Fresh Del Monte Produce Inc (FDP) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Fresh Del Monte first quarter conference call. (Operator Instructions). I would now like to introduce your host for today's conference call Christine Cannella, for opening remarks. Please go ahead, ma'am.

Thanks you Brian. Good morning, everyone, and welcome to Fresh Del Monte's first quarter 2013 conference call. Joining me today are Muhammad Abu-Ghazaleh, Chairman and Chief Executive Officer, and Richard Contreras, SVP, and CFO. This call complements our first quarter 2013 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 web cast and will be available for replay approximately two hours after the conclusion of this call.

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 now over to Muhammad Abu-Ghazaleh. Muhammad?

Thank you, Christine, and good morning, everyone. As stated in our press release earlier this morning, we continued to manage our business in the face of challenging times during the quarter. In Europe, Fresh Del Monte continued to confront economic uncertainty. Lower consumer demand, the result of unseasonably colder weather, and stronger than normal banana production. In Asia we experienced tough market conditions in Japan in the first half of the quarter.

Additionally, we encountered poor growing conditions in Chile which negatively impacted product quality. Together these factors adversely affected our performance during the first quarter of 2013. Despite these pressures on our margins and earnings, I am pleased with the progress we made towards our strategic initiatives in the first quarter of 2013.

We continue to focus on aggressively establishing a presence for Fresh Del Monte in markets which offer us strong growth potential including our progress in the Middle East, our fastest growing region, and expanding our product lines to keep pace with consumer trends for healthy fresh convenient and ready to eat products. We also saw an increase in net sales along with strong demand for our fresh cut products. A business that has grown significantly and continues to carry strong potential for us in the future.

As the global leader in this category we are exceptionally well positioned to leverage our vertically integrated structure through several key initiatives. One is these initiatives is the further expansion of our nontraditional distribution channels where our customers include some of the largest convenience stores, quick serve outlets, and food service operators, positioning our products at new and innovative purchase points. During the quarter we engaged in marketing opportunities that provided excellent exposure for our Del Monte Gold pineapple which led, in part, to a 2% increase in selling prices year-over-year.

We continue to expand our pineapple presence in exiting and emerging markets with much promise proving once again, the quality of the Del Monte pineapple is differentiated among customers and consumers worldwide. In summary, I'm very proud of our team's performance during these challenges times. I believe our passion dedication and hard work are reflected in our strong balance sheet and standing in the industry. We are building value every day in everything we do. At this time I will ask Richard to take over the call. Thank you. Richard?

Thanks, Muhammad, and good morning. For the first quarter of 2013 we reported earnings per diluted share of $0.71 compared with earnings per diluted share of $1.08 in the first quarter of 2012. Net sales were $919 million, compared with $898 million in the prior year. Gross profit was $99 million, compared with gross profit of $112 million in the first quarter of 2012.

In addition, operating income for the first quarter of 2013 was $54 million, compared with $66 million in the prior year and net income was $41 million in the first quarter, compared with $63 million in the first quarter of 2012. In our banana business segment net sales increased $8 million to $406 million, compared with $398 million in the first quarter of 2012, primarily due to higher sales volume in our Middle East, Europe, and North America regions, along with higher pricing in Asia and the Middle East. Overall volume was 3% higher compared with last year's first quarter.

Worldwide pricing decreased 1%, or $0.11 per box, to $14.97, primarily due to lower pricing in Europe. Gross profit decreased $8 million, to $31 million, compared with gross profit of $39 million a year ago. Total worldwide banana unit costs increased 2% compared with last year's first quarter. In our other fresh produce business segment, net sales increased $13 million to $434 million, compared with $421 million in the first quarter of 2012, and gross profit was 2% lower than the prior year period. In our Gold pineapple category net sales consistent with last year's level.

Volume decreased 2%. Unit pricing was 2% higher primarily in Europe and North America, and unit costs increased 1%. In our fresh cut category net sales increased $7 million to $99 million compared with $92 million in the prior year driven by our ongoing expansion into new food channels. Volume decreased 1%. The decrease was the result of the closure of an unprofitable fresh cut prepared salad facility in the UK in 2012, partially offset by higher fresh cut fruit sales worldwide. And unit pricing increased 8% while unit costs was 10% higher than the prior year.

