Fresh Del Monte Produce Inc. (FDP) Q4 2011 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen, and welcome to the Fresh Del Monte Produce Fourth Quarter and Full Year 2011 Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference call, Christine Cannella for opening remarks.

Thank you, Celia. Good morning, everyone, and welcome to Fresh Del Monte's fourth quarter and full year 2011 conference call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Richard Contreras, Senior Vice President and Chief Financial Officer. Our fourth quarter and full year 2011 results were made public via press release 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 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 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 a 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. Our 2011 financial results show a strong improvement over 2010. We continue to increase our market share in almost every product category, and I am very encouraged with the strategic achievements we made in our operation. Let me describe a couple of recent key developments. First, during the fourth quarter, we completed the build out of sales and marketing infrastructure of our Southern Europe distribution network. I’m very optimistic this change, effective January 5, provides us with an opportunity to increase our market presence and gives us greater control of our product distribution and quality. The transition has gone extremely well, and we have experienced strong sales. Our products are being delivered with a superior level of service Fresh Del Monte is known for. In addition, we continue to expand our presence in non-traditional delivery channels. These new channels allow us the opportunity to increase our distribution and marketing, by targeting a wide range of new purchase point, from convenience stores, college campuses, and cafeterias, to sports arenas. While we are still in the early phase of growth with these delivery channels, we are already seeing good customer response and competitive advantages in this space. Thirdly, a key move in this effort has been to deliver a variety of fresh, fresh-cut and prepared food products to more locations worldwide, providing greater exposure to consumers than ever before. However these strategic achievements were countered by the unresolved economic turmoil throughout Europe. We also experienced softness in demand in the second half of the year for all fresh produce, particularly in Europe and Japan, and we continue to face ongoing challenges in the European banana market. At the same time, our performance was hampered by higher market fuel costs worldwide. We recognized the impact that these difficult market conditions were having on our performance in the fourth quarter and we saw a need to take an even harder look at every aspect of our business. We eliminated some unprofitable product lines in our prepared food business, and we further rationalized our offshore melon program, as the melon business continues to be a very difficult environment. Additionally, we are closing an underutilized salad facility in the United Kingdom. Lastly, we initiated an aggressive cost reduction program during the quarter. I am pleased to share that our efforts are paying off, as we are seeing positive signs already in the first quarter of 2012. In addition, we have begun to see banana pricing improve as supply has tightened. However fuel pricing remains significantly higher and economic conditions in Europe show no signs of a recovery anytime soon. In the meantime, Fresh Del Monte will continue to differentiate itself within the industry by the quality and consistency of our products and expanding our reach through new distribution channels and geographies. As I mentioned before on these calls, we believe that investing in Fresh Del Monte Produce is a long-term proposition. Time and time again, we have shown we know our business, we are proactive, we don’t sit and wait for markets to improve, we take the necessary steps to manage our business and build on our leadership position. Our financial stability remains strong and we believe we are implementing the strategies that are necessary to drive sustained growth over the long-term. At this time, I would turn the call over to Richard. Richard?

