Fresh Del Monte Produce Inc (FDP) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fresh Del Monte Produce's third-quarter 2016 financial results call. (Operator Instructions).

I would now like to turn the call over to Ms. Christine Cannella, Investor Relations Officer. Ma'am, you may begin.

Thank you, Chelsea. Good morning, everyone, and welcome to Fresh Del Monte's third-quarter 2016 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 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 2 hours after the conclusion of this call. Our press release includes reconciliations of any non-GAAP financial measures we mention today to their corresponding GAAP measures.

Before we start, please remember that matters discussed on today's call may include forward-looking statements within the provisions of the federal securities Safe Harbor's 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 a written consent is strictly prohibited.

Let me turn the call over to Mohammad. Mohammad?

Good morning, everybody. Thank you, Christine. Good morning, everyone. I'm very pleased to report that during the third quarter of 2016 we delivered a stability across all of our business segments. Net sales were $14 million higher year-over-year, at $950 million. Gross profit increased 43% from last year's third quarter. And on an adjusted basis, we generated EPS of $1.17, up from $0.56 a year ago. These results demonstrate the strength of our business model and show that the strategic initiatives we have taken are contributing to the bottom line.

We continue to make investments in our production areas, our delivery channels, our value-added product lines; and, in several key markets, to further expand our diversification strategy. The success of creating efficiencies throughout our operations; higher banana selling prices; and lower fruit, shipping, and commodity costs also contributed to our results. In the third quarter, our North American avocado business performed very well. The results were characterized by higher selling prices, and demand for avocados outpaced supply.

While margins were squeezed during the quarter due to limited industry supply, we see the situation as a short-term challenge. Capitalizing on our ripening and distribution centers, we believe there is tremendous potential for growth in the avocado category.

The strong results during the quarter were also driven by higher sales and selling prices in our global fresh-cut business. We continue to leverage the competitive advantage of our worldwide fresh-cut facilities, gaining new customers and driving organic growth.

Our strategic initiative is to replicate the footprint we have built in North America worldwide, and create a multitude of new opportunities, is well underway.

In summary, the health and wellness consumer food trend continues to be highly favorable, and Fresh Del Monte is positioned like no one else to seek and take advantage of opportunities to offer healthier choices to all consumers.

At this point, I will turn the call over to Richard. Richard?

Thanks, Mohammad, and good morning. For the third quarter of 2016, on a comparable basis, excluding asset impairment and other charges and loss on sale of assets, we reported earnings per diluted share of $1.17 compared with earnings per diluted share of $0.56 in 2015. Net sales increased $14 million compared with the prior-year period. Gross profit increased 43% to $119 million compared with $83 million in 2015. Operating income increased $34 million to $70 million compared with $36 million in the prior year. And net income increased $31 million to $61 million compared with $30 million in the third quarter of 2015.

Now turning to our business segments. In our banana business segment, net sales in the third quarter of 2016 decreased $800,000 to $424 million compared with the prior year. The decrease in banana net sales was primarily driven by lower sales volume in North America, along with lower selling prices and lower sales volume in Europe. This was partially offset by higher sales volume and selling prices in Asia, and higher sales volume in the Middle East.

Overall, banana volume was 2% lower than last year's third quarter. Worldwide pricing increased $0.29 per box to $14.93. Total worldwide banana unit costs decreased 3% due to lower fruit and transportation costs. And gross profit was $40 million compared with $21 million in the third quarter of 2015.

In our other fresh produce business segment for the third quarter, net sales were $434 million compared with $420 million in the prior year. Gross profit was $62 million compared with $49 million in the third quarter of 2015.

In our Gold pineapple category, net sales increased $4 million to $123 million during the quarter as a result of higher sales volume in North America and higher selling prices in Europe. Volume decreased 3% due to lower yields from our plantations in the Philippines, the result of adverse weather conditions earlier in the year. Unit pricing was 6% higher. Unit cost was 3% lower.

In our fresh-cut category, net sales increased $8 million or 7% to $135 million during the quarter. The increase was primarily the result of increased sales volume and selling prices in North America and Asia, along with higher sales volume in the Middle East. Overall, volume was 8% higher. Unit pricing decreased 1%, and unit cost was 6% lower.

In our avocado category, net sales increased $22 million or 47% to $67 million compared to the prior year. The increase was primarily driven by higher selling prices due to lower industry supply and increased consumer demand. Volume increased 5%; pricing was 41% higher; and unit cost was 46% higher.

In our non-tropical category, net sales decreased $7 million to $45 million compared with $52 million in the third quarter of 2015. The decrease in sales was primarily attributable to lower sales volume in our grape and apple product lines, the result of adverse weather events earlier in the year in Chile. Volume decreased 15%, and unit pricing and unit cost were in line with the prior year.

In our prepared food segment, net sales were $92 million compared with $91 million in the prior year, and gross profit was $17 million compared with $14 million in the prior year.

