Fresh Del Monte Produce Inc (FDP) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Fresh Del Monte Produce third-quarter 2014 conference call. (Operator Instructions)

I would now like to turn the conference to our host, Ms. Christine Cannella. Ma'am, you may begin.

Thank you, Eric. Good morning, everyone. Welcome to Fresh Del Monte's third-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 complements our third-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.

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 now turn this call over to Mohammad Abu-Ghazaleh.

Thank you, Christine. Good morning, everyone. I am pleased with our strong performance in the first quarter of 2014.

Net sales for the quarter were $24 million higher year-over-year at $885 million, gross profit increased 39% from last year's third quarter and we generated EPS of $0.35, up from $0.11 a year ago. These results reflect strong operating performance in our banana business. This was primarily due to lower global industry supply during the quarter that helped by a 3% increase in banana selling prices.

Today we are seeing a more balanced supply and demand trend in global banana markets and, barring any unforeseen events, the trend should remain through the rest of 2014.

We experienced strong sales in our other fresh produce segment, especially in terms of higher sales volume of gold pineapples. We lead our industry in gold pineapple sales and we expect to maintain this commanding lead due to our superior fruit quality combined with brand awareness and our sales and marketing expertise.

During the quarter, we continued to develop our fresh-cut business. We generated strong sales growth in the Middle East and we are in the process of adding a second fresh-cut facility in Japan. We will soon be introducing our North America fresh-cut product line in Canada which will include our recently launched protein, salad, and snack offerings.

Also contributing to our strong performance was utilization of our sourcing flexibility and logistical expertise to maximize sales allocation to those markets with increased demand. Additionally, lower costs associated with shipping, distribution, packaging, and agricultural supplies had a positive impact on profitability during the quarter.

As we look to the end of the year, while we experienced better banana market conditions year-over-year, there are always challenges in our business. We foresee the headwinds of a difficult economic market in Europe, an oversupply of fruit as a result of sanctions in the Ukraine and Russia, and logistical issues caused by the situation in the Middle East. We will continue to work hard in the knowledge that we are building value every day for our shareholders.

At this point I would like to hand it over to Richard.

Thanks, Mohammad, and good morning. For the third quarter of 2014, we reported earnings per diluted share of $0.35 compared with earnings per diluted share of $0.11 in the prior-year period. Net sales were $885 million compared with $861 million in the third quarter of 2013 and gross profit was $74 million compared with gross profit of $53 million in the prior year.

In addition, we reported operating income for the third quarter of 2014 of $29 million compared with $7 million in the third quarter of 2013 and net income was $20 million compared with $6 million in the prior year. I want to point out that for the third quarter of 2013 we reclassified a $1 million charge related to unfavorable litigation from the selling, general, and administrative expense line to the asset impairment and other charges net line.

In our banana business segment, during the third quarter net sales increased $22 million to $424 million, compared with $402 million in the third quarter of 2013. Overall volume was 2% higher compared with last year's third quarter, driven by increased sales volume in North America. Worldwide pricing increased 3%, or $0.47 per box, to $14.77, the result of higher selling prices in our regions and the benefit of favorable foreign exchange.

Gross profit increased $21 million to $22 million, compared with gross profit of $1 million a year ago, primarily driven by higher selling prices and lower ocean freight and distribution costs. Total worldwide banana unit costs decreased 2% compared with last year's third quarter.

In our other fresh produce business segment, net sales increased $5 million to $371 million compared with $366 million in the third quarter of 2013 and gross profit was in line with the prior-year period. In our gold pineapple category, net sales increased $15 million to $130 million, compared with $115 million in the prior year, driven by higher sales volume in North America and Europe. Volume increased 22%, a result of favorable growing conditions in Costa Rica. Unit pricing was 7% lower and unit costs decreased 5%.

In our fresh-cut category, net sales decreased $10 million to $96 million, compared with $106 million in the prior year due to lower sales in Europe, partially offset by increased sales volume and higher pricing in the Middle East and Asia. Volume decreased 12%, primarily driven by the lower sales volume in the UK. Unit pricing was 3% higher with pricing gains in all of our regions and unit costs increased 4%.

In our melon category, net sales decreased $1 million to $9 million compared with $10 million in the third quarter of 2013. Volume decreased 16%. Unit pricing was 4% higher and unit cost was 9% higher.

In our nontropical category, net sales decreased $1 million to $81 million compared with $82 million in the prior year. Volume decreased 7%, unit pricing increased 7%, and unit cost was 4% higher.