In our melon category, net sales increased $4 million to $52 million, compared with $48 million in the first quarter of 2012. Volume increased 20%, the result of improved yields from favorable growing conditions. Unit pricing was 10% lower, the result of competitive market pressures, and unit cost was 3% lower. In our non tropical category net sales increased $5 million today's $116 million, compared with $111 million in the first quarter of 2012.

The increase was primarily driven by higher sales in our avocado and apple product lines, the result of increased demand. Volume increased 4%, unit pricing increased 1%, and unit cost was 2% lower than the prior year period. In our tomato category net sales decreased $1 million to $17 million, compared with the prior year period. Volume decreased 14%, pricing was 8% higher, and unit cost was 10% higher.

In our prepared food segment, net sales were in line with the prior year period. Gross profit decreased $4 million to $9 million. Gross profit for the quarter was negatively impacted by lower selling prices in our industrial product line, the result of industry oversupply. Now, moving to a discussion on costs. Banana fruit costs, which includes our own production and procurement from growers, increased 1% per unit worldwide and represented 29% of our total cost of sales for the first quarter.

Carton costs decreased 12% and represented 4% of our total cost of sales. Bunker fuel decreased 6% versus the prior year, and represented 5% of our total cost of sales. And ocean freight costs which include bunker fuel, third-party charters, and fleet operating costs was, 1% lower. For the quarter ocean freight represented 13% of our total cost of sales. As to foreign currency, the foreign currency impact at the sales level for the first quarter compared to the prior year was unfavorable by $14 million. And at the gross profit level the impact was unfavorable by $12 million compared to the first quarter of 2012.

Other expense net for the quarter was $2 million compared with other income net of $500,000 in the first quarter of 2012 primarily attributable foreign exchange losses during this quarter. At the end of the quarter our total debt was $151 million. During the first quarter we repurchased 1,038,209 shares for approximately $27.9 million as part of our share repurchase program. Income tax expense was $10 million during the quarter compared with income tax expense of $2 million in the prior year period.

We expect our effective tax rate for the remainder of 2013 to approximate 15%. As it relates to capital spending, capital expenditures for the year are expected to be approximately $120 million. That concludes our financial review. Operator, we can now turn the call over for Q&A.

Very good, thank you. (Operator Instructions). We will go right to our first question from Heather Jones, with BB&T.

Good morning, gentlemen, this is Bret Hundley standing in for Heather. Hi, I had a quick question, actually, on prepared. It missed our estimate by a pretty wide margin and I know it is a smaller portion of the mix but it is certainly an area of differentiation and leverage as you grow into places like the Middle East, for example. Margins there have steadily been declining. You guys called out the industrial component across the industry for this quarter but can you just give further clarity on some of the factors at play here in your prepared foods business and how you look at developing this segment going forward?

Yeah, the two main reasons prepared is declining, you mentioned Middle East, prepared is actually doing very well in the Middle East, and growing every day. The two main factors for the decline in the profitability of prepared, one is the industrial products, the concentrate, and IQF. There is an oversupply in the market. And that is much more of a commodity than the other products we sell and pricing is very low right now. And the other one is just Europe in general. The majority of the prepared that we sell is in Europe and just like we are in bananas where we are struggling in Europe.

How long do you see the concentrate issue lasting? Do you have any visibility into that?

That is very hard to tell. I mean over the years, it is very cyclical. We have seen very high pricing and very low pricing and right now we are in the downward cycle but it is very hard to tell when that will turn around.

Okay. I just want to focus in on Europe in your banana segment and I'm just curious if you can give maybe the impact of how Europe came in versus relative to your initial expectations?

This is Muhammad speaking. Actually we were not expecting better picture than what we saw this past quarter. What made it worse was actually the bad weather that Europe has experienced during the last three months of the year. And that was probably one of the factors that we did not anticipate. Europe, in general, what I have been saying for several quarters, is that Europe market is very weak and still struggling there.

Have you you seen any improvements since quarter end as far as weather wise and pricing trends?

Weather wise it has improved modestly but you as far as the pricing trends, very small improvement. Not significant in any way.

