Fresh Del Monte Produce Inc (FDP) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Delmonte Produce Incorporated fourth quarter and full year 2015 earnings conference call. (Operator Instructions). I would now like to introduce your host for today's conference, Ms. Christine Canella, Assistant Vice President of Investor Relations. Ma'am, you may begin.

Thank you, Chelsea. Good morning everyone and welcome to Fresh Del Monte's fourth quarter and full year 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 fourth quarter and full year 2015 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 mentioned 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 now turn this call over to Mohammad.

Thank you, Christine. Good morning everyone. I am pleased to report that the 2015 momentum in sales growth was again very strong in the fourth quarter. Net sales for the quarter grew by 5% to $978 million compared with $929 million in the prior year. As a result in 2015 we surpassed $4 billion in sales for the first time in the company's history. We also increased margins of several products in our prepared food and other fresh produce businesses during the fourth quarter despite significant currency headwinds.

Throughout the year in keeping with our vision and strategy we invested for our long-term growth by building our core businesses. We expanded our footprint by opening new distribution centers and fresh-cut facilities, we advanced our global presence through new sourcing initiatives, and we increased our market share in several product categories led by strong sales in our other fresh produce business.

We continue to capitalize on our global position as the leader in fresh-cut produce with substantial growth in this category across all regions. The fresh-cut business remains attractive for further growth with no globally branded competition. We believe there is tremendous potential for us to leverage our experience and expand our global distribution network to meet rising consumer demand for healthful, convenient and safe fresh Del Monte branded products.

We further benefited from our competitive advantage in the high-margin avocado business in 2015. We have built an impressive foothold in North America with avocado sales 34% higher over the prior year. However, these achievements were more than offset by an unusually strong banana production cycle in the last two months of 2015. That resulted in a substantial industry oversupply that overwhelmed already saturated global banana markets.

Today, I am happy to report the markets are better and pricing is climbing. The oversupply was an unfortunate short-term situation that resulted in us missing several key financial targets in the fourth quarter and constrained our ability to deliver optimal earnings for the full year. As we move forward into 2016, I am excited about our future prospects and look forward to continue pursuing our vision of having Fresh Del Monte Produce uniquely positioned to meet expanding worldwide consumer demand for healthful food products.

At this point I will ask Richard to discuss our financial results.

Thanks, Mohammad and good morning. For the year 2015, excluding adjustments on a comparable basis, we reported earnings per diluted share of $2.49 compared with earnings per diluted share of $2.74 in 2014. Net sales increased 3% to $4.1 billion compared with $3.9 billion in the prior year, and gross profit decreased to $343 million compared to $365 million in 2014. Operating income for the year was $161 million compared with $185 million in the prior year and net income was $132 million compared with $154 million in 2014.

For the fourth quarter of 2015 again, excluding adjustments on a comparable basis, we reported a net loss of $0.11 per share compared with earnings per diluted share of $0.20 in the fourth quarter of 2014. Net sales increased 5% to $978 million compared with $929 million in the prior year and gross profit decreased to $45 million compared with gross profit of $63 million in the fourth quarter of 2014.

Operating loss for the quarter was $6 million compared with operating income of $15 million in the prior year and net loss was $6 million compared with net income of $11 million in the fourth quarter of 2014. Included in the adjustments to arrive at comparable net loss in the fourth quarter of 2015 was a $66 million write-off of goodwill related to the tomato and vegetable business that we acquired in North America in 2003.

Now as I turn to our segments, I will only give fourth quarter statistics as reported. In our banana business segment net sales increased $35 million to $474 million compared with $439 million in the fourth quarter of 2014, a result of higher sales volume. Overall volume was 15% higher than last year's fourth quarter. Worldwide pricing was down 6% or $0.82 per box to $12.94 per box. The lower selling prices were primarily in response to competitive pressure from higher industry supply, as well as unfavorable exchange rates.

