and fleet operating costs, was 24% lower. For the quarter, ocean freight represented 12% of our total cost of sales.

The foreign currency impact at the sales level for the third quarter was unfavorable by $10 million, and at the gross profit level the impact was unfavorable by $3 million. Other expense net for the quarter was $3 million compared with $400,000 in the third quarter of 2011, primarily due to foreign currency losses. At the end of the quarter our total debt was $28.4 million.

Last week we announced that we had finalized a new unsecured five-year revolving credit facility to replace our facility that was expiring in January. The $500 million credit facility bears interest at a rate of LIBOR plus a margin that varies with the Company's leverage ratio, currently LIBOR plus 1.25%. The facility is unsecured up to a leverage ratio of 3.25 times EBITDA and replaces our former credit facility that was set to mature, as I mentioned, in January 2013. We plan to use the proceeds for working capital needs, capital expenditures and funding of possible acquisitions and possible share repurchases.

Income tax expense was $200,000 during the quarter compared with income tax expense of $2 million in the prior-year period. We are now expecting our effective tax rate for the full year of 2012 to approximate 12%.

As it relates to capital spending -- for the nine months ended September, we have spent $63 million on capital expenditures. Capital expenditures for the year are conservatively expected to be approximately $100 million.

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

(Operator Instructions). And we will hear first from Heather Jones with BB&T Capital Markets.

Good morning.

Morning, Heather.

I wanted to follow up on a comment you made earlier about banana pricing in Europe. You mentioned that it has weakened. But some of the data we're seeing -- first of all, showing significant year-on-year increases but also some of the strongest pricing that we've seen in Northern Europe for several years. And so just wondering if the weakening you're seeing -- is that just consistent with typical seasonal patterns? Or just if you could give us more color on your comment?

The fact -- as I said, the fact is that the pricing is well over last year -- the same time over last year. Now, I don't have data going back -- further back, but I believe it's a combination of weak markets -- the European economy is really bad. Secondly, I think a little oversupply as well and less consumption. And that's maybe -- hopefully, that's what we are hoping that this is a market pattern during this time of the year. And we are hoping that by middle of next month, hopefully, that this situation can change and improve to the better. But that it is, as we speak today.

What are your expectations for 2013? Many -- there's a lot of speculation out there -- not speculation but just projections that supply out of Latin America is going to be tight for at least the first part of 2013, largely due to Ecuador. So I was wondering if you could give us what your thoughts are on that? And how you think that will impact the North American contracting season for 2013?

As I see today, Heather, that the -- truly Ecuador is less in supply volumes compared to the previous years on a weekly basis or monthly basis. But, however, Central America has been flush with fruits during the last three, four months. As a matter of fact, we have been ourselves applying a lot of fruit -- extra fruit that we don't go to our traditional markets into the Mediterranean for spot sales during the last three, four months. And we still have maybe extra fruit for the next couple of weeks and then we will see back a normal trend to the market.

Now, hoping that no unforeseen events take place -- I mean, some type of floods or wind or weather-related issues -- I believe that we should see some tightening as we go to the end of the year, early next year. But, unfortunately, what we see as well is a lot of pressure on the contracted pricing for the next year in North America, which is not a very good sign.

You are seeing retailers that are -- they're wanting lower prices in 2013?

Yes.

You talk about you had -- you have been selling some fruit into the Middle East and all your volumes for the quarter were down 6%. So that doesn't sound like excess volumes to me. Just wondering what caused your volumes to be down 6%? And are your shipments into core Europe down much more than that, so that's why you're shipping into Middle East? Or if you could help me to resolve those two different scenarios.

That is true. The market is Europe could not take these volumes. As a matter of fact, during the summer, we had to reduce the volume drastically to Europe and we moved a lot of that extra fruit into the Mediterranean to be sold to the non-traditional markets like Turkey, Iran, Iraq -- all these Mediterranean countries. And they were depressed as well.

But as far as our markets, as well, don't forget that we're having issues in Asia. China has almost stopped import of Philippine bananas because of territory issues. Now, we don't know if it's political or (inaudible), but they almost stopped -- very few volumes go into China now from the Philippines. At the same time, Iran has not been able to import any more of the volumes that they used to take, not even 10% of what they used to take from the Philippines or from even other sources like Central America. So all these factors have depressed the market in Japan, in Korea, and in the Middle East, as well.

These volumes that are not being able to ship to China and Iran has been diverted to other markets, which is -- there's not too many choices there. Except that the Middle East markets and either flood more into Japan and Korea -- which has depressed the prices as well. And that's -- it's not our problem only, but it's a universal problem for all other suppliers. So we are having issues now in Asia as we speak and we are having issues now in Europe. Hopefully, that this situation in Europe can improve shortly.

If you could give us a sense for Q3, that 6% volume decline for the total bananas, was the majority of that related to the issues in Asia? Or if you could just give us a sense of how that broke out by geography?

Heather, total volume in Europe was down 30% and Asia was down 11%. But most of it, as Mohammad said, was in Northern Europe and that was when we decided to walk away from a couple quarters ago.

This was the -- this is the UK business?

No, no, no. All over Europe.

All over Europe. Oh, okay. And then the final question, your balance sheet is very strong. And just if you could give us more color on what your thoughts are there? You basically have no net debt. Wonder if you could give us a sense of where your bias is? Is it acquiring assets, would you consider a special dividend, given the possibility of tax rate changes next year? Or just -- where your priorities lie?

