Fresh Del Monte Produce Inc (FDP) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's fourth-quarter and full-year 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 conference, Christine Cannella, for opening remarks.

Thank you, Camille. Good morning, everyone, and welcome to Fresh Del Monte's fourth-quarter and full-year 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 fourth-quarter and full-year 2012 press release we made public 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, retransmission or rebroadcast of this call in any form without our written consent is strictly prohibited. Let me turn the call over to Mohammad.

Thank you, Christine, and good morning, everyone. 2012 was a good year for Fresh Del Monte Produce. Our overall financial results for both the full year and fourth quarter reflect the solid execution of a number of initiatives we put in place earlier in the year. Our performance also underscores our resilience and core competencies of industry experience, innovation and financial discipline, as well as our focus on long-term growth.

I would like to share a few highlights from 2012 with you. During the year we achieved significant growth in our fresh-cut business. We focused on further solidifying our leadership position by aggressively increasing our market share and customer base in North America, the Middle East, Europe and Asia. We extended our productline in nontraditional delivery channels such as club stores, convenience stores, foodservice operators, quick serve and casual dining outlets.

Over the past [15] years we have established an impressive foothold in the fast-growing fresh-cut business by expanding our distribution and marketing capabilities to target a more diversified balance of global consumers. We are pleased to share with you that today we are the largest branded fresh-cut food supplier in the United States.

Looking forward, we see significant potential in our branded fresh-cut category. Healthy eating habits and convenience are just two of the many trends that drive our strategies and opportunities to increase our global market share in 2013 and beyond.

We are justifiably proud of the results of our decision to take over the marketing, sales and distribution of Del Monte's fresh produce in key markets in Southern Europe. As a result of our decision we delivered substantial profitability improvements during the year. We anticipate that our fresh business in Southern Europe will remain strong as we continue to increase our customer base.

In 2012 we continued to focus on product innovation, efficiency, improvement and aggressive core production in every segment of our business to increase profitability and to build a better business infrastructure for the future. We took steps to decrease costs and increase productivity in our production areas and our facilities. We increased efficiencies in our global logistics network and we also strengthened our prepared food business by introducing new products.

Before I turn the call over to Richard I would like to reiterate how proud I am with our results. In many ways 2012 was a tough year. In Europe we contended with an intensely competitive marketplace, decreased demand for fresh produce and continued economic uncertainty. We experienced trade disruptions in some selling markets in Asia and the Middle East and aggressive banana contract pricing by competitors in North America.

We enter 2013 with tremendous growth opportunities. We have a powerful supply chain, a world-class brand and the financial strength to further our expansion in emerging markets and introduce our products to new and existing customers through an increasing range of distribution channels. At this time I will turn the call over to Richard. Richard?

Thanks, Mohammad, and good morning. For the full-year 2012, excluding asset impairment and other charges, we reported earnings per diluted share of $2.54 compared with earnings per diluted share of $1.82 in 2011. Net sales decreased $169 million to $3.4 billion compared with $3.6 billion in the prior year and gross profit increased to $343 million compared with $318 million in 2011.

Also excluding asset impairment and other charges, operating income for the year was $166 million compared with $131 million in the prior year, net income was $147 million compared with $107 million in 2011.

For the fourth quarter of 2012, excluding asset impairment and other charges, we reported earnings per diluted share at breakeven compared with a net loss per diluted share of $0.15 in the fourth quarter of 2011. Net sales were $777 million compared with $781 million in the prior year period, and gross profit increased to $39 million compared with gross profit of $29 million in the fourth quarter of last year.

Also excluding asset impairment and other charges, we incurred an operating loss of $2 million compared with an operating loss of $20 million in the prior year period. And net income for the quarter was $200,000 compared with a net loss of $9 million in the fourth quarter of 2011.

Now as I turn to our segments I will focus on fourth-quarter statistics as reported. In our banana business segment, net sales decreased $22 million to $362 million compared with $384 million in the fourth quarter of 2011, primarily the result of planned supply reductions in certain markets in Northern Europe and lower sales volume in our secondary markets in the Middle East. Overall volume was 7% lower than last year's fourth quarter.

