Fresh Del Monte Produce Inc (FDP) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fresh Del Monte Produce first quarter 2014 conference call. (Operator Instructions). Now I would like to turn the call over to Christine Cannella. Ms. Cannella, you may begin.

Thank you, Kevin. Good morning everyone and welcome to Fresh Del Monte's first quarter 2014 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 compliments our first quarter 2014 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 this call now over to Mohammad.

Thank you, Christine and good morning everyone. Net sales for the first quarter of 2014 was 7% higher year over yearat $982 million. Highlights included higher banana, pineapple, and non-tropical sales volume in North America, increased banana sales volume and pricing in the Middle East, higher sales volume in our Prepared Food business in the Middle East, and favorable exchange rates in Europe.

It is important to note that the first two months of the quarter were extremely difficult as we were severely impacted by extremely cold and severe winter weather conditions. In our business, we know things can change and sometimes change unexpectedly and dramatically as we saw in the second half of 2013. Our teams ability to meet numerous challenges and deliver strong improvements from both the fourth quarter of 2013 and also year-over-year validates the execution of our long-term strategic initiatives which remain and aimed at expanding our global market position, enhancing our product mix, and bringing our closer to end consumer through new channel development.

I hope that the produce business will continue to be as good in 2014 and beyond. We have been asked about recent changes and pending consolidation in the industry. We applaud any activity that brings more assurety to the marketplace.

In summary, we will continue to address the short-term challenges of our industry faces. We are well-positioned in our marketplace as we continue to seek ways to improve our performance. Our business is growing, and we have the right strategies in place to continue to expand our healthful value-added product mix.

We will continue to invest in our vertical integrated infrastructure as well. We have the strength of the skilled management team and a strong balance sheet and asset base along with the determination to provide good long-term returns to our shareholders. At this time, I would turn the call over to Richard. Richard.

Thanks, Mohammad, and good morning everyone. For the first quarter of 2014 excluding adjustments on a comparable basis, we reported earnings per diluted share of $1 compared with earnings per diluted share of $0.71 in the first quarter of 2013. Net sales were $982 million compared with $919 million in the prior-year period an increase of 7%. Gross profit increased to $170 million compared with gross profit of $99 million in the first quarter of last year.

In addition, operating income increased 18% to $63 million compared with operating income of $54 million in the prior year and net income for the quarter increased to $57 million compared with net income of $41 million in the first quarter of 2013. Now turning to our segments.

In our banana business segment net sales increased $31 million to $437 million compared with $406 million in the first quarter of 2013. Primarily a result of higher sales volume in the Middle East and North America. Net sales in Europe were also stronger due to favorable exchange rates and lower supply.

Overall volume was 6% higher than last year's first quarter. Worldwide pricing increased 2% or $0.24 to $15.21 per box. Total worldwide banana unit cost increased 2% primarily driven by higher fruit procurement costs and gross profit was in line with last year's first quarter.

In our other fresh produce business segments for the quarter, net sales increased $20 million to $454 million compared with $434 million in the prior-year period. Gross profit increased to $65 million compared with $59 million in the first quarter of 2013.

In our gold pineapple category net sales were $133 million compared with $119 million in the prior year with strong sales in North America and Europe driven by increased volume. Our overall volume increased 16% a result of favorable growing conditions in Costa Rica. Unit pricing was 4% lower and unit cost was 1% higher.

In our fresh-cut category net sales decreased to $88 million compared with $99 million in the prior year. Net sales decreased primarily as a result of lower sales volume in Europe due to the previously-announced loss of business in the UK. Volume rose in Asia and the Middle East with increased pricing in North America. Overall volume decreased 11%, unit pricing was in line with the prior year, and unit cost was 2% higher.

In our melon category net sales decreased 1% to $51 million in the first quarter. Volume decreased 19%, unit pricing was 23% higher as a result of tight industry supply, and unit cost was in line with the prior year. I should note that the majority of our gross profit increase this quarter is attributed to this year's offshore melon season.