As Richard I think in the last phrase that he mentioned that we are looking right now at possible acquisitions, buying back our shares and continuing with our regular dividend that we payoff. So we are looking at several alternatives which, as you said, I agree with you that we have a very strong balance sheet and no debt and we are looking at several options which I hope we can, by the next two, three months, can have some news.

Is your focus more on the Middle East and growing out those assets? Would you like to bolster your prepared foods business? What would be your preference, all things being equal?

Well, we have invested already a lot in the Middle East. And all these investments, as a matter of fact, are just starting operations; be it the canned juice plant we just started a few weeks ago, frozen potato project also started a couple of months ago. All these projects have just started operating and we will see the results as we go forward in 2013. And we are building up the fresh-cut operation there further. So we have done -- the investments in the Middle East has been done and there will be additional investments, but not as large as we did in the past.

Africa is our next target, we are planning to, hopefully, start juice operations in West Africa, in one of the major markets there, hopefully, by 2013. So we are looking at where our -- where the best way to employ our funds and make (inaudible) on them, and that includes everything. The door is open for many alternatives.

Okay. Thank you very much. Have a good day.

Thank you.

(Operator Instructions). We'll move next to Diane Geissler with CLSA.

Good morning.

Good morning, Diane.

You can hear me okay?

Yes.

Okay --

Hello? Hello?

Diane?

Ma'am, your line is open. (Operator Instructions). Due to no response, we will move to the next caller. We'll now hear from Eric Larson with CL King.

Yes. Good morning, everyone.

Good morning, Eric.

Just a couple questions. First on the prepared foods side; obviously you had a big increase in sales and it was probably due to the poultry business. You obviously didn't get a lot of profit translation on that, unless your core maybe UK business was a little softer in the quarter. Is it really that you had good poultry sales and there wasn't a lot of profit translation there? Or was the core piece weaker in that mix?

The -- you're right, Eric. The weaker part of the core business was the industrial sales, the concentrate, those products there's a bit of an oversupply. So those products were where the weak sales were.

Okay. And why such a nice pickup in your poultry business? Is it sustainable or is it a one-off event for the quarter?

No. It's sustainable. As a matter of fact, last year, I probably -- I said it on conference calls, that we had a strike of disease -- a lot of diseases or viruses that struck the farms in the region. I'm not only saying our operation, but in the region. Which had affected productivity and yields and increased cost tremendously. So that was an event that was exceptional last year, and now we are getting back to normal pattern and better production. But don't forget that also we have much higher feed costs --

Right.

-- than in the years before.

Yes.

There are several factors. But I believe that, so far, National Poultry is back on track and, hopefully, that should show us better results as we go forward. As long as we don't get into any unforeseen events.

Sure. No. That makes sense. And then just a little follow-up on your total ocean freight costs. Obviously, oil prices have gotten a little bit weaker I think just due to a general global economic softness. But is it a combination of that and your ocean -- your shipping rates? Could you give us a little more flavor as to what that is and should we expect some lower ocean freight, going forward?

No. I don't think that we should expect -- that I'm sure that you heard, like everyone else, that the container ship companies are increasing their freight rates worldwide. They are between $1,500 and $2,000 in some cases, in almost all the routes around the world. And that probably will translate into higher freight going forward. Using our leverage, as far as Fresh Del Monte is concerned, and our flexibility in our logistics operations has given us probably an advantage over others in terms of putting a lot of sources in a much better matter, which translated into better freight rates. Hopefully, we can maintain that and improve even further as we go forward in the future.

Sure. Now, Mohammad, a few years ago you had -- I remember some of your own ships were pretty old and I think you scrapped a few and you moved -- your strategy then was to move toward leased ships. With your balance sheet, I would assume if freights are going back up, then the cost of boats are going up as well. Have you shifted your strategy? Maybe use your balance sheet to buy a ship or two now? Or are you going to stay on your same path?

No. You are reading our minds. We already bought three ships in the last three months.

I figured that may have happened. Yes. Okay. And then what you're doing then is just terminating --- as your lease runs out on the other ships, you're just dropping those ships? Is that correct?

Not necessarily. But we have scrapped a few of the old ships, which already were over age and we are replacing -- the three ships that we have bought recently have been actually, late 1980s, almost 1990s. So they are good -- very good condition, secondhand ships.

Well, you must be getting good prices on them because your CapEx numbers have been very reasonable and so you must be finding good rates on those ships.

We were lucky, I would say.

Okay. Well, yes. I would rather have luck sometimes than intelligence, believe me. It works more often. And then finally, Richard, on [4X] -- your hedging practice there, again I know that you were about -- at the end of the last quarter, you were about 50% hedged for the year. Have you gone forward on anything in 2013 -- where are you on your hedging? Let me just leave it at that.

Yes. On 2013 we always try to be around 50% so we're not quite there yet on 50%. We're still working on putting those together. We are where we usually are at this time.

Okay. Okay. All right. Well, thank you for all your comments.

Thank you.

And we'll hear from Diane Geissler with CLSA. Please go ahead, ma'am. Ma'am, you do have an open line. (Operator Instructions).

Ladies and gentlemen, this is all the time we have allotted for the question-and-answer session. I will now turn the call back to Mohammad Abu-Ghazaleh for any additional remarks.

Thank you very much. I appreciate your presence and under the circumstances that you are facing now in the Northeast. And I hope everybody will be safe and in good shape. And let's hope that tomorrow will be a normal day again. Thank you very much and talk to you soon. Bye.

Ladies and gentlemen, that will conclude today's presentation. Thank you for your attendance. You may now disconnect.