Worldwide pricing increased 2%, or $0.24 per box to $13.41 with higher selling prices in Europe and North America. Total worldwide banana unit costs increased 1% and gross profit increased $4 million to $1 million compared with a loss of $3 million in the fourth quarter of 2011.

In our other fresh produce business segment for the fourth quarter net sales increased $19 million to $335 million compared with $350 million -- $315 million in the prior year period. Gross profit increased $3 million to $29 million compared with $26 million in the fourth quarter of 2011.

In our Gold pineapple category net sales were $127 million compared with $123 million in the prior year, primarily due to higher sales volume in North America. Overall volume increased 6%, a result of favorable growing conditions in Costa Rica. Unit pricing was 3% lower and unit cost was in line with the prior year.

In our fresh-cut category net sales increased 12% to $91 million compared with $82 million in the prior year driven by increased consumer demand especially in our new distribution channels in North America. Volume increased 1% partially offset by our previously announced closure of a fresh-cut facility in the UK. Unit pricing increased 10% with higher selling prices across all of our regions and unit cost was 4% higher than the prior year.

In our melon category net sales increased 40% to $23 million compared with $16 million in the fourth quarter of 2011; volume increased 27%, a result of favorable growing conditions in Guatemala; unit pricing was 10% higher driven by lower US domestic industry volume; and unit cost was 14% lower.

In our non-tropical category net sales increased 7% to $50 million compared with $47 million in the fourth quarter of 2011 primarily driven by higher sales of apples in the Middle East and avocados in North America. Volume increased 19%; unit pricing decreased 10%; and unit cost was 8% lower than the prior year.

In our tomato category net sales decreased 3% to $15 million compared with $16 million in the prior year; volume decreased 6%; pricing was 4% higher; and unit cost was 5% higher.

In our prepared food segment, net sales decreased 2% to $80 million compared with the prior year period and gross profit increased $600,000, or 8%, compared to the prior year.

Now moving on to costs, banana fruit costs, which includes our own production and procurement from growers, decreased 2% worldwide and represented 31% of our total cost of sales for the fourth quarter. Carton costs decreased 7% and represented 5% of our total cost of sales.

Bunker fuel costs were in line with the prior year and represented 5% of our total cost of sales. And total ocean freight costs during the fourth quarter, which includes bunker fuel, third-party charters and fleet operating costs, was 16% lower. For the quarter ocean freight represented 13% of our total cost to sales.

The foreign currency impact at the sales level for the fourth quarter was unfavorable by $6 million and at the gross profit level the impact was also unfavorable by $6 million. Other income net for the quarter was $4 million compared with other expense net of $6 million in the fourth quarter of 2011 primarily due to the absence of foreign exchange losses.

During the fourth quarter we repurchased 560,000 shares for $14 million as part of our share repurchase program. At the end of the quarter, our total debt was $126 million. Income tax expense was $3 million during the quarter compared with an income tax benefit of $17 million in the prior year period. We are projecting an effective tax rate of 15% in 2013.

As it relates to capital spending, we spent $80 million on capital expenditures in 2012 and we expect to spend approximately $120 million in 2013. This concludes our financial review. We can now turn the call over for Q&A, operator.

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

Good morning. I have a few questions. First on currency, I was wondering if you could give us a sense of what your positioning is going into 2013 on the euro and the yen.

We have some hedging on the yen and the euro, but we wouldn't -- I would like to keep it confidential, not public.

Well, you are typically around this time of year going into a year you are at least 50% hedged. Is that a fair assumption for this year?

Yes.

Okay. And you noted that banana pricing was higher in North America and Europe for Q4 but you didn't mention Asia. I understand that Asia strengthened considerably in late December. But was it just so weak at the beginning of Q4 that it wasn't able to offset?

That is true mainly. Actually the strength of the pricing was at the very tail end of the fourth quarter, Heather. That is why it didn't really show any significant impact on the pricing or results for Asia. That is the fourth-quarter.