In our tomato category, net sales increased $3 million to $25 million, compared with $22 million in the first quarter of 2013. Volume increased 63%, pricing was 31% lower, and unit cost was 25% lower. The increase in sales volume was a direct result of our new farms in Virginia. We are now focused on our upcoming Florida season.

In our prepared foods segment, net sales decreased $3 million to $90 million compared with $93 million in the third quarter of 2013. The decrease was primarily due to lower sales volume in our canned deciduous product line and decreased demand for canned pineapple in the UK. Gross profit was in line with the prior-year period.

Now moving to costs, banana fruit costs, which includes our own production and procurement from growers, increased 2% worldwide and represented 32% of our total cost of sales for the third quarter. Carton cost decreased 4% and represented 4% of our total cost of sales. Bunker fuel decreased 1% versus the prior year and represented 4% of our total cost of sales, and ocean freight costs, which not only includes bunker fuel but also third-party charters and fleet operating costs, was 7% lower. For the quarter, ocean freight represented 12% of our total cost of sales.

As for foreign currency, the foreign currency impact at the sales level for the third quarter compared to the prior year was favorable by $5 million and at the gross profit level the impact was favorable by $10 million. Other expense net for the quarter was $4 million compared with other expense net of $200,000 in the third quarter of last year due to foreign exchange losses this year. At the end of the quarter our total debt was $140 million.

Income tax expense was $4 million during the quarter, compared with income tax expense of $2 million in the prior-year period. And as it relates to capital spending, capital expenditures for the nine months ended September were $119 million. Capital expenditures for the full year 2014 are expected to be approximately $150 million.

This now concludes our financial review. We can now turn the call over to the operator to begin the question-and-answer portion of the call.

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

Good morning, everyone. Mohammad, I wanted to go back to a statement you made in your prepared remarks about just the overall supply situation in the banana industry. You had talked about how things are more in line, supply and demand, right now, but one of the things we are seeing is a continuation of very solid pricing in spot markets.

And I am just curious -- I just want to get your thoughts on why you think banana pricing has continued to remain solid amidst supply and demand more closely matching. Is it something comparison wise from last year? Are you seeing something demand wise?

Just wanted to get your overall thoughts there. I'm curious if you wouldn't mind answering whether or not you think banana pricing in spot markets can remain favorable through the end of the year.

Like I said, the supply is really -- compared to last year, this time of last year, we -- I remember we have so much surplus at that time also and the competition that we had to dump into the markets, be it Europe or the Mediterranean markets. And this year we don't have the same kind of surplus that we saw last year.

We do have the surplus, but it's manageable. And as we speak, the Mediterranean markets still, even though we have so much complexities especially going to Iran, Iraq, and all these markets, but so far the market has been holding well.

Europe in particular, in my opinion, was a relation of maybe better, let's say, allocation by all the players that -- we, in our case, were not supplying the market more than what it needed. And as I said in my remarks, we have allocated our fruit really to the market that pays better and we didn't talk about market share or market needs. So that is one of the reasons also why we see markets are better.

As to your question regarding the rest of the year, the markets have softened a little since four, five, six weeks ago, but I believe that hopefully that this will be -- the prices will still be favorable going to the end of the year. So we will not see the same very bad negative results that we experienced the fourth quarter of 2013.

Okay, that's really helpful. And I think you made another good point about the Russian market closure and availability of fruit. I know, Mohammad, you've talked periodically about the viability of the European banana market overall.

Is this something over the short term -- or it may even be more structural in your opinion. But is this something over the short term or long term where you may want to get smaller in the European banana market? Can you address that?

No, I think it's the wrong impression to think that Fresh Del Monte wants to be smaller in the European market. We want to maintain our share and we want to stay and even get more -- a bigger presence in the markets.

But as I said, we are not ready to lose money just because of acquiring more market share or getting bigger piece of the pie in that market. These markets are still, in my opinion, very weak. Structurally they are not in the best condition and I don't think that situation is going to improve.

On the contrary, we have been lucky that we have seen that pricing held well in the third quarter and hopefully will continue during the fourth quarter. And we are entering the winter months, which is usually banana volume [are short] and pricing is better because of noncompetitive other fruits. But I don't see that the European market in the long-term is going to be the bright spot.

We have to also remember that the euro is getting weaker and this is also another very important point that we have to take into consideration. So I personally am not very optimistic in the European market long-term, but being there for so many years our presence there is very important because we don't deal only in the bananas.

We have so many other items that we market there and we have other plans for the European market as well going forward. Our presence there is permanent and our share is not to be compromised.