Now as for costs in the third quarter, banana fruit cost, which includes our own production and procurement from growers, decreased 4% worldwide and represented 31% of our total cost of sales. Carton costs decreased 2% and represented 3% of our total cost of sales. Bunker fuel costs per ton decreased 19% and represented 2% of our total cost of sales. And total ocean freight costs during the quarter, which includes bunker fuel, third-party charters, and fleet operating costs, was 11% lower. For the quarter, ocean freight represented 8% of our total cost of sales.

As for foreign currency, the foreign currency impact at the sales level for the third quarter was favorable by $900,000; and, at the gross profit level, was favorable by $3 million.

Other expense, net, for the quarter was an expense of $2 million, principally attributable to foreign exchange losses. At the end of the quarter, our total debt was $138 million. Income tax expense was $6 million during the quarter compared with income tax expense of $5 million in the prior year.

And as it relates to capital spending, capital expenditures for the nine months ended were $98 million. Capital expenditures for the full year of 2016 are expected to be approximately $140 million. This concludes our financial review.

We can now turn the call over for Q&A.

(Operator Instructions). Mitch Pinheiro, Wunderlich Securities.

So, let me ask you a couple questions. First, when I look at your sales by geography, most of the increase -- almost all the increase, I think, in the quarter was driven in Asia. So, as I look at the rest of your business, like, say, take fresh-cut, for instance, which I know you are growing worldwide -- does that -- it looks like some of the businesses were -- in North America, in particular, were below where the growth rates that they had been in prior quarters. Is there anything in particular going on that explains that?

I don't think you are right. I think our growth in North America is -- and the only reason it could be because of raw material decrease.

Okay.

We had issues with strawberries throughout the year, actually, as this has been one of our big items that we use, which has high value, as well as other -- some other commodities. So, if there was any type of -- not enough growth, is because of these reasons.

Okay. So, in terms of volumes -- so you would think fresh-cut -- there's nothing in particular that changes the trends that fresh-cut has been delivering over the last year.

No. I think that it is going to be -- as we go forward, you will see a lot of upside going forward because certain new commitments with certain clients have tremendous volume, going forward, in the fourth quarter and the year to come. So I think we will see a lot of new activity in this field.

When I look at banana pricing data that I see, I see -- in the third quarter, from a global perspective, it was up in the high-single-digit area. Your pricing was up about 2%. What's the difference between the two? Is it inaccurate data that I'm looking at? Or is it just the mix of your business?

Mitch, can you repeat that, please?

Yes. When I look at the World Bank data for banana pricing, it shows -- for the months June, July, August, and September, a high-single-digit growth rate in pricing for bananas. And Europe, your pricing was up 2% in the quarter. And I was just wondering, is it just a geography mix that's different that explains the difference between your pricing?

Yes, those that you're looking at are sometimes dated and global numbers. Ours are specific numbers. But the other thing to remember is our number is a net number. So it includes any decline from fuel surcharges in North America, for example, which I don't think would be in those global numbers you're looking at, those published numbers.

Okay, that's helpful. That's probably a lot of the difference. And then speaking of that and fuel surcharges and things, as you look forward, how would you characterize the outlook for ocean freight costs over the next several quarters?

I don't think there will be much. It all depends on the oil prices, which, in our opinion, we don't believe that this is going to go anywhere from where it is today. I believe that it will be in the same region for -- I don't want to say many years, but at least many quarters to come. So, I don't see a big change in that area, Mitch.

Okay. And just one more question, and I'll get back in the queue. How would you characterize the current banana supply and demand outlook for -- as we look here at the fourth quarter?

Fourth quarter is always the same case. You have oversupply and less consumption in the market. But we have -- we manage this somehow in order to alleviate the surpluses and not affect our traditional markets like North America and Europe. So, we have other markets where we -- so far, we have seen the impact much less than what we have seen last year, this time. So, we are managing in much better ways that we managed last year.

Okay. Well, thanks for taking the questions. I'll get back in the queue.

Jonathan Feeney, Consumer Edge.

I wanted to ask about -- I know it's not a huge, but growing and certainly progressive part of your business. The competitive environment in fresh-cut, there's a lot of small companies out there talking about fresh, prepared meals; things that touch your business in an ancillary or sometimes more direct way. Are you seeing -- I know you are growing that business to put some capacity in, particularly in North America. Are you seeing any increased competition there? And can you comment on how big do you think that business can be, looking 3 to 5 years down the road?

Well, competition will always be there, Jonathan. We don't have a problem with that. We have a model that we are working on. And we have demonstrated throughout the years that we grow into fresh-cut, year over year over year over year. And as a matter fact, we are at maximum capacity as we speak, and we are expanding some of our already fresh-cut operations across North America. So, we don't have really -- the only thing that we have is just to catch up with the demand and the new offerings that we give to our customers.

I think we are unique in being able to deliver across the United States, North America, and come with innovation and new items that I think are differentiated from so many competitors. Competitors, they have to buy their own fruit. We produce most of our own raw materials. So, you see the competitive edge here, which is really unique.

So, I believe as Fresh Del Monte, we will grow our business, as we grow it every year. And I don't see any kind of danger from competition. Competition is healthy, and I believe that gives us more drive to do better.

