Fresh Del Monte Produce Inc (FDP) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Fresh Del Monte Produce Incorporated first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Christine Cannella. Ma'am, please begin.

Thank you, Liz. Good morning everyone and welcome to Fresh Del Monte's first-quarter 2015 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 first-quarter press release we made public this morning and you can find that release or register for future distribution 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 mentioned today to their corresponding GAAP measures.

Before we start please remember the 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 over to Mohammad.

Thank you, Christine. Good morning everyone.

We saw solid progress toward our strategic initiatives to improve our long-term performance and increase our competitive position during the first quarter of 2015. We were successful in expanding our market reach in North America, Europe and Asia and we further increased penetration of our brand awareness highlighted by new innovative distribution channels in the Middle East.

During the quarter we benefited from strong demand for Dell Monte bananas in North America and higher sales in our other fresh produce segments supported by higher demand and increased selling prices in our fresh-cut and avocado product lines. This led to a $26 million increase in net sales despite the unfavorable impact of foreign exchange.

Even with these positive developments our earnings performance was not in line with our expectations as a result of further challenges in production areas in Florida, Chile and Costa Rica that adversely affected our earnings during the quarter. We experienced significantly higher banana procurement costs, decreased tomato and grape quality along with reduced banana and pineapple yields.

Looking forward we have a strong track record of taking expenses out of the business and creating operational efficiencies and we are steadfastly committed to that mission. We also see significant opportunities for continued growth in the value-added product line through new products and channel development and we are investing heavily in these areas. We remain focused on seeking opportunities to tap unmet consumer needs for Del Monte's healthful, wholesome and nutritious fresh produce and prepared food products.

Before I turn the call of it to Richard I would like to highlight that banana selling prices are too low and this cannot be sustained. I want to make it very clear that pricing must be increased. I have challenged all of our employees to take immediate steps to improve margins in our banana business to keep pace with economic conditions.

At this point I would like Richard to take over.

Thanks, Mohammad, and good morning. For the first quarter of 2015 excluding asset impairment and other charges on a comparable basis we reported earnings per diluted share of $0.83 compared with earnings per diluted share of $1 in 2014. Net sales increased $26 million or 3% to $1 billion compared with $982 million in the prior year.

Gross profit decreased $6 million to $101 million compared with $107 million in 2014. Operating income for the quarter was $58 million compared with $63 million in the prior year and net income was $44 million compared with $57 million in the first quarter of 2014.

Now I'll turn to our business segments. In our banana business segment net sales increased $17 million to $454 million compared with $437 million in the first quarter of 2014, primarily a result of increased demand in North America offset by unfavorable foreign exchange rates. Overall volume was 6% higher than last year's first quarter driven by increased demand and new customers.

Worldwide pricing decreased $0.32 per box to $14.89 per box primarily due to unfavorable exchange rates. Total worldwide banana unit costs decreased 3% primarily driven by lower ocean freight and transportation costs and gross profit increased $5 million to $36 million compared with the first quarter of 2014.

In our other fresh produce business segment for the fourth quarter, net sales increased $11 million to $465 million compared with $454 million in the prior year. Gross profit decreased to $51 million compared with $65 million in the first quarter of 2014.

In our Gold pineapple category net sales decreased by 8% to $122 million during the quarter primarily due to lower sales volume in North America and Europe. Overall volume decreased 13% due to lower yields from our plantation in Costa Rica brought about by poor weather conditions. Unit pricing was 6% higher and unit cost was 5% lower driven by lower fruit and transportation costs.

In our fresh-cut category net sales increased 8% to $95 million compared with $88 million in the prior year. The increase was primarily the result of higher sales in North America driven by increased sales volume with existing and new customers, continued expansion in multiple distribution channels along with higher selling prices in North America.

Overall volume was 7% higher. Unit pricing increased 1% and unit cost was 3% higher than the prior year.

In our melon category net sales were in line with the first quarter of 2014. Volume increased 11%, the result of favorable growing conditions in Guatemala. Unit pricing was 10% lower due to higher industry supply and unit cost was 3% lower.