Okay. And then just rotating over to North America, there has been a lot of talk about competitive pressures there amongst industry players and so I just wanted to ask a question on the retail environment there and whether that has become any more are competitive, less competitive, and what your outlook is for that region this year?

Well, our outlook still stands the same as I said in the first quarter in the last conference call. And we see some competitive pressure on pricing in the market but we don't anticipate anything different because most of our contracts have been signed for the year. And we don't see much difference from now to the end of the year from what is going on.

Okay. And then I just want you to touch broadly, if you could, on the banana supply situation across Latin America and just if you are still seeing, are you still seeing some oversupply across central America? If you could just touch on supplies coming out of Latin America as you see them today.

Historically, you know that during the first quarter and the second quarter usually we have a lot of pressure on supplies coming out of Central America and Ecuador. This year, so far, we have not seen any pressure really and you can tell that from the prices in Ecuador have not increased significantly like in the previous years. You know, we could see prices in the $16, $17 or maybe more FOB.

This year we did not see this at all which means that supplies were actually abundant in central America which did not put any pressure to start sourcing out of Ecuador. And that, in my opinion, is going to continue unless other than catastrophe somewhere, hurricane or flood or very strong wind, that can make a difference to the supply chain. As we speak we see abundant supply coming through.

Thank you, that's very helpful. I just have one other question on your balance sheet. I think there were some hopes that you could use your strong balance sheet to maybe level up on some projects for the benefit of shareholders. The past couple quarters, you have increased some debt given reduced cash flow levels, and I wanted to get your overall thoughts. Are you concerned about the industry's operating environment during what is typically a very strong Q2, from a working capital standpoint?

From our point of view, we don't see any problems with our cash flow. We have very strong cash flow. We know how our business is operating and we have so much diversified, and we have so many projects that are still kicking in right now and we have new productions in different parts of the world so we're not very concerned at all about our cash flow.

Our next question comes from Jonathan Feeney, with Janney Capital Market.

Good morning. Thank you very much.

Good morning, Jonathan.

Mohammad, I wanted to talk about the Middle East a little bit. It still seems like a great potential growth opportunity but it seems like pineapples have grown and continue to grow nicely, but the prepared food business where it seems where most of the potential upside I would think from a margin and profit the standpoint are, just haven't seen a tremendous amount of growth of late and I kind of wanted to see where we were from a longer term perspective versus your aspirations say, a few years back.

I don't know what you mean by prepared. Is prepared the canned food?

Yes, canned. Exactly. Exactly. Yes.

We are expanding year by year. The canned business, what I would like to highlight here, is that we are leveraging the brand not only on the canned business really. We are leveraging the brand on many other areas that we started in the Middle East, be it in juices, be it in fresh prepared meals and offerings, that have made tremendous growth in that market. In addition to that we are starting, we actually started a year back, a fresh market concept which is like a quick service store but only for healthy snacks and healthy food.

And this is taking off very nicely in Saudi Arabia and in Dubai and we believe that this over the next few years is going to make a big difference to our mix of business. We are doing so many projects as we speak that I think will pay off as we go forward. Not in a month or two, but in a year or are two, we would see quite a significant difference to our sales mix and margins in the Middle East as we go forward.

Thank you. And just one follow-up for Richard. You have been active in the share repurchase market as you alluded to and I think last time you updated us you prioritized acquisitions, and correct me if I'm wrong, as higher than share repurchase. Is this a commentary on what the acquisition environment looks like or that your stock is relatively attractive here? Update me on your thinking please.

Obviously it is. We are still looking for if we find a good acquisition we still feel we can do both. But, yes.

I guess what is a practical level of debt you think the company could handle in terms of EBITDA? Still under leveraged or conservatively leveraged?

We really don't have a magic number there. If we found a very large acquisition that was accretive and fit in we wouldn't hesitate to do it.

But nothing like that on the horizon?

Nothing like that on the horizon.

Great, thank you very much.

Next a question from Eric Larson, with CL King & Associates.

Good morning, everyone.

Good morning, Eric.

Two questions. Could you talk a little bit about the North American banana market? I know that you are probably struggling with modestly lower contract prices from last year and yet it doesn't look like it had a demonstrable impact on your business in the first quarter. Could you just give us a quick update on what the North American banana market did in the quarter?