Thanks, Mohammad, and good morning. For the year 2011, excluding asset impairment and other charges and credits net, we reported earnings per diluted share of $1.56, compared with earnings per diluted share of $1.02 in 2010. Net sales increased $37 million to $3.6 billion compared to the prior year and gross profit increased $37 million to $318 million compared with $281 million in 2010. In addition, excluding asset impairment and other charges and credits net, operating income for the year 2011 was $131 million, compared with operating income of $124 million in the prior year, and net income was $107 million compared with net income of $108 million in 2010. For the fourth quarter of 2011, excluding asset impairment and other charges and credits net, we reported a net loss per diluted share of $0.15 compared with net income per diluted share of $0.07 in the fourth quarter of 2010. Net sales decreased $36 million to $781 million compared to the prior year and gross profit decreased $11 million to $29 million compared with $40 million in the fourth quarter of last year. In addition, excluding asset impairment and other charges and credits net, operating loss for the quarter was $20 million, compared with operating income of $400,000 in the prior year period, and net loss was $9 million compared with net income of $4 million in the fourth quarter of 2010. Now as I turn to our segments, I’ll be giving fourth quarter statistics only. In our banana business segment, net sales decreased $11 million to $384 million compared with the fourth quarter of last year, primarily due to lower selling prices in Europe. This was partially offset by a significant increase in pricing in Asia and the Middle East, and increased pricing and volume in North America. Worldwide pricing increased $0.39 or 3% to $13.17 per box. Volume was 6% lower compared to the same period last year, gross profit improved $8 million during the quarter to a loss of $3 million compared with the loss of $11 million a year ago and unit costs increased 2% compared with last year. In our other fresh produce segment for the fourth quarter, net sales decreased 4% to $315 million, compared with $328 million in the fourth quarter of 2010 and gross profit decreased $16 million to $26 million, compared to the prior year. In our Gold pineapple category, net sales were in line with the prior year period. We did experience lower than expected sales over the holidays in Europe. Volume increased 7%, a result of higher production yields in our Central America operations. Unit pricing was 5% lower and unit costs increased 7%, compared with last year’s fourth quarter primarily due to higher fuel costs. In our fresh cut category, net sales increased $8 million to $82 million, compared with the prior year. Volume increased 8%, unit pricing increased 3% and unit cost was 7% higher primarily due to higher product procurement and transportation costs. In our melon category, net sales decreased $13 million to $16 million, compared with $29 million in the fourth quarter of last year. Volume decreased 46%, the result of a combination of planned volume reductions and lower supply brought about by poor weather. Unit pricing was 4% higher and unit costs increased 23%. In our non-tropical category, net sales increased $4 million to $47 million compared with the prior year. Volume decreased 2% and unit pricing increased 11%, primarily due to higher selling prices for stone fruit and unit cost was 15% higher. In our tomato category, net sales decreased $9 million to $16 million compared with $25 million in the prior year. Volume decreased 32% as a result of our shift in sourcing tomatoes from growers to our own greenhouse production. Unit pricing was 6% lower and unit costs decreased 3%. In our prepared foods segment, net sales decreased $12 million to $81 million during the quarter. The decrease was primarily result of planned volume reductions in our canned deciduous product line and lower volume and selling prices in our process pineapple product line. Gross profit was slightly lower than the prior year period. Now moving to costs and continuing with fourth quarter’s statistics only. Banana fruit cost, which includes our own production and procurement from growers, increased 2% worldwide and represented 33% of our total cost of sales. Carton cost decreased 4% and represents 5% of our total cost of sales. Bunker fuel increased 43% versus the prior year and represents 5% of our total cost of sales. And ocean freight costs during the quarter, which includes bunker fuel, but also third-party charters and fleet operating costs, was 2% higher. For the quarter, ocean freight represented 15% of our total cost of sales. The foreign currency impact at the sales level for the fourth quarter compared to the prior year was unfavorable by $7 million and at the gross profit level, the impact was unfavorable by $8 million compared to last year. SG&A expense during the quarter was $49 million compared with $41 million in the fourth quarter of 2010. The increase was primarily due to higher administrative expenses, including compensation and health benefit costs, along with increased expenses associated with the expansion of our operations in the Middle East and Southern Europe. During the fourth quarter, we spent $7 million to repurchase an additional 319,000 shares as part of our repurchase program. For the full year, we spent approximately $15 million to purchase an additional 2.2 million shares. At the end of the quarter, our debt was $216 million. And as for taxes, in the fourth quarter, we reported an income tax benefit of $17 million compared with a tax benefit of $5 million in the prior year period. The tax benefit in the fourth quarter of 2011 was primarily the result of a change in the tax treatment of plantation costs in a foreign jurisdiction. And we are projecting an effective tax rate of 15% in 2012. Capital expenditures in 2011 were $79 million and we are forecasting capital expenditures in 2012 to be about $95 million, as we continue our expansion in new markets and products. This concludes the financial review. We can now turn to call over to the operator to begin the Q&A.