In our non-tropical category net sales increased 4% to $130 million compared with $125 million in the first quarter of 2014. The increase in sales was primarily attributable to the higher sales volume and pricing in our avocado product line. Volume increased 15%, unit pricing decreased 9%, the result of quality issues with product sourced from Chile and unit cost was 3% lower than the prior year.

In our tomato category net sales increased 38% to $26 million compared with $19 million in the prior year driven by higher sales volume. Volume increased 97% due to our new production operations in Florida. Pricing was 30% lower as a result of our shift to a higher percentage of our sales in bulk form versus value-added repack.

Additionally inclement weather in our production area in Florida contributed to poor quality. And unit cost was 7% lower. In our prepared foods segment net sales decreased to $90 million compared with $91 million in the prior year and gross profit was $2 million higher.

Now moving to costs for the first quarter, banana fruit costs which includes our own production and procurement from growers increased 3% worldwide and represented 31% of our total cost of sales. The increase in fruit costs during the quarter was primarily driven by higher procurement cost and shortages forced us to buy higher priced fruit in Ecuador at spot prices and higher production costs on our own farms in Central America.

Carton costs decreased 4% and represented 3% of our total cost of sales. Bunker fuel costs per ton decreased 35% and represented 2% of our total cost of sales.

And total per unit ocean freight costs during the first quarter which includes bunker fuel, third-party charters and fleet operating cost was 13% lower. For the quarter ocean freight represented 11% of our total cost of sales.

The foreign currency impact at the sales level for the first quarter was unfavorable by $29 million and at the gross profit level the impact was unfavorable by $13 million. Other expense net for the quarter was $6 million and is comprised of foreign exchange losses.

As far as our stock repurchase plan during the first quarter we repurchased approximately 2,056,000 shares for approximately $70 million. At the end of the quarter our total debt was $342 million.

We recently announced that we entered into a new unsecured five-year credit facility. The $800 million facility bears interest at a rate of LIBOR plus a margin that varies with the Company's leverage ratio. That rate is currently LIBOR plus 1.25%.

The facility replaced our former $500 million revolving credit facility that was set to expire in October of 2017. We plan to use the proceeds for general corporate purposes which may include working capital needs, capital expenditures, the possible funding of acquisitions and possible share repurchases. Income tax expense was $5 million during the quarter compared with income tax expense of $6 million in the prior-year period.

As it relates to capital spending, we spent $25 million on capital expenditures in the first quarter of 2015. We expect to spend approximately $200 million in 2015.

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

(Operator Instructions) Mark Williams, [Avalon].

Good morning. Thank you. Mohammad, you talked about the need to raise prices. Given some of the pricing and currency headwinds in the near-term with the euro and the ruble given what they are do you expect pricing to improve in the near-term?

Well as I can tell you our objective is actually our major headwind. And most of our sales increases that you saw in bananas that Richard just mentioned a few minutes ago has been out in other markets than North America. And that's where our major let's say emphasis will be on North America prices because it's all contract pricing and these contracts have not been favorable to us at all in the last several years.

Prices haven't increased for so many years in spite of inflation and additional cost that we incur every year. And we need -- when I said we have to increase prices I meant for North America in particular because the other markets are not contractual. And we gain on the spot actually when the market is high we make our money and when markets are soft we can still survive.

But in North America since everything is contracted we have very little room to enjoy high markets during the shortages and still have to supply our customers even though we face so many issues. Like we said we have incurred tremendous costs during that quarter just to secure volumes to satisfy our customers and their contracts which in my opinion you know it is unfair because we have incurred tens of millions of dollars to be able to meet our contractual demand and that has a cost and I believe that this cost should be reflected in the price. And that's what we are planning going forward in the future and in new contracts that we are going to discuss needs to have some adjustments to it.