Total worldwide banana units cost was in line with the prior year period and gross profit for bananas was a loss of $25 million compared with gross profit of $6 million in the fourth quarter of 2014. In our other fresh produce business segment for the fourth quarter net sales increased $17 million to $418 million compared with $401 million in the prior year period. Gross profit increased to $54 million compared with $49 million in the fourth quarter of 2014.

In our gold pineapple category net sales were $133 million compared to $142 million in the prior year a result of lower volume in our production areas. Overall, volume decreased 9%, unit pricing was 2% higher due to increased pricing in the Middle East and North America, and unit cost was 4% higher. In our fresh-cut category net sales increased 36% to $122 million compared with $90 million in the prior year. The increase was driven by higher demand in all of our regions along with higher selling prices in North America. Overall, volume increased 36%, unit pricing decreased 1%, and units cost was 2% lower than the prior year.

In our avocado category, net sales increased 27% to $39 million compared with $31 million in the prior year. Volume increased 42%, price was 10% lower, and unit cost was 15% lower. In our non-tropical category net sales decreased 15% to $37 million compared with $43 million in the fourth quarter of 2014. Inclement weather in Chile, earlier in 2015 resulted in lower production and quality issues with Chilean products. Volume decreased 2%, unit pricing decreased 13% and unit cost was 15% lower than the prior year. In our prepared food segment net sales decreased 4% to $86 million compared with $89 million in the prior-year period and gross profit was $8 million higher than the prior-year.

Now moving to cost for the fourth quarter. Banana fruit costs which includes our own production and procurement from growers increased 2% worldwide and represented 36% of our total cost of sales for the fourth quarter. The increase in fruit cost was the result of lower yield and higher productions costs on company owned farm in Costa Rica and higher spot pricing in Ecuador. Carton cost decreased 4% and represented 4% of our total cost to sales.

Bunker fuel cost decreased 47% and represented 2% of our total cost of sales. And total ocean freight cost during the quarter 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 10% of our total cost of sales. As to foreign currency, the foreign currency impact at the sales level for the fourth quarter was unfavorable by $18 million and at the gross profit level the impact was unfavorable by $5 million.

Other expense net for the quarter was $3 million compared with other expense net of $5 million in the fourth quarter of 2014. As far as our stock repurchases, during the fourth quarter we repurchased approximately 160,700 shares for approximately $6.3 million.

Total debt at the end of the quarter was $254 million. And income tax expense was a $3 million benefit during the quarter compared with a $1 million benefit in the prior year. As it relates to capital spending we spent $132 million on capital expenditures in 2014 and we expect to spend approximately $180 million in 2016.

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

(Operator Instructions). Our first question is from the line of Jonathan Feeney with Athlos Research. Your line is now open.

Good morning. Thanks for the question.

Morning, Jonathan.

Mohammad, it seems you talked a little bit about the dynamics that created this very difficult banana pricing environment, but I would love you (inaudible), you know, my first question would be, does it surprise you that this type of pricing is going on when there's been recently seems so much structural change that would seem to indicate better pricing? You know, you had Dole go private, you had Chiquita join a private company. You would think these types of moves would indicate a more rational pricing environment globally. Has that happened in any detectable way? To the extent it hasn't, does that surprise you at all?

