Fresh Del Monte Produce Inc (FDP) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's third-quarter 2013 conference call. (Operator Instructions).

I would now like to introduce your host for today's conference call, Christine Cannella, for opening remarks.

Thank you, Stephanie. Good morning, everyone, and welcome to Fresh Del Monte's third-quarter 2013 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 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 webcast and will be available for replay approximately 2 hours after 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 this call now over to Mohammad.

Thank you, Christine, and good morning, everyone.

I'm pleased to report that during the third quarter of 2013 Fresh Del Monte generated strong top-line growth. Net sales for the quarter increased 9% year over year to $861 million with higher net sales across all regions in a quarter that is generally the most difficult of the year for the produce industry.

In terms of other highlights for the period, we continued to enhance our operations and further strengthened our grower business platform. We gained new customer relationships and expanded our distribution channels to drive additional sales and increase global market share. We firmly believe there are significant opportunities for continued long-term growth through new channel development, bringing our product closer to end customers.

During the quarter, we introduced an attractive range of new products in our value-added fresh-cut and prepared fruit product lines to meet growing consumer demand for convenient, healthy, and nutritious meals and snacks.

For example, we benefited from our presence in the Middle East, a rapidly growing market for Del Monte brand in our fresh and prepared businesses. We certainly have every reason to be excited about our progress in this region as we continue to break new grounds as the first multinational branded fresh produce company to establish live sales, a distribution network and a number of innovative points of sale.

Going forward, we'll continue to introduce new products that we can sell through a variety of distribution channels in all markets.

During the quarter, we also continued to explore sourcing opportunities to increase our core products volumes and to further leverage our vertically integrated business model and strengthen our relationship leadership position.

At the same time, we were faced with a number of difficulties that limited our ability to deliver optimal earnings for the quarter. Our biggest challenge was an endlessly wide over supply of bananas.

In addition, while we succeeded in obtaining price increases across almost all of our business segments, price increases were not high enough to offset a range of higher operating costs, including increased logistics and fruit procurement costs.

Additionally, these factors were compounded by unfavorable exchange rates. We also continued to face a very competitive banana market in North America and challenging conditions in Europe.

We are very bullish on our long-term prospects. We will continue to do everything we can to keep our expenses low. However, where we have seen signs of rationalizations in some markets, we also recognize that selling prices of bananas need to improve across the industry.

In summary, we always believed the foundation of Fresh Del Monte's long-term success is our adherence to a core strategy that includes a focus on diversification, efficiencies and a powerful combination of assets. We have a diverse product line that is sourced globally, we hold commanding positions in several product categories, and we have a powerful distribution network that enables us to meet growing worldwide demand. We have a strong balance sheet, and we have proven time and time again that we are a Company that moves in the right direction.

Now I will turn the call to Richard.

Thanks, Mohammad, and good morning.

For the third quarter of 2013, excluding asset impairment and other charges, we recorded earnings per diluted share of $0.09 compared with earnings per diluted share of $0.45 in the prior year period.

Net sales were $861 million compared with $789 million in the third quarter of 2012, and gross profit was $53 million compared with gross profit of $75 million in the prior year.

In addition, excluding asset impairment and other charges, we reported operating income for the third quarter of 2013 of $7 million compared with $31 million in the prior year, and net income was $6 million in the third quarter of 2013 compared with $26 million in the third quarter of 2012.

In our bananas business segment during the third quarter, net sales increased $43 million to $402 million compared with $360 million in the third quarter of 2012 with higher sales volume in all of our regions and increased selling prices in Asia, the Middle East and Europe.

Overall, volume was 3% higher compared with last year. Worldwide pricing increased 8% or $1.09 per box to $14.30, partially offset by lower selling prices in North America due to competitive market pricing.

Gross profit decreased $11 million to $1 million compared with gross profit of $12 million a year ago with almost the entire decrease in North America where higher costs were combined with lower pricing. Total worldwide banana unit costs increased 12% compared with last year.

In our other fresh produce business segment, net sales increased $31 million to $366 million compared with $335 million in the third quarter of 2012, and gross profit was $10 million lower than the prior year, primarily due to the non-tropical category.

In our Gold pineapple category, net sales decreased $8 million to $115 million compared with $123 million in the prior year. Volume decreased 10% due to lower production in the Philippines and Central America. Unit pricing was 3% higher, and unit costs increased 3%.

In our fresh-cut category, net sales increased $7 million to $106 million compared with $98 million in the prior year, the result of increased demand in North America and the Middle East. Volume increased 8%, unit pricing was in line with the prior year, and unit costs increased 5%.

In our melon category, net sales increased $3 million to $10 million compared with $7 million in the third quarter of 2012. Volume increased 4%, unit pricing was 32% higher, and unit cost was 20% higher.

In our non-tropical category, net sales increased $21 million to $82 million compared with $61 million in the third quarter of 2012. Volume increased 25%; unit pricing increased 7%, driven by higher selling prices in our avocado product line; and unit costs was 17% higher than the prior year, primarily the result of quality issues with grapes sourced from Chile.