That make sense and in that vein after a quarter of ownership and Chiquita having changed hands are you seeing any signs of maybe some more rational pricing behavior, maybe improving some of the contractual pricing going forward? Do you expect further consolidation?

I cannot speak for my competition. I can speak for myself. We are not running after marketshare.

We want to make sure that whatever we felt makes money for our shareholders. That's the most important -- that's the bottom line.

We are not here to just meet our customers' demands at very low prices. That's not going to happen.

Fair enough. You know, the banana volume, however, has remained strong in North America. Are there any near-term benefit that you have been receiving from the California drought on demand?

I couldn't hear that last --

Has the California drought benefited your demand in North America at all?

No, no. The demand is good. The demand is steady and good but however the pricing for us and I believe for the industry in general is really doesn't reflect the cost that we're incurring in securing this fruit.

It's not only securing the fruit it's times like when you don't have all of a sudden because of weather conditions you lose supplies and then you have to scramble around and go pay $5, $6, $7, $8 and more dollars per box to secure that supply and not only that but all your logistics is messed around. Because you have to move ships from one end to the other, you have to reorganize, you have to come to different ports in North America and then have to ship from off course, when I mean off course you have to ship let's say in the Eastern side cluster or Wilmington, wherever. And then you cannot reach because of weather conditions and you know what happened during this winter in the Northeast, the freeze and the snow.

And we have to let's say unload in Manatee which is in Florida or unload in the Gulfport and then transship all this fruit all the way to the Northeast in order to keep our customer supplied. Now this is our duty and this is our obligation and we have no question about that but you see that has a cost and that cost has to be recognized. And that has to be included in the price going forward because we cannot afford as a company to keep supplying at these prices.

Sure. You speak about supply having to contract supply. Has the dollar strength helped you or at least made you a little bit more inclined to look for new sources of supply say in South America or Central America?

No, as we get new customers and demand increases we go out after that additional supply. But the dollar hasn't had a big impact on that.

Okay. And you didn't maintain I guess the $2 million in capital expenditures. Can you just remind me what that spending you guys are spending that on again?

We are expanding our production capacity in different parts of the world. We are expanding our production in the Far East. We are doing many things actually, on the constant rate front, on the production front, on securing new sources of supply.

It's all productive let's say spending. It's not -- it's all very well invested.

Okay. Actually, speaking of the Far East we've heard it might not affect your markets as much but the spread of the Panama disease in Australia and there appears to be some research going on, giant Cavendish or disease resistant strain. What are your thoughts on that, Mohammad?

Do you think are you guys working on anything? Do you think there's anything in the near-term to improve --

We're definitely looking at as I speak there is nothing to replace the Cavendish but we do have other strains, other varieties that might be more resistant to this. We cannot promise anything but however this is a big nightmare and if it happens you can't get a box of bananas for $100 there.

Right. So where were -- on the other fresh side the lower pineapple yields were those caused by Costa Rican weather and how long do you expect that to last?

Well, I was in Costa Rica just last week. I came back a couple of days ago and the weather there is very erratic, very volatile especially on the Atlantic side and we don't know. It's something that we cannot control.

Sometimes you expect the production to be consistent and then all of a sudden it's not consistent. Sometimes you get so much rain and then you cannot even spray the trees.

So we expect that the weather hopefully should normalize going forward. But we definitely had very bad weather during the last I would say four months, four or five months.

And has that led to a tightening of supply or what do you see on the supply front for the pineapples?

Are you talking pineapples or bananas?

Pineapples.

You are talking pineapples. I think for pineapples as far as we are concerned at Del Monte you know I think we have enough supplies to fulfill our demand.

There might be shortages in my opinion for the Atlantic side of the country where most of our competition is and I believe there will be a shortage going forward. We will see a big shortage probably by the beginning of next year.

Okay. And lastly you obviously executed a big share repurchase this quarter.

And it appears that some (inaudible) have continued. Can you explain I guess that dynamic and I guess what you would see going forward on the use of capital?