No. As a matter of fact we were expecting and hoping that with the changes, structural changes, in the ownership of the, our competition would help to making a more rational market, but unfortunately this has not happened, as we speak. Hopefully, that sometime in the future this can happen but so far we haven't seen anything, but if you look at the big picture, you know, in the banana, you know, 2015 was a very tough year in terms of banana. At the first part of the year we had a big shortage, you know, in the first two months and I can't give you an example for the first couple of month let's say of 2015 we had to buy an additional 8 spot ships, I mean loads of bananas from Ecuador at the very high price compared this year, for instance the first two months where we have only bought one ship, that tells you what the dynamics of this industry. We have more normal production in our own farms in (inaudible) and Guatemala, which have helped us in mitigating, in buying any additional volume from the normal volume that we bring from Ecuador. So that has helps a lot. Also, at the end of the last year unfortunately, all of a sudden there was like, an explosion of production in the farms be it in Guatemala and Costa Rica in particular where we had, as well as the Philippines as a matter of fact. So in the last two months of 2015 we had really an unexpected avalanche of supplies which we had to put into markets like the Mediterranean and the Gulf region in Iran and all of this, so it really affected pricing and unfortunately this has, we were expecting a much better year than what we ended up with, but I'm not too pessimistic about it and I know what happened. We know the reason and we are going forward. You know, we are, we will make it up.

Have you seen any signs that, obviously, these are difficult times particularly when you look at some of those European and Mediterranean, Southern European and Mediterranean markets, that others are pulling back from the market or that there's others planting less fruit right now or investing less in the business?

No. Unfortunately, I would hate to say that, but unfortunately we see a lot of drug smuggling in banana ships and pineapple containers which (inaudible) it seems that bananas is becoming a very easy conduit to, for this trade and -- you know, I mean the banana becomes irrelevant compared to the other cargo inside and I am sure that business is going on -- and this is -- unfortunately a fact that we have to -- because in the news all the time discovery of certain, you know, drugs into ships and different ports and -- which, you know, distorts the whole business. I mean, and prices that we see in the markets in Europe and Russia and doesn't make any sense unless there is some other substantive that make up for this business. So I think what really is distorting this business is not supply and demand. It's other reasons that we don't have any control over.

You think that, is that more true in the fourth quarter this year, or in general this year, than it's been in the past?

I'm sorry?

You said, you mentioned the drug smuggling.

No, no. The drug smuggling has been going on throughout the years. I mean it's not only fourth or fifth or -- it's ongoing. You know, it's an ongoing business.

Has that become a greater effect do you think recently or is it just --

No, no, no. I'm just saying in general. I'm talking you know, in macro vision. I mean when you see prices in the market and sent to market that is $4 or $5 a box of loss and then still that market repeats using the same volumes, it makes you wonder how can anybody can survive, you know, with such losses, you know, forever. I think what is lacking is more intervention and government control and government supervision worldwide and I think that is something that we as a company cannot do much about.

For a while some of the Latin governments had been enforcing minimum reference price, prices a little bit more aggressively. Would you say that's still going on?

The only one is Ecuador actually, and I think that they are not very successful at that to be honest with you, because you cannot (inaudible) you cannot force pricing. You have to let supply and demand and the markets decide what is the price and it wouldn't work if you put reference price or not. It might drive people to go somewhere else and buy the fruit from other sources.

So just wrapping up on bananas it doesn't sound like there's been a lot of change in the marketplace, but yet seasonally we should naturally expect,, pricing does tend to improve this time of year. Would you expect this year's seasonal pricing pattern to be similar with similar year-over-year type pressures or is there something different about this year from what you can see.

I think as we speak about this year so far it looks good year because pricing is better than last year. You know, year-over-year. Number one. Number two is we see drought, let's say in the Philippines which produces volumes going forward. We see volumes more rational at the tropics here and some (inaudible) so I hope, we always think and believe that this would be a better year than 2015 and I think that the same pattern in bananas cannot repeat itself for, one year to the next so that would be, we haven't faced any kind of climatic catastrophes over the last four years or five years actually, so you never know. All of a sudden this there could be a huge shortage or there could be, a normal supply, but I believe in the other side which there will be more, more stable let's say not excessive supplies like we faced in 2015.

Thank you. And moving onto the more uplifting topic of the avocado business, what is it that's allowing you, it seems like the bottleneck in the past has been getting access to fruit. You seem to be able to grow that business nicely now. Where are you getting this fruit and can you continue to get your hands on more supply and bring it into the US?