I can tell you that our volume has increased in the first quarter year-over-year and I can tell you that our efficiency and costs have been contained which has helped us in offsetting some of the price erosion that we have seen over the last few months. That is in essence what really is taking place in North America.

Okay. So up volumes and cost containment has been a benefit and obviously there is enough fruit to be able to divert to the North American market where you can make a better profit and it has obviously helped you in the quarter. Richard, the other question that I have is, in quarter foreign exchange had a much bigger impact on your gross profit margins than I would have expected.

Obviously, we know the movement of some of the relative currency's, it doesn't look like the producing countries had a potentially huge negative impact on that. Can you talk about that? I thought that you were probably as much as 50% hedged. Where do you sit on 4 X and why was the impact so big in this quarter?

The impact was in the Euro and the Yen but for the most part in the Euro. More than half of the impact you saw was in the Euro. And, yeah, we are about 50% hedged right now on that.

Okay. That will continue to be a headwind for you, I suspect, if rates stay where they are, that will be a headwind pretty much through this calendar year but more so in the second quarter, would that be a safe statement?

Yeah, I would say so.

Okay. And then Mohammad, just another quick question on just your overall view point. Again, you did allude to the supply coming out of Ecuador and you have been absolutely dead correct on the direction of where this is all going. Do we need, do you think, some bad weather somewhere, some bad winds or some flooding, or a hurricane in order to correct the supply problem that you see across the globe?

I guess you are right. I hope that they happen but not on our part of the farms.

It doesn't sound like Ecuador is being the nasty perennial over supplier of fruit at this point. Maybe we a self-correcting process already taking place.

In one way, yes. But I still believe that Ecuador still has overproduction. I still believe that Ecuador could still if they want to maintain a decent price, I think the government has taken good steps in terms of regulating the industry in a more rationale way and in terms of production as well as pricing but I hope that this can hold and continue. Central America hasn't been increasing production really in any significant way over the last few years. The only reason why we are having good production out is because we didn't have any adverse climate conditions in the last, let's say two years, and it has been perfect. So that is why we see good and consistent supplies from Central America.

Okay. Okay.

And then just a final question, Mohammad, and this is something that you and your organization I think has been really good at the last five or better years, is that you are not shy about exiting businesses that don't have the potential I.E. your melon business, and you have done a lot of things in your business. In looking at your industrial concentrate business in Europe with the Del Monte brand, this periodically comes in and nips your P&L periodically. My mind is getting old and I can't pinpoint the exact year be it happened before but that a business that net returns good profits to you? Is it worth the volatility of earnings that you have in your business to hang on to that particular product segment?

You are right that we are not shy to exit any business that is not performing but you that is completely different from businesses that stand alone. This concentrate, for instance, business, which is a by product of the pineapples. I mean we do have plantations and canning operations in Kenya, and we do have the operation in Costa Rica which is for mainly fresh but we do have a lot of residues that come out of these farms that do not go into canning or do not go into fresh that we have to use. Part of that is being used as IQF which is doing quite well and growth there.

However, the concentrate which is the juice itself has, since the last five/six months, has not been doing well at all. And the reason for that is because of the oversupply from Thailand. Thailand is the determining factor in this business really in the concentrate business. A year and a half ago, over the last two years Thailand had a drought and they had shortage and prices of concentrate shot through the sky. And we did extremely well.

We made a lot of money. And now Thailand has so much production which has created oversupply and depressed the prices significantly. We cannot just get out of the business because the prices have come down because I'm sure that there will be a reversal of what we are seeing today. We just have to go through the pain that we are experiencing today and wait for the bright future. I mean bright period later on.

Well, yeah, and that is a perfect explanation. I guess the answer is, you just need to grow your fresh cut business an awful lot faster and find a more profitable outlet for your excess concentrate.

You bet.

All right. Thank you, everybody.

Thank you.

And this concludes our question and answer session. I would now like to turn the conference back over to Mohammad Abu-Ghazaleh for any further or closing remarks.

Thank you very much for everyone that was on this call and I hope to speak to you in our second quarter results hopefully. Thank you so much. Bye.

And this does conclude our conference for today. We thank you, again, for your participation.