Well, as we are opportunistic you know if we see the price right and if we see we have capacity to buy we will do that. As Richard mentioned a while ago our new financial deal is for several reasons and one of them is the possibility of a buyback.

Great. That's all the questions. Thank you very much.

(Operator Instructions) Eric Larson, Janney Capital Markets.

Hello, can you hear me?

Yes, yes Eric. We can hear you.

Sorry about that. I thought I was asking my question already. I said Mohammad you never seem to catch a break.

You get some benefits on bunker fuel and then you give the majority of it back on your procurement cost. So it's unfortunate.

Let me ask this question Mohammad. On the supply of bananas obviously if you're sourcing out of Ecuador you need volume to supply your contracts.

Is there anything going on in terms of the number of plantations? It sounds like it's all weather related of the majority but are you seeing a shortage of or maybe some shutdown of some poor banana capacity or how would you look at that?

No, we don't see actually shutdown of lower banana. It's a consistent -- I would say more or less it's the same falloff, the same production, it's just the yield.

You're supposed to get X amount of boxes per hectare and then all of a sudden you see that it's like 30% or 20% less. Plus the quality is as well is not there so you have more rejects and discards then what your normal percentage is which means at the end of the day less fruit to export to the markets where you have to go and compensate from somewhere else which in this case is Ecuador.

Yes, and that -- I was just making sure that it was mostly weather-related and not something from a broader term perspective where the market might be tightening as well by the number of plantations. So that's helpful.

The other question that I have is related partially to your avocado business. You said that that was particularly strong, you had good volumes. Is that a function of market demand or is it a function of bigger supplies?

It's market demand and better sales team and sales efforts from our side as well. So it's a twofold effort. It's market demand plus our penetration, better penetration in the market and reaching more customers and getting to new places.

Okay, good. Then this question might be for Richard. Richard, I'm blanking on what your guidance was for the year at the end of your fourth quarter for your CapEx.

I thought it was more like $150 million but you stated $200 million this year. Is this a one-year -- you've been spending more capital the last few years for all your growth initiatives but is it particularly high this year and where is the majority of your capital being spent?

It is a little bit higher this year but in the fourth quarter we did say $200 million as well.

Okay, that was my error.

We've expected that all along. As Mohammad said we're spending a lot of it in the Far East and the Philippines to feed our increasing demand in the Middle East and in addition Asia-Pacific. And a lot of products, a lot of projects around the world as we enter into new products we start producing them ourselves as opposed to co-packing them.

We've got some concentrate plant in Latin America as you mentioned. It's pretty much across the board.

Okay, okay, good. Then finally Mohammad you made a strategic decision not too long ago to start producing your own tomatoes in the US both in the Carolinas as well as Florida. Does that seem like a strategy that's working for you and you might even pursue more vertical integration on that side?

Well, actually let me be very honest. The tomato unfortunately for the last several months the weather hasn't been helping us a lot in Florida and even in Virginia. So we didn't have a very good let's say outcome of these crops.

We are restructuring our operation and streamlining our people. So I believe that within the next month or two with the new season coming soon our operation will be getting better.

Don't forget that we are new into this and we are like in the learning curve. But I have very high confidence that we will be on the right track in a very short period of time.

Okay, good. Then just one final question and I'll pass it over to whoever else is on the line.

It looks like possibly that your banana supplies will continue to be relatively tight in the second quarter. That might even be helpful for you in Q3 and Q4.

Give me a little bit of a timeline on when you might see the supply actually come back and improve a bit? Obviously I'm asking you to be a weather forecaster but how should we look at the next 6 to 12 months on banana supplies?

As we speak the supply is coming back to normal. So we don't have that, what we faced during the last three, four months is over, now our supplies are back on track, normal again. But who knows in three, four, five months what's going to happen.

Yes, okay. Thank you very much.

And that's just a fact of life.

I'm showing no further questions from the phone lines at this time. I'd like to turn the call back to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Thank you everyone and I appreciate your attending this call. I hope to speak to you with better news on our next call. Thank you very much and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.