Understood. We've heard early indications of US and Northern EU banana contract pricing being signed flattish year-on-year for 2015. And I'm just curious if you are seeing and hearing the same things and kind of what your overall thoughts on this would be.

You are very true. The prices are contracting more now in the US. North America has been flat and in some cases very minute increases which really does not cover the increase of course that we are incurring today.

And as far as Europe is concerned, as a matter of fact, if you look at it considering the euro strength and the attitude of the buyers or the supermarkets in Europe, I think that the price has slightly eroded from what it used to be last year. And that's why I said I'm not so very positive on Europe long-term. It could be short-term, okay, but long-term I don't think that we are going to face a lot of headwinds in these markets.

Okay. One of the things that I have been concerned about are these low sulfur requirements for shipping into the United States in 2015 and potential added costs for the industry. I am hopeful that the industry would look to pass that cost on. Do you have any early read on whether or not these low sulfur requirements will indeed be a headwind for you guys next year or whether you and the industry can manage that added cost next year?

As we speak, we believe that this is very minimum and it does not have really a very big impact on our costs when you look at it in general. And if it becomes really significant, I think we need to speak to our customers and see what we can do there.

Okay. Then just one last question and I will jump into the queue. Mohammad, I just wanted to get your overall thoughts from recent news on Chiquita and Fyffes not tying up together. I know this was something that we had hoped would help consolidate the industry somewhat and hopefully lead to more rational pricing both at the supply level and at the trade level.

I'm just curious your overall thoughts on this merger not happening and Cutrale indeed getting its target in Chiquita.

I'm not -- looking at this, because everybody's expectation was that if Fyffes and Chiquita joined up and become one company that the pricing could be more -- there could be more sense and more rationale to the price. But I'm not so sure about that, to be honest with you, because we are competitors and each has his market share and everybody wants to hold to his market share.

And don't forget the power of -- the buyers' power and the supermarket [clout] these days is so tremendous that, even if you have more consolidation in the business, unfortunately the buyer or the supermarket power is so significant that does not leave too much room for people like ourselves to decide what the price is. And usually supply and demand determine that at the end of the day.

So in either case, be it Cutrale or be it Fyffes, I didn't see much that can happen in that sphere going forward. So we are competitive -- wish that our industry could recover and have more rational pricing, but at the end of the day also it takes two to come to that conclusion, which is the buyer as well as the seller. So it's not only in our hands; that's the sad story.

All right, thanks for your time.

(Operator Instructions) Jonathan Feeney, Athlos Research.

First question, I wanted to talk a little bit about the prepared foods segment. Could you talk -- maybe came in a little bit south of what we were expecting. Is this a consumer issue? Should you tell us a little bit --? You mentioned it a little bit; could you give us a little bit more detail around that segment?

Yes, you know that most of our sales goes to Europe. The bulk of our sales are in Europe and Europe markets during 2014, as you know, and we have just be saying that it's been performing very poorly in the major markets like Spain or Italy or France and the UK. So that's one thing.

The other thing is that we have been also facing some headwinds from Kenya because the Kenyan government did not reach agreement with the EU regarding the pre-duty from Kenya into -- especially on the pineapples. And that has also affected us in the last 30, 40 days additional, of course, for our products until this issue is resolved. Hopefully soon, within the next two to three months.

So it's not yet -- it's not significant, but it started to influence our costs and our net price. So in general it's the European situation.

How about within prepared? Has there been growth in the prepared foods business in the Middle East and could you update us on your performance in the Middle East generally this quarter?

There has been growth. I don't know if Richard has any number, but of course Middle East numbers compared to Europe -- Europe is a very big market compared to the Middle East in prepared food in particular. But still it's growing there, but not enough to make, let's say, a big difference into the total picture.

Would you say the Middle East is less than 10% of the prepared food segment?

Yes, Middle East is still -- it's got a lot of growth this year. It's got about almost 50% growth year-to-date, but that's off a very small base.

Great, thanks very much. Just two more, one on the -- could you update us on the -- we've seen a lot of movement in currency and changes in asset prices. Could you update us on land values in and around where you have looked in the past, say Costa Rica where your big landholdings are?

I know there have been times in the past three or four years where you have been active buying land. If you could update us on what those values are like, I would appreciate it.

Well, land is expensive. In Costa Rica it is expensive and that's a fact. It depends on where you look. There are some areas more expensive than other areas, but on average the land in Costa Rica is expensive and it's difficult as well to find new land for expansion. That is a very important factor.

But it's not that the land is expensive; it's also scarce to find enough land to put new projects. As well as the government has made it more difficult for any new expansion in pineapples or bananas in relation to environment implications and the new old laws regarding the residues in the rivers. And that is keeping also a lid on growing in Costa Rica. So, yes, land is expensive and if we find an opportunity we will not hesitate.