Supply is not an issue. We have enough supply and we can supply more and as you see we are growing every year and that means that we are having the supplies. It's just expending a lot of market reach and getting into new customer bases. We are very optimistic. We are doing that on a weekly basis. We see our sales increasing, we see our region increasing and customers realize that Fresh Del Monte can deliver a better quality avocado than other suppliers in the market and we can cater to their needs more than anyone else in the country.

Are you selling avocados in the same places you're selling bananas and pineapples in the US using the same relationships and sales force.

Yes. Of course. Not only bananas and pineapples but we have so many products that we sell to the same customers so we have different situations than other suppliers.

Great. And the last question is with some of the pretty dramatic changes in currency strengthening of the dollar, change in global, kind of capital flows has, for a long time it was very hard to get one's hands-on land and particularly some of your more dear markets like Honduras or Guatemala or Costa Rica. Are land prices still as, for a land like yours, still as high as they ever were?

Yes, they are. You see, they never, they don't care about the (inaudible) currency in Central America hasn't been depreciating as much as other countries so their currency has been more or less stable in terms of strength. However, land owners they don't talk about local currencies, they always talk about dollars. So prices haven't gone down as a matter of fact. Maybe being stable or on the rise as well.

Understood. Okay. Thank you very much for your time.

My pleasure.

Thank you. Our next question comes from the line of Mitch Pinheiro with Wunderlich Securities. Your line is now open.

Yes. Hi. Good morning.

Morning, Mitch.

So just sort of following up on John's banana questioning. It's actually shocking that the drug trade can actually have an impact on banana pricing, but my, so these bananas that are getting dumped upon at ridiculously low prices these aren't your branded -- these aren't your branded guys, right? This is just off label, you know, it's private label bananas flooding the market, is that correct?

Yes. Of course.

So -- so my question is, don't brands matter, in Europe in particular, or around the globe? I mean shouldn't the other -- the large branded banana companies shouldn't that mean something or is it just, it really comes down to, it's a banana?

Yes. Definitely. We have our own -- I mean client base in Europe. You know, and the United States most of the business is contract business. So more than 90% of our business is already in contract, so we don't have these kind of cyclical because supply is more or less static or very stable in terms of North America. We are talking here about other countries which is outside the United States, which is Europe mainly. And that's a big market that can be distorted because we do have our -- our loyal clients and loyal consumers that they want branded bananas, but when you do have let's say, 10%, 15%, 20% more bananas coming into the market where there is no room for it and you just dump it there, I mean definitely that will eat up from the market share of everybody else. I mean--.

So you're saying -- I'm sorry.

And it will depress the market.

Yes. So in the fourth quarter was an oversupply condition, but you're talking generally speaking we're talking the -- you are seeing pressure from -- from commodity bananas being priced at irrational levels is that -- over the longer -- over longer periods is what you're saying.

Yes. The pricing for bananas, rational be it North America or other places in the world, but, I think that the banana pricing is the lowest price of any type of fruit in the market. I mean you cannot buy anything for the same value of buying bananas today. I mean you are buying bananas for $0.50 a pound or $0.60 a pound or $0.49. If you look at any other type of fruit in the market, not even -- I mean there's no comparison. You buy a pound of -- grapes for $3 or $4 , you can buy -- anything else you don't pay this kind of prices. So the -- pricing for bananas is low, is very low, at the retail level and that's something that the banana suppliers like ourselves are really affected by. I mean, that's price and retail is very low and the retailers won't raise their prices and won't pay more money for that benefit, and that's what we are -- it's a catch-22, you know. We just have to live with the market and do the best we can. It doesn't mean that we are losing money on bananas we are still making money but we should be making a lot more money than what we are doing today, to be viable and rational business like any other business.

Okay. So just get back to the fourth quarter issue, you talked about obviously it was a big oversupply and you said there's an explosion of production in the farms in Costa Rica, Philippines, you know, everywhere.