Yes, Heather, the fourth quarter in Japan, the local currency was about 21% lower than in prior year and Korea about the same.

Oh, wow. Okay, now that we are into Q1 with what happened in the Philippines, is it fair to assume that pricing is higher? And if so, is it high enough to offset any related costs to the typhoon for you guys?

Well to start with, our farms -- not our farms but our grower plantations have not been impacted so much as the industry. We had a very small -- about 800 acres which were impacted by the typhoon. So really compared to the total size of the plantations was not -- more or less was around 11% of the production. So really we haven't been hurt in terms of volumes.

As far as pricing is concerned, the pricing in Asia actually just started improving in the last couple of weeks. Of course it has improved tremendously from the -- in the fourth-quarter after the typhoon the prices had improved but not enough to offset previous losses or even come across at that time.

Today the prices have improved in the last week or two and we see a strengthening there. But still I believe that it's not strong enough to give us a comfortable feeling about the market going forward.

And why is that? Is it still just the overhang from China not taking much Filipino fruit or are there other dynamics at work in that market?

No, I think it is not only China. I think China now is taking fruit and they were not taking -- they are not taking the fruit that they used to take before because of the quality standards that they put in place. So there is fruit going there provided it is fruit that meets their standards and we have been sending fruit regularly without any interruptions or problems -- and I am sure others as well.

What happened is that they were -- these spot growers or small growers, shipping containers with no really (inaudible) sanitary compliance. So that is what really created the problem in China. However I believe that what is happening in the Asian market is that the markets themselves are a little bit weaker. And secondly is that there is overproduction in the Philippines in general.

We will see two or three months or four months of a good healthy market, but I believe afterwards we will see a weakening again as we enter the summer. So we as a Company, we don't have -- we have a very diversified market geographically. So we are handling our volumes in a very prudent way. So we are not really so much impacted by the markets. I mean we go to the market where the price is reasonable. We are not going to go to the market where we lose money.

Because aren't you guys -- because you said something about the Filipino market being overproduced -- oversupplied in general. Aren't you guys expanding production in the Philippines? So have the end markets changed since you made that decision or why would you be expanding production if Filipino production is oversupplied to begin with?

To start with, there is of course with the -- after the typhoon the small growers are disappearing, I mean they are not replanting. That is one thing. And the second thing is that we have other markets that we are very strong in these markets, let's put it that way. And we have our own outlets in the Middle East and Asia and that is where we need more fruit, especially during the first half of the year. And that is why (multiple speakers) are expanding.

And I was wondering if you could share with us your thoughts about Latin American supply. Because if we rewind back to the fall, there was this expectation that Ecuadorian volumes would be down significantly because of sigatoka. I mean that seemed to have been widely believed. But now fast-forward and the volumes have actually been stronger than expected in general, European pricing is now down year on year pretty significantly. I mean what happened in your opinion?

What happened is exactly what I said on the last conference call. Remember I think this question was raised and I said that there was no shortage. And the Central American countries, be it Guatemala, Costa Rica and others, have been at very high yields, perfect weather conditions -- much, much better year than the years before.

And there was -- I mean, I am talking about -- speaking for ourselves we had really more production than we anticipated. And we had to divert some of this into the Mediterranean and other markets. So I don't see that there is going to be -- unless a natural disaster happens in the next two, three, four months, but other than that I believe that the markets are well supplied.

And I think that -- and you can see that the prices in Ecuador haven't hinted up like the normal years. And that is because of the reason we have enough supplies from Central America. And our strategy that is what we have anticipated. And that is what is happening right now.

Okay. My final question is on the US. Like you noted, we have heard multiple reports of aggressive contract pricing. Could you give us a sense of how -- what kind of price decline we should expect for the US market this year? I mean are we looking at low-single-digit?

They will be in single-digits but they pointed that we are surprised as much as anyone else why it would be a competitive pricing because nobody is going to take anybody's marketshare. I mean it is just a loss of revenue and net income for everyone. So I really don't understand what is going on.