In our non-tropical category net sales increased 8% to $125 million compared with $116 million in the first quarter of 2013 primarily driven by the continued success of our avocado product line in North America and higher sales volume and pricing of grapes in Asia. This increase was partially offset by lower sales volume of stone fruit, the result of a series of freezes that hit Chilean growing regions in the fall of 2013. Volume decreased 3%, unit pricing in increased 11%, and unit cost was 12% higher than the prior year.

In our tomato category net sales increased 11% to $19 million compared with $17 million in the prior year. Volume increased 9%, pricing was 2% higher, and unit cost was 4% higher. We recently began harvesting tomatoes in Florida from agricultural production we purchased late last year making us a year-round producer and a major marketer in the North America fresh tomato market.

In our prepared food segment net sales increased 15% to $91 million compared with $79 million in the prior-year period and gross profit was $2 million higher than the prior year. Now moving to costs. Banana fruit costs which includes our own production and procurement from growers increased 3% worldwide and represented 29% of our total cost of sales for the first quarter.

The increase in fruit cost was driven by higher costs paid to independent growers, partially offset by lower production cost on company-owned farms primarily due to favorable exchange rates. Carton costs increased 9% and represented 1% of our total cost of sales. Bunker fuel cost decreased 4% and represented 5% of our total cost of sales,and total ocean freight cost which includes bunker fuel, third party charters, and fleet operating costs was in line with the prior-year period.

For the quarter, ocean freight represented 13% of our total cost of sales. As for foreign currency, the foreign currency impact at the sales level for the first quarter was favorable by $7 million and at the gross profit level the impact was favorable by $12 million.

Other income net for the quarter was $700,000 compared with other expense of $2 million in the first quarter of 2013 primarily associated with foreign exchange. In our stock repurchase program, during the first quarter we purchased approximately 765,000 shares for approximately $19.8 million. At the end of the quarter, our total debt was $285 million.

For income taxes, income tax expense was $6 million during the quarter compared with income tax expense of $10 million in the prior-year period. As it relates to capital spending, we spent $51 million on capital expenditures in the first quarter of 2014, and we expect to spend approximately $120 million in 2014. This concludes our financial review. Operator, we can how turn the call over for Q&A.

Thank you. (Operator Instructions). And our first question comes from Brett Hundley of BB&T Capital Markets. Your line is now open.

Good morning, everyone.

Good morning, Brett.

Congratulations on a good quarter. Mohammad, I wanted to ask you a few broader questions and then maybe jump back in the queue and come back later. But my first, I am asked about Panama disease, and honestly I just do not have a good read on it clearly. When I talk it people in the industry, it seems like it is a concern, but that people feel that proper measures are set up in Latin America, but any way, Mohammad, I wanted to get your read and feel for the situation. And if you think that the media is making a bigger deal out of this, or if you think that this is something that the industry needs to react to and that you actually do have some concern to it.

It is a catch 22. The media maybe has exaggerated the situation, but the situation exists and the danger exists. I have seen through my career this disease have wiped out farms in Indonesia in Sri Lanka, in other places. I have seen it myself, and it exists in the Philippines for the last 40 something years.

So it is not like something that does not exist. It exists, and it is dangerous. It can wipe out crop if not proper management, and it is very costly because what happens is that you have to keep replanting, replanting in order to keep producing, and in some areas even if you replants does not turn out to be good and you cannot produce.

Now, is it going to wipe out the banana industry? That is a very doubtful question. Is it going to be dangerous? Yes. It could be negative? Yes.

We have a Company I mean at Fresh Del Monte we take all measures in order to be able to hopefully, be proactive in terms of with changing some varieties from (inaudible) to other varieties as we go forward, with doing that and doing all the necessary steps to, hopefully, avoid it or not to be affected by it, but it exists. It is spreading to Africa as you know in the news. It spread in Jordan, and it is just like the - - more or less like the Canker disease with the citrus in Florida. It was there in many areas. You still have oranges. You still have citrus, but the damage is so great that added cost of production will be so substantial that does not warrant, and that is another question why this industry is suffering really, and nobody is touching on that. The costs keep increasing even though we do not have the disease yet, but the price does not move, and I do not know where is this going.