In our tomato category, net sales increased $6 million to $22 million compared with $16 million in the prior year. Volume increased 20%, pricing was 16% higher, and unit cost was 14% higher.

In our prepared foods segment, net sales decreased $1 million to $93 million compared with $94 million in the third quarter of 2012, and gross profit decreased $1 million to $11 million.

Now moving to costs, banana fruit costs, which includes our own production and procurement from growers, increased 11% worldwide and represented 31% of our total cost of sales for the third quarter. Carton costs increased 16% 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 during the quarter, which includes bunker fuel, third-party charters, and fleet operating costs, was 16% higher, primarily due to increased shipments of bananas to the Middle East from Central America as a result of an oversupply. 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 compared to the prior year was unfavorable by [$15 million], and at the gross profit level, the impact was unfavorable by $10 million compared to the third quarter of 2012.

Other expense net for the quarter was $200,000 compared with other expense net of $3 million in the third quarter of last year. The decrease was primarily attributable to lower foreign exchange losses.

At the end of the quarter, our total debt was $100 million. Income tax expense was $2 million during the quarter compared with income tax expense of $200,000 in the prior year period.

As it relates to capital spending, capital expenditures for the nine months ended September 2013 were $90 million. Capital expenditures for the year are expected to be $120 million.

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

(Operator Instructions). Brett Hundley, BB&T Capital Markets.

I just wanted to start on your banana costs. So clearly the spike in the quarter was due to continued increases in fruit costs and then carton and ocean freight, as you mentioned, Richard. Would you expect carton costs to remain high over the short-term?

Over the short period, we expect carton costs to remain relatively stable as to what they are right now.

And then when I think about your commentary, which certainly matches others, you have all this banana supply out there right now, yet costs are remaining considerably higher. So I am trying to understand that disconnect. But then, of course, you talk about total banana costs up 12%. Your volumes are up 3%. So seemingly it is costing you much more to bring incremental fruit to market, of course. And so I'm just curious about, first, if you can help reconcile with all that higher supply why fruit costs continue to move higher. And then secondly, what steps you can take to address this issue.

As far as the costs, cost to purchase food, especially from the independent growers, has been higher all year. That has been a fact all year.

As far as what can be done to offset that, we need to increase pricing.

Okay. So to that point, I mean early reports out of the North American market are that contract pricing is not going as well as one would hope. And so can you describe the North American environment for me, and has it become more difficult in dealing with retailers, or what is happening in North America? Because I don't understand why competitors would be irrational against the backdrop that we are seeing right now.

That is exactly the question that I have to ask myself -- why would competitors be irrational to go and offer just to get volume? That is the irrational question that we ask ourselves every day.

But, however, we have to coexist with this fact and continue with our business. We are probably one of the largest companies that own our own farms. The increase in costs really comes from independent or third-party growers. It doesn't come from our own production. And that is a trend that is continuing year over year that, unfortunately, to attain the volumes, we need to absorb this additional cost that we are facing on a yearly basis.

Of course, we continuously expand our production, and hopefully we will come to this point some time in the future where we can have our own production to fulfill our needs. And by diversifying our sourcing as well, replacing some sourcing with other areas either to mitigate logistic costs, we're having some ideas and we're working on some plans, how can we mitigate or overcome these headwinds considering all the circumstances we're going through now.

Whatever is happening right now is something that we cannot control, but we can control by creating new opportunities, which we are working on right now.

So, Mohammad, so owning more of your own production is attractive for a number of reasons, but you're also saying that it allows you to compete at a more attractive margin because third-party growers won't have as much control over you.

Exactly. And not only -- we're not talking about adding our own production, but geographically diversifying our own production and not just depending on one source. We're trying to mitigate the logistic costs as well into this picture.

So Mohammad, just longer term, is the North American market a place where you would like to strategically gain share?

We are happy with our share in the market, as we speak. We would like to grow as the market grows, and that is, of course, an annual growth into the market demand. I mean the market is growing year over year, and we would like to maintain our share of that growth but not necessarily to go and undercut our prices to gain a 1% or 2% additional share into the market.

And Richard, can you remind me what type of ROIC you guys look for when you make investments?

We don't have a magic number, Brett. We look at a lot of different factors when we invest. We look at payback. We look at how much our earnings can be on that. There's a lot of different factors. We --

There are two different types. I mean we have strategic investments, and we have other types of investment, and that is how we look at that. We would look at that strategic side of it, and then we would look at the pure commercial way of looking at the investment.

Okay. And so I would be curious to get your thoughts, Mohammad, on the East Coast brokers land that you guys purchased in Florida and Virginia. I just wanted to get your rationale behind the purchase and what you are looking for strategically going forward.

Well, this, actually, it has been overdue to grow our own products in North America and here, be it in Florida or up in the Northeast, and we have been in the tomato business for so many years now. However, we've not had production on land in North America. We do have production outside, offshore, which is the greenhouses we have in Guatemala and Costa Rica. However, this is a very big move for us. That same opportunity has been presented to us about a year and a half ago unfortunately, or fortunately, we did not agree at the time, and then we have been lucky enough to gain these assets into the auction. And I believe this is a very strategic and important acquisition for us that will put us now on the local -- as a local producer in the US, which makes a big difference to the retailers as they request any supplier to be in any significant volume has to be a local producer at which we're in right now. So it fits perfectly with our offshore production to combine this more and have a 12-month supply for our customers.