Yes.

But you guys had lower yields on your farms in that period and, therefore, higher -- -- you know, higher production costs. Is that correct? I mean you guys didn't see the oversupply or --

No, we didn't see the -- the we are very short supply at the beginning of the year, 2015. That's why we had to go and procure more volume from Ecuador during that period which has affected as well, our results at the beginning of the year and increased our costs and--.

Okay. So that was a yearly -- that was an annual comment, not a quarterly comment?

Yes. That was an annual comment, not quarterly.

Okay. Then as you look -- you know, very little visibility for us in 2016 for North America. How would you -- how would you describe the pricing environment in North America as for the contract year?

I would say more or less stable with a little bit more pressure on pricing, you know, on the contract pricing this year than last year, but not much difference, you know. So it's more or less stable pricing.

Okay. That's -- that's actually -- that's maybe even better than -- than I was originally thinking. I thought it might be a little more severe than that, but it's a stable is actually not bad. So in terms of avocados, the one question I had was what gives you -- your advantages -- you say you're getting into new customers. Is that -- I realize you have 39 distribution centers. So all these distribution centers they all have ripening rooms and you can ripen, use the banana infrastructure, to ripen avocados? Is that an advantage that you hold?

That is true. That is true. We have coverage with today we have 24 DCs across the country. And we can reach any customer at any time within two hours range. So that tells you the story. I mean that tells you where we are today and these DCs don't deal only with avocados or bananas or pineapples. Probably they have 40, 50 different types of fruit and vegetables that they get to their customers -- the customers base where they are in and -- and I think that tells you the leverage that we have with -- in the business in general, but when you cater to the customer the -- you know, the pressure that he needs for that avocado, the condition that it arrives into their store and the velocity of sales, which is very important because we demonstrate to everybody that we can sell more avocados in their store than what they have been selling before and that has been demonstrated and proven and that is I think in my opinion another way, why customers slowly believe that Del Monte has the leverage and the better service than anyone else in the market.

So these are all branded avocados ; is that correct?

It's all Del Monte. Yes.

Okay. And then -- and why -- why was pricing down, just curious. Why was pricing down for avocados in the fourth quarter?

It's the volume. It's the supply and demand but don't forget we buy cheaper, we sell cheaper. So it's--.

Yes. Okay. And then just a couple things. Inventories were down 7% year-over-year. What's driving that?

That was -- that's the conscious effort to -- to focus on less packaging and a lot of it was conscious.

Better management of inventory. More control.

Okay. It's not -- it's -- okay. And then when I look at your balance sheet still under leveraged, I mean, you're buying back stock. Is that -- what are your thoughts on your balance sheet and -- and capacity there?

It's an ongoing process.

Okay. Meaning ongoing -- I mean are you -- I mean would you look at an acquisition? Have you -- do you have an appetite for that? What's.

If there is the right thing, yes, we would. You know, we wouldn't do it unless it is very -- it's an added value or very rational to us otherwise.

Are there a pipeline of idea or do you have -- is there anything in pipeline, or is this, just there's nothing happening at the moment.

No, no, no. In house we have a lot of new things coming up. We have new DCs, we have new fresh-cut operation and around the world, we have new agriculture farms in different parts of the world. So we have many things coming up in the next 12 months or so.

Okay. And then last question was just the jump in SG&A. Any -- any color there?

Some of that, Mitch, some of that is legal costs in just ongoing cases and so on. Nothing new. But just the stage that they're in. And then some of it is admin in certain regions where we're growing. Yes. In the -- all the expansion is obviously the administrative costs will increase there in these new areas.

Okay. Thank you very much. Appreciate your time.

Thank you.

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the call back to Mr. Mohammad Abu-Ghazaleh for closing remarks.

I would like to thank everybody for attending this conference call and I hope to speak to you soon in the next quarter with much better news. Thank you very much. Have a good day.

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