I mean if the price doesn't really go along the cost increases I do not see how the industry can survive for a long time to be honest, and that is my worry. Is that costs are over taking prices by far and the market does not realize and the retailers and buyers do not realize this that one day they will end up with no fruit to sell and they will lose that golden goose that they are milking out of it today. That is the fact today.

And so it sounds, I think you called this before, but do you believe that more cooperation has to happen between the multinationals and the retailer set?

Well, I guess, the multinationals are like sitting duck. The retailers unfortunately have the leverage on. I am not talking only in North America but across the world. That is unfortunate because at least North America is a little bit more orderly.

However, the pricing is very poor, but in Europe it is even worse because there you do not have any control whatsoever and pricing is extremely poor. If you look at the first two months of this year, January, February I was seeing a very bleak picture for the first quarter to be honest. Only in March we started seeing these prices turning around dramatically and saved the quarter. If it wasn't for that, I do not think that we would have had nice picture as we see today, and the prices in Europe today is coming down again and maybe in a month time or maybe in less just as quickly as they turned around in March to be positive side, they could turn around in the other side -- in the other direction in a couple of weeks. So we do not know really in this business how is it moving, and unfortunately we see some good pricing or good appreciation by buyers, we would not be discussing this, and that is the situation.

Okay. I wanted to stay on that topic, but I also did want to ask you about pricing because what is happening right now honestly, it is tough to gain a good feel for where pricing is headed. We see a number of countries that are having fairly solid yields and volumes. We hear about efforts in Northern Europe in particular where pricing continues to be pressured. The North American market seems, somewhat neutral and the med markets have been very volatile and trying to gain a handle on it is tough.

We see Northern pricing come in a little -- Northern EU pricing come in a little bit here recently, but pricing across the continents and particularly in the South looks to be somewhat net positive. Med pricing looks like it remains strong. So I wanted to ask you if maybe -- it sounds like the stronger banana pricing that you have been seeing is more a function of currency. So I wanted to get your opinion on what you are seeing in local terms around the world as far as banana pricing goes, and what you expect going forward? Related to that, I wanted to get some commentary just on what type of yield you are seeing on your farms, or if you do not want to speak specifically to that, just what you are seeing yield wise across the industry compared to last year.

As far as yields are concerned, we he do have in our farms some improvements. There is no question that we have done some new practices in order to improve yields, but do not forget that these farms talking about ourselves or the competition. These farms most of them have been producing for tense of years. That same land has been producing bananas for 50, 60, 70 and maybe more years. It did not start yesterday, and no matter what you do you cannot go from let us say 2,000 -- 200 bucks (inaudible) to 3,000 bucks (inaudible) because even if you do whatever improvements you do you can maybe get another 5%, 6%, 7% more at the most to improve your yield, but these are the facts. That the land is limited. The same land has been producing for a very long time and it is exhausted.

Now, we have been lucky also with the weather for the last two, three years. We have been very lucky that we did not have any kind of natural disasters which have helped as well the production and the yields. Aside from that pricing, I do not think that the pricing has improved I mean in Europe and (inaudible) terms. If you look at last year and this year, I mean the same time of the year, I think we have had better pricing last year. Exchange rate has helped, yes, you are right.

World wide the pressure is there, and I do not understand what is going on because Ecuador, something is malfunctioning there because I see that huge volumes fruit goes into Europe and the Mediterranean and unfortunately there is no check this fruit. Because you can see, I have said it before maybe privately, but I will say it publicly. The (inaudible)trade to the banana is becoming so common that even if you dump a 100,000 or 200,000 boxes at low price, and there is other income coming from 50 times more from other type of product, that might also be very, very kind of what would I say disturbing the industry. That does not make things are equal. Something is going wrong. Something is really happening that I do not believe that it is proper business kind of environment.

