Fresh Del Monte Produce Inc (FDP) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fresh Del Monte Produce Inc. third-quarter 2015 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Christine Cannella, Assistant Vice President, Investor Relations. Ma'am, you may begin.

Thank you, Ben. Good morning, everyone, and welcome to Fresh Del Monte's third-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 third-quarter 2015 press release we made public this morning. 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 the conclusion of this call.

Before we start please remember that matters discussed on today's call may include forward-looking statements within the provisions of the federal securities safe harbor laws. Forward-looking statements involve risks and uncertainties, which are more fully described in today's press release and our SEC filings. These risk factors may cause actual company results to differ materially.

This call is the property of Fresh Del Monte Produce. Redistribution, retransmission, or rebroadcast of this call in any form without our written consent is strictly prohibited. Let me turn this call over to Mohammad.

Thank you, Christine, and good morning, everyone. Thank you for joining us. We are pleased to report that for the third quarter of 2015 Fresh Del Monte's net sales increased 6% to $936 million compared with the $885 million we reported last year. We also generated adjusted EPS of $0.57 compared with EPS of $0.35 in the third quarter of 2014.

The increase in net sales was across all of our business segments, driven by higher volume and increased demand and higher selling prices in several of our value-added product lines. We credit the strong performance for our strategy and progress we have made in transforming our company to import resilient, diversified company; a company that isn't just dependent on two or three products, markets, or customers.

One of the key drivers of our results during the quarter was our global fresh-cut business. We grew volume by 30% and sales by 32% year over year. We have an excellent global fresh-cut footprint, as proven by our expanding product lines and growing worldwide presence. We work closely with our customers to find the optimal mix of fresh-cut products that enable us to achieve higher sales, higher price points, and margin expansion.

We also continue to streamline our fresh-cut business through automation and enhancements in our production techniques. While already the global market leader, we have just begun to tap the strength and market potential for worldwide demand for healthy ready-to-eat fruit and vegetables. I believe we are well-positioned to expand our products and market presence to increase market share in the coming quarters.

We delivered strong sales growth in our avocado business during the quarter, driven by a 52% increase in volume compared with the prior period. Over the past few years avocados have become a much bigger part of our product portfolio. We believe there is tremendous potential for growth in our avocado business as demand continues to rise, as we penetrate new channels, and as we continue leveraging our platform of 22 distribution centers in North America.

One of our top priorities is to roll out this product category to additional markets in the coming quarters, utilizing our global distribution centers. Another driver of our growth during the third quarter was our banana business segment with solid sales in our Middle East and North America regions, the result of increased demand.

While we are clearly pleased with our third-quarter performance, we would have done even better had we not continued to be adversely affected by higher costs associated with banana production and procurement, unfavorable foreign exchange rates, and the lingering effects of a weak Chilean season.

In summary, our business is growing. I believe we have the foundation, the strength of a skilled management team, and the flexibility to continue to transform Fresh Del Monte as a global food company; to position us to capture increasing global demand for healthy and convenient portfolio of products and deliver long-term shareholder value.

At this point I would like Richard to take over.

Thanks, Mohammad, and good morning. For the third quarter of 2015 on a comparable basis, excluding asset impairment and other charges, we reported earnings per diluted share of $0.57 compared with earnings per diluted share of $0.35 in the prior year.

Net sales were $936 million compared with $885 million in the third quarter of 2014, and gross profit was $83 million compared with gross profit of $74 million in the prior year. In addition, we reported operating income for the third quarter of $36 million compared with $30 million in the third quarter of 2014, and net income for the third quarter was $30 million compared with $20 million in the prior year.

In our banana business segment during the third quarter net sales were $425 million compared with $424 million in the third quarter of 2014, primarily driven by higher sales volume in the Middle East and North America. The increase was partially offset by lower industry supply out of the Philippines.

Overall volume was 1% higher compared with last year's third quarter. Worldwide pricing decreased 1%, or $0.13 per box, to $14.64, primarily due to unfavorable exchange rates. Gross profit for the third quarter of 2015 was $21 million compared with gross profit of $23 million a year ago. Total worldwide banana unit cost was in line with last year's third quarter.

In our other fresh produce business segment net sales increased $49 million to $420 million compared with $371 million in the third quarter of 2014, and gross profit increased $8 million to $49 million compared with $49 million in the prior year.

In our gold pineapple category, net sales decreased $11 million to $119 million compared with $130 million in the prior year, as a result of lower sales volume in Europe, Asia, and North America. Volume decreased 12% due to lower production and decreased yields from our farms in Costa Rica which have been adversely affected by erratic weather. Unit pricing was 4% higher and unit cost decreased 1%.

In our fresh-cut category, net sales increased $30 million to $126 million compared with $96 million in the prior year, due to higher sales volume in all of our regions and higher selling prices in North America. Volume increased 30% as we continued to increase distribution and further diversified our customer portfolio and geographic presence. Unit pricing was 2% higher and unit cost increased 1%.

In our non-tropical category, net sales increased $5 million to $52 million compared with $47 million. Volume increased to 19%, unit pricing decreased 8%, and unit cost was 8% lower.