But at the margin this year, Mohammed, has there been --? With the dollar being strong, with some of the concerns about emerging markets, has there been any weakening in those land prices?

No, no, no. The land does not -- anything can go down except land, in my opinion, and that's a phenomenon that we see in many parts of the world, Jon.

Last question, if you wouldn't mind, is you are getting back to levels of indebtedness that are -- you've always been a conservatively leveraged company, but now you are well below 1 times EBITDA. Could you just give us -- or maybe this is a good question for Richard -- an update on your priorities for utilization of cash over the next 12 months?

We are very fortunate that we have strong cash flow, so we continue to pay the dividend. We do stock purchases when opportune and we are always looking for acquisitions, so fortunately we can do all of the above.

We -- Jonathan, more importantly, we spend -- we do have a lot of capital expenditures, new expansion, new projects in different parts. And as you see in 2014 we are planning to spend about $150 million on capital expenditures and next year probably will be the same more or less. So we do have a lot of different new ideas and expansions going forward.

Great. Okay, thank you very much.

Brett Hundley, BB&T Capital Markets.

Thank you, I appreciate it. Mohammed or Richard, you just mentioned CapEx, Mohammed. I am just curious within some of that CapEx I think you were doing some farm expansion in the Philippines. Do you have an update on how far along that expansion is?

We are expanding actually as we speak. We do have a program of expansion and it's going as per plan, you know. We do have a plan for about 3,000 hectares in the Philippines as we speak and these lands are being planted as per schedule.

That is on one side, but we do have a lot of other projects. You know we are just building -- finishing a concentrate plant in Costa Rica. We're just finishing a new, completely new fresh-cut operations in Japan. We just finished our new DC and fresh-cut operations in Canada and also expansion, new expansion in Dallas as well. So we do have a lot of things going on in North America, outside North America as well.

And with your banana expansion in the Philippines, should we expect that production to largely come online kind of middle of next year?

We had it growing slowly so our volume will be -- it will not be a significant, let's say, volume all at once. But as we grow, we expect probably our volumes to grow by about 20%, thanks, in 2014 -- 2015, sorry.

20% out of Asia?

Out of Asia, yes.

Okay, that's helpful. And then tomato pricing, while it was weak during the quarter, it appeared to be very strong now and it seems like this can last for a little while just given rains in Florida and an early end to the California season. I'm just curious if you agree with that statement.

That is true. The prices for the last three weeks has been very strong, but, unfortunately, they get strong when you don't have enough volume. It's a catch 22 thing.

But we started production in Florida in a small way and, hopefully, we will ramp up more significant volumes in the next few weeks. Don't forget that this 2014 was our first year of production, be it in Florida or in Virginia, and it was a learning curve. I think that we are -- as we speak, we are on the right track right now and we are hopeful that 2015 will be a lot improved from what we saw in 2014.

Okay. Then just one more question from me, Mohammed. I'm just curious of your thoughts on -- we have heard of a smaller competitor of yours launching a branded banana in the United States with a favorable marketing story of traceability, vertical integration, etc., and I have heard of similar marketing type efforts in the Japanese market.

I am just curious to get your thoughts if there is the ability of the multinationals to create more of this in the United States and if that would help with the supply dynamic there and improving margins, or if you really don't think that that can last in the US market. Thanks for your time.

Thank you. I don't believe -- I would say, first of all, good luck for you, whoever it is. I know who it is.

And, secondly, we have seen -- in my life I have seen so many come in and so many go out. It's just like a revolving door, you know, and that is another case that we see there.

Banana business is not easy. You need to have different sourcing. You need to have logistics. You need to have a whole infrastructure behind it. You have to have experience. You have to have the markets. You have to have the relationships. You have to have the distribution centers.

It's a whole lot of things that people think that banana is just so easy to grow and to ship. It is easy to grow and you can ship it because they are containers today that can transport this, but how to market it and who to market it is a big question. It's not a problem to sell when the market is good. It's the problem when the markets are not good, and that's how I see it.

So I'm not really -- I wish everybody luck. This is an open market, a free market, and everybody can try his luck. And that, in my opinion, for our business, for our case I don't see it as a threat whatsoever.

Thank you much.

There are no further questions at this time. I would like to turn it back to Mohammad Abu-Ghazaleh for further remarks.

I would like to thank everybody for their patience and being with us today and hope to speak to you on the next call. Have a good day. Thank you very much, everyone.

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.