Okay. And I had the same view, and I was just wondering back to the trade discussion in general. You mentioned it in your prepared remarks there is a couple of things supposedly in the works from and industry consolidation standpoint. One of them has been formally announced, and I am just -- I am wondering what your view is. You said that you guys have a positive view on that. Industry consolidation as a whole some of the things that are floating around out there. Do you think that the consolidation that can take places is enough to improve trade conditions for the industry?

Really how to be rational. Otherwise it will be just the same game. I mean there will be no -- if the rationality prevails, if really everybody want really to take a position in order to make decent repairs on their investments, his investments, our investments I think it will make sense. Otherwise, I do not think that it will make any sense consolidation or not consolidation it even gets worse.

And a question for you or Richard is a consolidation effort something that the Company would like to take part in and a consolidation obviously in banana, or do you as a management team as a Board, etcetera, do you prefer to spend capital in other areas?

If it was not for our other areas, we would not have been able to deliver a quarter like this. Like Richard mentioned in his script or his remarks, that melon was a very important factor in our performance this quarter. Melon has been - - we have been challenged with melons for the last several years, but thanks God there quarter we have had I a very good result with melons, and that actually has helped us tremendously in reaching these results. If it was only for bananas, I think that we would not have been able to do that.

Okay. I will jump back in the queue. Thanks for your time Mohammad.

Pleasure.

(Operator Instructions). Our next question comes from Eric Larson of CL King. Your line is now open.

Yes. Hello everyone. Good quarter.

Thank you, Eric.

Mohammad, just a little bit on some of the previous questioning. Obviously, these things are, you know, evolutionary rather than revolutionary per se, but how difficult or how close is it to come up with a new banana variety that is disease resistant particularly to the Panama disease, and I know these things sometimes take years and years. If not decades. But is there anything on the horizon that from a variety - - from genetic point of view that could be developed over the next five or plus more years that would ease the pressure on the potential disaster you could have with Panama disease?

As we speak there is none. To change variety that can be ever to counter that disease. We do not have yet. I mean nobody has. We changed the variety in order just to hopefully not to have the same -- I mean if you have the same variety for so many years, then it will be susceptible for disease. So we changed the variety in order to hopefully avoid or delay such and outcome, but as we speak, there is no other variety that is resistant to this disease. It has not been done for the last 40 something years where this disease has been existing for over 40 years actually in different parts of the world.

Let us take it this way. If this disease God forbid takes place in Central America, and if we say we do not lose all the farms or loss 20%,30% of production which will happen, I mean definitely happen. What impact would it have on the supplies or what impact would it have on the market? And that' is the question that we have to ask ourselves.

Sure. Sure. That makes sense. These are all really interesting topics. I do want to get to another topic in the quarter. Obviously we had talked a lot during the month of January and February, and it was a very, very difficult North American market and, hence, we all knew that North American earnings were going to be under some pressure. Is there a way to quantify either in sales or in margin, can you somehow quantity what the impact may have been in North America with kind of the disastrous weather that we had in the quarter? Can you give us some way to shape the impact on that?

We cannot give you really. I mean and this - - when we have (inaudible) up Northeast for instance, or we have (inaudible) growth all over the country. We have to reshuffle logistics, shift that was supposed to go to (inaudible) and Philadelphia and would not be unloaded or could not reach even there had to be discharged for instance in (inaudible) Florida and then it has to be tracked all that through to be tracked up North which sometimes cost half a million dollars extra or four, five, six hundred thousand dollars extra to be added to this. This has happened during the quarter on several occasions, unfortunately and even trucks we could not inland transportation was not available.

So you had to reshuffle and do things like this which at the end of the day cost you money. That is the kind of impact that we were faced or even not to be able to deliver the fruit or the product to the retailer on time, and it was mainly logistical issues that have impacted us financially. And Europe there was there was no other related issue. The markets were very, very weak during January and February as well as in the Mediterranean markets were extremely poor. So like I said, we were lucky that the market changed to the better in March, and we have other products that would that would support us during the quarter.