And to that point, I mean I can get to some pretty favorable accretion levels given current tomato prices, et cetera. And just so my last question and I'll jump back in the queue is, what kind of investment is needed to get that land back in order, and how quickly should we think about that investment starting to yield production for you and a top-line impact? Thank you.

We will lost start production actually as of January, hopefully, next year. So we will not use all our land. We just started -- we will be starting planting soon on some of these lands. We are not going to start planting the 7200 acres right away, but we will start in two phases. And we will see, of course, the impact of this acquisition going forward into 2014.

Thanks, guys.

Jonathan Feeney, Janney.

My first question, guys, is over the course of the quarter, it seemed like we really had strong banana prices in July and August, and they tailed off at least in Europe, anyway, through the course of September, even to a much greater extent than would be expected from the regular seasonal falloff. Was that consistent with how you experience profit in the banana segment? Did it trail off over the course of the quarter in a way you might not have expected?

Yes, this is a normal trend, but this was more severe this year than normal years.

You know, Jonathan, if you would recall years back, third and fourth quarters were always been losing quarters.

Yes, right.

We used to post losses every third quarter in the past. Now we are posting profits in third quarter, which is a great achievement considering all the headwinds that we have been facing. Which means I business, I'm talking about our business, I'm not talking about the industry, but our business has transformed in a way that at least we can overcome problems or headwinds regarding our core business because we diversified our business. And that is why we can come even with a very difficult quarter with not so big net incomes, but at least to come with a black figure, that figure.

And just as you look at this quarter, I look at your total banana unit costs, which I think were up 11%, would you say that is about in line with your competitors for this particular quarter? Because I know you are a little more vertically integrated than others.

We don't know what our competitor's cost is.

We cannot --.

Well, let me ask the question this way then. If I just thought about this quarter and what has been happening to banana prices recently, is our companies at a short-term advantage -- probably not a long-term advantage but short-term advantage who had less owned fruit because there is cheaper fruit out there, or is that not right?

Most of the fruit that we contract or our competitors contract is usually an annual basis. So it's not a matter that you cannot go and speculate in the market saying, I will buy this fruit today and not buy it tomorrow.

Got you.

The only difference is only at the peak, in the high season where we are short, we go and buy on a spot basis. That's the only time we buy, let's say, outside our contract format.

Got you. And that happens every year.

And that happens every year.

I see.

However, this year in particular, we had so much fruit, us and our competitors, be it big, small, or large. But everybody had a lot more fruit starting July onward, which had to be disposed of, and mainly it was disposed into the Mediterranean markets where prices have suffered tremendously, greatly. And that has also had a very negative impact on our income.

I see. And if I could -- the North American business where we're seeing quite a bit of competition, did that business get more competitive this quarter?

No, the competition continues because we have contracts that have been since January, for instance, or several last year. So that, the competitive environment is there not only month per month, but the whole year.

And am I right, the fall is a little bit heavier renewal period for North American contracts, right? There tends to be more contracts proportionately?

That's true, yes.

And you would say that the tone is still somewhat competitive in North America?

Yes.

Great. Okay. Well, thanks for answering all my questions.

Thanks, Jonathan.

Thank you.

(Operator Instructions). Eric Larson, CL King.

Just a few follow-up questions on the banana market.

I saw that there was a fair amount of supply coming out of Ecuador I think in the month of August, and I think there were also some increased supplies in Asia. Is that true, and is that still a problematic issue, Mohammad?

It is, yes. It is.

And so if we look into the first half of next year, into your seasonal peak selling season, do you still expect to see a fair amount of fruit available relative to maybe last year?

I think it would be more or less the same line of last year. During the second -- I mean winter months, banana production goes down because of the climate conditions, and demand goes up. So both of them work together to make it a positive market environment, and that is what we hope for.

Okay. Yes. For sure.

And when you contracts with your independents for production -- for fruit that is outside of your own farms, those are annual contracts, and are those set prices, or do they vary by quarter?

No, by annual. Annual prices.

They are annual pricing, okay. All right.

The next question, Mohammad, if you look at your overall competitive situation right now, we typically know who is the big price discounters, yet the fact is that Europe actually seemed to be a lot better in the quarter than I would have expected relative to the amount of fruit. Was there also additional fruit available in Asia in the quarter outside of Ecuador?

Yes, there was. I mean the fruit, unfortunately, was abundant, be it Central America, the Philippines, and Ecuador, but mainly the major amount of fruit that came was from South America and the Philippines.

And the Philippines. Okay. All right. That helps.

I'll get back in the queue. Thanks.

Thank you.

And I am currently showing no further questions. I will now turn the call back over to Mr. Abu-Ghazaleh for closing remarks.

Thank you very much, everyone. I wish we could have given you more brighter news, but these are the facts, and I hope that we can have better news in the coming quarter. Thank you very much and look forward to talk to you again.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and have a wonderful day.