How about structurally, on the banana side? I know I ask this often. But are we seeing -- it's got its puts and takes. But the general trend -- and it's got the same seasonality, as you mentioned -- but the general trend has been up. Have we reached a -- are we reaching a new normal, in terms of more rational competition? Or is this just what's going on within the -- would you interpret this as within the historical ups and downs of supply and demand in the market?

I believe it's more historical ups and downs. I do pray at night that we will have a rational environment (laughter). But so far, it's just how you -- you know, we are very well geographically diversified as a company. And we have outlets that can give us better, let's say, distribution and better leveraging our supply chain. And that's maybe one of the things that give us some advantage and ability to market our fruit better.

As a matter fact, during the first six months of this year, seven months, we have a shortage supplying our Middle East markets, where we could have made a lot more money than -- going forward, we have our own plantations growing in the Philippines, and that will give us more supply in 2017 and beyond. And that should even give us more leverage in reaching markets that we were all short-supplying in the last few years.

Okay. Thank you very much.

(Operator Instructions). [Ajaya Patel, Evaluate Research].

What I wanted to ask was about the avocado business. So basically the costs and the sales price has gone up by more than 40% this quarter. So is there -- apart from the lower supply, is there any other reason why the prices have gone up so much? And do you believe that during that during the coming quarter, we will see similar -- I mean, the prices will be as high in the coming quarter? Thank you.

I hope not. Actually in the last -- particularly in the last six weeks, the prices in Mexico have gone so high. And that was actually by design of the growers, that they stopped picking fruit and stopped picking the avocados, which made a huge shortage in the pipeline. And that pushed the prices up to $70, $80 a box, which is really absurd in terms of -- and that has created this situation where supplies were short, and less consumption going forward.

So I hope that this situation will normalize as we go in the next couple of months so we have a more rational, let's say, cost from Mexico. But I believe that supplies are there. However, it was a situation where producers were not taking the fruit and dictating, let's say, prices to the packer and exporters. And that's actually what happened in the last six, seven weeks, which created a very bad supply issue.

Okay. And so if we are seeing that they we're not picking up the fruits and everything, so do we expect that -- if that is the case, then during the next quarter probably we'll have an oversupply or something?

No, we already -- it's already back now. The pipeline is already back normalizing the supply. However, the prices hasn't come down as much as we would like to see. Because the more rational pricing with net -- retailers sell better, you know, and consumers buy better. So that's the whole thing. I hope within the next 30, 40 days, we will see a more normal situation, like usual.

Okay, thank you. That's it. Thank you.

Mitch Pinheiro, Wunderlich Securities.

So, a couple housekeeping. One, Richard, the tax rate in the fourth quarter, is that -- where do you see that falling?

For the full year, we are modeling a little lower than normal because of the performance in the first; so about 12%, 13% for the year.

Okay. So that would imply maybe somewhere in the of 20% area for the fourth quarter? Is that --?

Well, wherever that falls out.

Okay. Okay. Second, your CapEx, around $140 million, is a little lower, I think, than where maybe I think you suggested last quarter. Any reason for that?

No, it's come down somewhat. It's only because of delays. We certainly haven't taken anything off the table. It's just certain things get delayed, and they'll roll into next year.

Okay. And then in terms of margins for the fourth quarter, is there anything that we should know that's either different from last year or different from the quarter you just reported, as it relates to the fourth quarter? I understand this is your very low-margin quarter for bananas. Last year, it was losses in bananas, and some years -- which happens -- and some years, you make a small profit. Is there anything unusual going on in the banana market for the fourth quarter?

No. No, Mitch. It's more or less the same story. The fourth quarter is a soft quarter in bananas, and you know that; so more or less the same story.

Okay. And getting back to the avocado question, since you are in a buy/sell sort of arrangement, does -- the higher prices don't -- they don't help your -- they actually hurt your margin, right, where you make a fixed to margin over a higher price? Is that correct, or do I have that incorrect?

No, the margin would not be had -- what would we have is that the volume -- you don't have enough volume to supply your customers. And that's what really helps the business. It's not the pricing or the -- as far as the margin. You know that we are already in the process of constructing our packing operations in Mexico, which will give us an advantage in not packing through third parties. And that will add to our margins, as well, and make our position much stronger in the [market]. As well as we are also in the process of putting our own production in Mexico and other countries in order to be more integrated into the avocado business.

So, when does the new packing house -- when does that become operational?

Hopefully by third quarter of 2017, if no delays; you know, government regulations and things like that.

Okay. And how much of your own -- where would you -- would you be buying land or leasing land for avocado production?

Well, we will we be buying land. We never lease. We don't -- it's not our habit to lease land, and for such an item. We would be buying land. And as we speak, we are even making some experiments by planting a small acreage in Florida to see if we can produce as well -- locally produced avocados as well, which we want to diversify our sourcing and not be 100% dependent on Mexico.

Okay. All right. Very interesting. Well, thank you very much.

Thank you. And I'm not showing any further questions at this time.

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 call, and I hope to give you as good news for next quarter as well. Thank you very much and have a good day. Bye.

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.