I guess the only good thing you can say about that is you are set up for a fairly easy comparison next year, right? With the exception of melons. I mean melons are set up for a hard comparison, but in the quarter on the whole quarter in total your European banana pricing was it actually down in local currencies?

Yes. It was down slightly. About 1%.

About 1%. Okay. So obviously the currency impact obviously was the whole revenue gain, and then you probably had positive currency comparisons in the Costa Rican colon in the quarter, and you had probably negative comparisons in the yen. So did the yen have a significant negative impact on you in the quarter?

It did have a negative impact, yes.

Okay. All right. And then just one final question. If you could give us, the surprise -- one of the really nice surprises for me in the quarter also was the significant year-over-year improvement that you had in your gross profit margin in prepared foods. Can you give us a little bit more fuel for what may have been the driving factor there? Did your industrial business come back a little bit better? It was a year ago that really had a tough profit quarter profit quarter. Is that some of the factors that may have led to a better gross margin in the first quarter here?

Yes. That is true. The industrial has improved the pricing a little bit, not as much as we anticipated, as we hoped. But yes, it did and that is part of the major part of the improvement.

Okay. Good. Thank you. Everyone. I will get back in the queue.

Thank you. We do have a follow-up question from Brett Hundley of BB&T Capital Markets. Your line is now open.

Thank you. I appreciate it. I just had a few other questions. Richard, one of the things that I really struggle with in trying to forecast the banana segment in particular for you guys is how costs are moving around. You actually jokingly said before that it can be tough period for anyone, but one of the things I have done back and looked at historically is bunker fuel changes within your total ocean freight changes. So what I will do is I will back out bunker, and I will try and gauge how the cost of your third-party charters and your fleet operating costs are moving. One of the things that I was seeing over time over the past three or four quarters or so was you were seeing big year-on-year increases in those other areas outside bunker.

However, for Q1 here my back of the envelope math suggests that your costs associated with everything outside bunker were up very minimally. So A, can you kind of bless that way of thinking, and then B, is that sustainable? Is there any type of color you can give me on the cost side within banana as to maybe what was happening before Q1, and then maybe what changed during Q1, and can that be sustained going forward? I hope that makes sense.

Yes. As far as the bunker, it is not really the charter or the fleet costs that fluctuate that much. It is also a function of where we're moving fruit to. So, for example, in the fourth quarter because there was such and over supply a lot of that fruit was being shipped to areas where we normally would not ship it under a perfect -- under a better supply scenario.

So that increases the cost per unit as well. Where in the first quarter here, we had more better supply situation with lower supply. So we ship it more to just the ideal market. So that fluctuates more so. We did have some repairs in the past on some of the ships, but that causes more of a fluctuation than the time charter and the vessel operating costs.

Okay. Okay. So but you are still talking specifically within the bunker category?

Yes. Excluding the fuel. I am talking the ocean freight.

Okay. Okay. So ocean freight x fuel, You are saying really is a function of just volume and that was actually part of the question I had, too, is just if you're going further into the Middle East with added volumes, there is just added cost there or are you not getting the same type of price coverage in some of those markets? I guess to your point, they are not traditional market, and so you are not getting the same type of price coverage there offsetting the added costs?

Not during periods where there is over supply, no.

Okay. All right. That makes sense.

And on your banana fruit cost question, the problem as Mohammad alluded to is the cost we pay - - the price we pay growers for fruit just continues to increase.

Exactly. Exactly. Okay. Mohammad, I wanted to ask you this. You have always said that you like having your shipping fleet , and one of the things that I have constantly thought about as an issue across the trade, especially with how much pressure the retail set has put on the industry as a whole, one of the things that I always thought could be and option towards potentially helping you with supply is having a shipping fleet that would more appropriately match supply and demand.

Have you ever thought or would you ever think about monetizing your slipping fleet which could obviously raise some money for investment elsewhere and then potentially also allow you to better match supply and demand because you do not have a big fixed asset base that you have to fill? Do you think that I am looking at that in correctly or can you just respond to that?