In our avocado category, net sales increased $13 million to $46 million compared with $33 million in the third quarter of 2014. Volume increased 52%, pricing was 9% lower, and unit cost was 8% lower.

In our prepared food segment, net sales for the third quarter were $91 million compared with $90 million in the third quarter of 2014. The increase was primarily due to higher sales volume in our canned pineapple product line, along with higher sales volume and increased selling prices in our industrial pineapple product line, partially offset by lower sales in our poultry line.

Gross profit increased $3 million to $14 million compared with $11 million in the prior year.

Now moving to costs. Banana fruit costs, which includes our own production and procurement from growers, increased 4% worldwide and represented 30% of our total cost of sales for the third quarter. Carton costs decreased 3% and represented 3% of our total cost of sales; bunker fuel decreased 44% and represented 2% of our cost of sales; and total ocean freight, which includes bunker fuel, third-party charters, and fleet operating costs, was 15% lower. For the quarter, ocean freight represented 10% of our total cost of sales.

As for foreign exchange, the foreign currency impact at the sales level for the third quarter compared to the prior year was unfavorable by $27 million and at the gross profit level the impact was unfavorable by $10 million. Other income net for the quarter was $1 million compared with other expense net of $4 million in the third quarter of last year, primarily attributable to foreign exchange losses in the third quarter of 2014.

As to our stock repurchase plan, during the quarter we repurchased approximately 721,000 shares for approximately $28 million. At the end of the quarter our total debt was $212 million. Income tax expense was $5 million during the quarter compared with income tax expense of $4 million in the prior year.

As it relates to capital spending, capital expenditures for the nine months ended September were $90 million. Capital expenditures for the full-year 2015 are expected to be approximately $150 million, as many of our projects will carry over into 2016.

This concludes our financial review. We will now turn the call over to the operator to begin the Q&A portion of the call.

(Operator Instructions) Mark Williams, Athlos Research.

So, Mohammad, the Middle East surprised me on the positive side this quarter. Can you talk about where you are seeing improvement there in sales and margins, particularly the pricing headwinds in places like Turkey and the political turmoil broadly in that market?

Actually, the Middle East is performing as per our target and our plan. The only issue that we had was shortage of bananas from the Philippines during -- I would say between August and September and first part of October, which has affected their turnover and sales.

Pricing has been very strong during that period.

As far as all the other businesses that we are carrying there, they are all doing extremely well as a matter of fact. We have diversified as well into agriculture, into the MENA region, which adds value to our end products. So all-in-all things are moving very well in the MENA region.

As far as the political situation there, really it has not impacted us in any way, except in Iraq and Syria where we used to sell large volumes of mainly bananas into these markets. Due to the spot action; due to the political instability there, it's more mostly due to the oversupply of bananas in the last couple of months that have destroyed the markets there.

We believe that within the next four to six weeks this should reverse and the markets will improve there. In spite of the war, in spite of the fighting they still consume bananas and they still buy fruits, so --. And being in the market there and our physical presence in these areas give us additional advantage and leverage to market our fruits in a reasonably good way.

And as the fruit supply normalizes, would you expect your sales and margins in the Middle East to be stronger or weaker in the next quarter?

Well, I cannot predict now. As we speak now the markets are weak because of oversupply situation, either from Central America or from the Philippines. But it is normal at this time; this pattern has been going for years at that time of the year. We hope that by middle of next month this situation normalizes and they go back to their normal pricing, which is quite favorable.

Okay, thank you. And another area that really surprised us during the quarter is how strong your other fresh sales were, particularly with the growth in some of your newer products like avocados and fresh cut. Is that coming from your own capacity, or are you just seeing some room to expand distribution and utilize capacity on your ships?

Well, in most of our actually plants right now we almost maxed our production and that's why we are now expanding existing production spaces in some of the actual existing plants. And we have plans to expand our geographic presence in North America, Europe, and MENA as far as new production facilities and expansion of our capacity.

So you will see a continuous growth into this area going forward and it's just a matter of time to catch up with more capacity, so we are very confident in that area. We have become very solidly entrenched as a major player in this field and I feel very confident that we will accomplish our goals.

So how would you characterize your level of vertical integration in both fresh cut and avocados?

Vertical integration?

Yes, do you -- is most of your avocados on a contract basis? And same for fresh cut. Or do you -- how much of that production do you own?

No, the avocados are mainly on long-term contracts with growers, especially in Mexico and other countries; Peru and Chile, but to a lesser degree into these two countries. The major volumes come from Mexico and California as well.

Actually, we are expanding our customer base and our leverage is with our ability to deliver to customers on a timely basis at a very convenient space. We are very close to our customers and that's what makes us have this leverage and advantage.

Right, yes. This is the first time I think I noticed you disclosing avocados in the release. What kind of a run rate is that business on right now?

I'm sorry?

The avocado business. I think this is the first time I saw you disclose it in the release. I'm sure you talked about getting more aggressive there. How big is that business at this point?

Yes, we don't disclose within other fresh produce, but it is growing and that's why we started reporting it and calling it out separately.