Okay. But you believe it is going to be a single-digit decline?

Low-single-digits I would say.

Low-single-digits.

At least for our (multiple speakers).

Okay. All right, thank you very much.

(Operator Instructions). Jonathan Feeney, Janney Capital Markets.

Hi, this is Mark Williams on for John. My first question is regarding pineapple fundamentals. You noted good flowering conditions and I was hoping to get your outlook there on pineapple pricing going forward in the next few months?

Well, the market right now is short. We had a very strong volume over the fourth quarter which has influenced prices a little bit downward in a downward trend. So at this time pricing is quite strong and because of supply, supplies are short. And we hope that this will continue even in the next let's say three months to the summer period.

Our pricing is more or less -- you know, most of our fruit is contracted, so our pricing is more or less stable. What really makes a difference is the extra volume that we keep for the open market which makes the difference. But so far the market is strong at least for ourselves.

Great, thank you. And you are pretty much at zero -- at close to zero financial leverage. Can you just talk about your priorities for cash flow? I know that you bought back some stock here and talked about CapEx plans next year. Any color on that would be appreciated. Thank you.

Like I always say, we are always open to look at opportunities, be it stock repurchase, we will do that continuously when the opportunity and the window is there. We are investing in new projects across the different parts of the world be it in North America or outside North America and we look at opportunities. So we are always open to look, but we are very prudent and we don't take hasty decisions just for the sake of revenue or expansion in sales.

Thank you.

Eric Larson, CL King.

Yes, good morning, everyone.

Hi, Eric.

Mohammad, just a quick thought here. You had a really good year in a tough banana environment. Your adjusted gross profits were actually up a little bit, which is really strong performance for a really difficult market. You are going to have difficult markets again this year obviously with what is going on in the US pricing and in Europe, etc.

Can you this year with lower unit costs and your productivity and maybe lower freight, that all adds into your lower unit costs. Can you protect your gross profits that you earned in 2012 in 2013?

That is our target. That is what we are here for. That is our mission is to hopefully even improve on them. So I would like to say that we are probably the only fruit company that understands what fruit's about. So that is our mission, how to make money out of our business.

Okay. All right. Well that is a very -- it is nice to know that that -- obviously that is your target and that is what we will kind of center on and good luck with that. It is going to be a tough year but you guys have proven you can do that in the past.

Your fresh fruit -- your fresh cut business really is becoming a meaningful piece of your business and someday it would be nice if that is what you would call the tail of the dog today -- if you can grab a hold of that tail and shake the whole dog with that one because it is got a better margin profile, etc.

What kind of a sustainable growth rate -- how do you view your top line and what can that business do over the course of the next few years, Mohammad? Not necessarily just in the next 12 months, but I mean how big can that business get for you do you think over a reasonable period of time?

We would like to have North America at around $500 million in a few years. That is our target for the fresh-cut operation. And that has been the target from day one and we are slowly but surely achieving that every year. So that is only North America, but you have to take into consideration that we are a fresh-cut fruit leader worldwide, not only in North America.

We are now becoming the leader in the Middle East. We are becoming also in some countries in Asia. We are introducing now in other countries in the Soviet Union -- ex-Soviet Union countries. So we are moving and that is why I always said that our business is -- our core business is bananas and pineapples and fruits, but we are moving towards the added value and that is why you see our operation improving year over year.

Yes, absolutely. Would you rank your fresh cut business as your best growth opportunity over the next few years? How would you kind of in order of importance rank your top two or three growth opportunities to grow your profits in total, not just that business but your total profits?

Fresh-cut, prepared foods, these would be our top priorities along with our core business.

Wonderful. Thank you, Mohammad. Good luck, guys.

At this time I would like to turn it back over to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Thank you very much. I would like to thank everyone for joining us on this call today and I hope to talk to you next quarter hopefully with good news. Thank you very much and have a good day.

This concludes today's presentation. Thank you for your participation.