Yes. From a theatrical point of view, you are right. That has been done from one of our competitors, ten years back or more that they sold their fleet and monetized, but I do not think that in the long-term it is a very good alternative. It might be short-term. It could be very tempting and attractive, but in the long-term it is not right.

However, if you look at our fleet compared to our volumes not only bananas but everything else. It is really a function, part of the total movement. We do charter third-party ships a lot. We do move a huge number of containers with third parties,with different shipping lines. So we are not -- we cannot let us say be 100% dependent on third-party carriers. We have to have a base fleet which we do. Cannot be the last ( inaudible) and can be improved, yes. I agree with that. And I hope that we can do this as we go forward, but to be (inaudible) 100% on third-party carriers, I do think that would be a wrong arppoach to do.

Okay. And then I just had two questions on fresh-cut. One was kind of more high level and then the first one here is more specific. So the business in Europe that you talked about, some lost business there. Do you still feel confident that you can regain that business either regaining the actual account or winning new business? When do you think we should expect to see fresh-cut volumes start to look a little bit better?

Hopefully, sometime in the third, fourth quarter. That is what we anticipate. Of course, things.

Okay.

You know.

Q3, Q4?

Yes. That is what we hope for.

Okay. And my broader question on fresh-cut, it still seems like a very strong business overall. I ask this question as more of a -- with more of a North American view, but I wanted you to talk a little bit about your fresh-cut strategy. Do you still expect grocers to be willing to pay for third-party sourcing? Are you seeing grocers move more to any type of in-house sourcing production? Is there any concern over a private label push by grocers and what that might do to pricing? It has very good growth prospects as a category, but I just wanted to get your thoughts on kind of the competition within the fresh-cut market?

Yes. You are right. I mean we have seen grocer coming in and out They come, they say supply us, and they realize no, we can cut it in-house and save 20% or 15% or whatever percentage. The difference is that we deliver 10 plus fruit into fresh-cut forms. And the grocers, the mentality and the Philosophy is that, no it is the fruit that remains on the shelves.

That should be cut and put into containers and, of course, there is a big difference between cutting, plus A fruit, top-notch quality rather than other quality. That is number one. Number two, is that we do have all the standards and the hygienes that no one else can have in a grocery. So you can imagine, that if you cut this in your -- in the kitchen -- or the backyard or whatever at the grocery level, what it means to -- So we see a lot of movement that- - we see a lot of grocers changing their mind going into their own cutting, and then maybe one year later or few months later getting back and say no, we better have your product and so on.

It is a continuing process. It is not that hundred% they are dependent on us, and it is not 100% that they can cut their own fruit in-store. It is a matter of probably leveling process, and it will take some years for that to settle down that this is a business that has to be done on a professional and more systematic level.

Okay. That is really helpful. And just one last one, and I will hop. Richard, the increase in pine volumes in the quarter can you give me an idea of what acquired volumes made up of that increase? Were acquired volumes half of the volume increase year-on-year, more than that? Do you have a sense for that?

Yes. No. It still continues to be mostly our own volume.

Okay. That is mostly organic growth on the pineapple side in?

Correct. But that fluctuates.

Yes. Yes.

That fluctuates based on - - . Yes. Still 80% of the volume is our own.

Don't forget that we acquired a farm late last year from (inaudible).

Exactly. Exactly. I was just curious what (inaudible) I was trying to get a sense of what (inaudible) may have added.

Not -- not much yet. We are still getting it to be Del Monte quality, Del Monte practices and it takes over a year -- year half to grow pineapple. So it will be a little bit before we get them up to our -- all of our standards.

Okay. I really appreciate it, guys.

Thank you. Mr. Abu-Ghazaleh,I am not showing any further questions at this time. Please proceed with any further remarks.

Well, I would like to thank everyone on the call and hope that we can deliver good deals as we go forward and look forward to talking to you in July. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.