Oh, okay. I guess I will watch for that in future quarters.

Obviously [it's the size] because the sales were $46 million this quarter.

Yes, is this a seasonally high quarter out of Mexico, I would assume?

I'm sorry?

Is this a seasonally high quarter for Mexican imports into the US?

No, this is normal. This is steady, actually. I mean the volumes are there. We are expanding our market presence and share in the market, increased demand, so it's from many aspects in terms of how this business is growing with us.

And don't forget that we do a lot of ripening for our customers, which is a very special service which I think it's making a big change into the customers' perception that you can go to the supermarket and you can find an avocado that you can take home and eat right away, rather than wait a few days for it to ripen at home. So that's a big difference.

We have the technology and the ability to -- because it's a very sensitive product, so it has to be well taken care of and do the right thing to have it ripe to the customer. I think our customers right now realize that Fresh Del Monte has that capacity and ability to deliver.

Is that new, that technology? It's the opposite technology to bananas, right, where you accelerate ripening (multiple speakers)?

Yes, you use the same rooms but it's a different way of handling the product.

Okay. And is that -- you've had that for a while now?

We've been doing that for a while. We have -- now it's picking up quite significantly and I think it's making a big difference.

Okay, thank you. And just lastly, where does that -- so the avocados, do they -- how do they index compared to that segment's margin structure?

I'm sorry, we couldn't hear clearly. Say that again, please.

Avocados, how do they index compared to other fresh margins?

I would say they are in the top half. They are in the higher end of the fresh category.

Okay, great; that's great. I guess moving on to bananas now. Seeing fruit costs higher for you and some of the pressure on pricing, I was positively surprised by the margins there. Can you talk about what held those up this quarter?

The fresh-cut?

No, I'm sorry, bananas.

I couldn't hear you well to be honest with you, Mark, so if you can repeat it, please?

The banana margins I thought would be -- you had falling prices and rising costs. They held up pretty substantially. Can you give I guess some detail on how -- on what you did to mitigate some of that pressure on bananas between the costs and the prices and some of the euro headwind?

Volume. Volume was increasing.

Okay. And which markets in particular are you gaining share?

Middle East and North America was where volume was higher in this quarter.

Okay. So bunker fuel specifically was down and it looks like it was down a little bit more than Q2, but still not down as much as I guess the spot market. Is that -- what -- why is that not flowing through I guess more to the gross margin line? Is there anything that's offsetting that?

You note that bunker usually it takes time to follow up the market. If the price of oil today is, let's say, $45 companies, oil companies or refiners do not reflect that pricing on a spot basis, but maybe one month or 45 days later, because of the reserves and in the spots that they have inventory that they have. So usually a spot [price] that you see it right away if the price of oil goes down that we see that reflected into the bunker.

And remember, in North America we have surcharges to customers so it sort of offsets to an extent.

Okay. And speaking of North American pricing, I think -- we are starting to get into contract season. Can you just give some detail on how that's looking?

We are doing our best to improve our pricing, for sure, and hopefully, the market will cooperate with us. But definitely we are trying to improve in order to mitigate our increased cost.

Okay. And what are you seeing on the supply side from Latin America? It seems like there's a lot of fruit available.

At this time of the year you have a lot of fruit available, but I think the peak of the excess fruit is almost come to an end. By the end of this month there will be no more excess in the market, in the production areas, and then we will see the market of course improve. But that takes, of course, a few weeks to have all the fruit that was on the water being cleared out of the market.

So I believe by early December the market should turn around and start becoming more the normal pattern of increased pricing. I'm talking here as far as Europe and the other markets in the world. North America mainly contracted fruit, so we are not too much influenced by the excess fruit.

The excess fruit really helps Europe, Asia and the MENA region in particular -- in these markets. And these markets should -- once the oversupply is cleared, these markets come back to their normal level of pricing, which usually is good for pricing.

Okay, great. And so my final question relates to the balance sheet. You obviously are below 1 times leverage, did some share repurchase this quarter and with the CapEx now a little bit you have obviously a lot of cash. So can you just talk about getting more aggressive on avocados? I noticed that a competitor made a land investment in Costa Rica during the quarter. So can you just talk about the use of your balance sheet and the cash flow?

As you can see, we have already spent by the third quarter $90 million and we are spending a lot of projects now is undergoing. We have, looking at acquisitions of land and agricultural, new activities in the MENA region and Central America as well as North America.

So we are looking at how can we -- the whole idea of Fresh Del Monte which you can see today is transforming the Company from a banana company to a much wider product line and added-value products, which gives us consistent business with consistent margins with high added-value products with high margins. So that's the kind of strategy, that's the kind of direction that Fresh Del Monte is going to and we are going to achieve these results as we go forward.

Okay, great. Thank you for taking my questions and for your time.

(Operator Instructions) I'm showing no additional questions. I would like to hand the conference back over to Mr. Abu-Ghazaleh for any closing remarks.

Thank you very much. I appreciate whoever is on the call and thank you very much for participating. And hope to talk to you with better news on our next conference call. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.