[Operator Instructions] We will go first to Heather Jones with BB&T Capital Markets.

Real quick, Richard I missed the comment, how much did you say fruit costs were -- costs for the quarter?

Banana fruit cost was 2% I think let me make sure here. Yes, 2% worldwide.

It was up 2%?

Correct.

Okay. Okay, and just real briefly on your CapEx that came into the year lower than you were expecting and so the $95 million in 2012, does that include any, like catch-up projects, projects that were supposed to have been done in ‘11 and have been pushed into ‘12?

Not especially. We always have carryover, obviously. But there is nothing significant that we pushed into next year.

Okay. Now Mohammad, you mentioned a cost cutting program that has been implemented and we had heard talk about a cost cutting program in North America. I was just wondering if you could elaborate more specifically what you are targeting and just any color you could provide there?

Well, it’s actually not only North America, it’s worldwide. It’s going to be implemented -- it is actually an implementation as we speak, and this is on all levels of our activities, be it on the production level, be it on the marketing, administrative, across the Board, I think from every once in a while one has to look again at his operation and see where can efficiency be improved and where can comforts can be removed. So that’s what we’re doing and I think that will result into very important significant, I think, given figure at the end of this year.

Now when you talk about these across the board cuts, is it just people, or you going in and trying to improve productivity of your farms or -- I mean, or is it just people?

That’s very true. That’s the most -- mostly we’re focusing on is efficiency and streamlining our business in a better way, by adopting better let’s say ways of conducting our business. I think that there are many ways and many areas that we have seen and we’ve improved on during the last few months.

Okay. And I have heard that you guys were possibly having some issues recently -- with some of the yields in your farms in Costa Rica. Is that the case and is that related more to weather and should that normalize? How should we be thinking about your product -- this is banana farms? How should we be thinking about your productivity and yields in your banana business right now?

I don’t know where you had this rumor or this talk. As a matter of fact, I can tell you that our yield in Costa Rica and Guatemala has been the best ever. I think that we have an excellent yield in our farms as we’ve seen, I mean, for the last, I would say for the last several months, this has been the case. So I don't know where you heard this from.

Okay. And as far as your other produce business, the results for the quarter, as far as from a total profits, was the weakest quarter that -- going back at least a decade and so, now trying to get a sense of the melon business was very small during the quarter, I think only like $16 million in sales. Just wondering what specifically is driving that weakness and how should we be thinking about that in Q1 of 2012 and on a full year basis, should we look at Q4 as a low point or just any help you could provide on that business?

I believe that this is a hiccup that fourth quarter that we have seen we just across. It's not a kind of I would say a momentum or a kind of a pattern. We know that the fourth quarter was weak, we know the reasons why it was weak, unfortunately, these reasons, some of them were beyond our control like the European market, like the oversupply during the summer that went throughout actually, up till end of November and early December was oversupplied that we had to bump into the Mediterranean market at very low values. And we have suffered as well on the pineapple oversupply situation during that quarter. So there were many reasons and many factors that have actually played against us. And that's the main reason for the weak quarter, but I believe that this is not something that could be repetitive.

Okay. And you said, pineapple oversupply, what was the other fruit that you said was oversupplied?

Bananas and pineapples really, I mean the melons itself was not a big factor in the sense, that we have rationalized our volume. As a matter of fact, during this quarter, we see a lot of improvement on the melon pricing, compared to last year and the year before.

Okay. And as we're looking at Q1, do you expect pineapple profits to rebound significantly from Q4?

I think, maybe slightly or maybe on the same length.

Okay. And then finally, one of your competitors put out to the trade last week that it was going to implement a post measure surcharge and in the next week or so in the bananas, given the tight supplies here in North America. Just wondering, what are you seeing from the supply front? Does Fresh Del Monte have any intention of following suit or any color you could give there?

Yes, we have seen that in the market and that's not the intention of Fresh Del Monte actually because we don't really see that shortage of supply to justify us to put a surcharge because I think what is happening is that we see more demand than what we have seen from the previous years in especially in North America and in other markets. But not to the point where we have seen very severe, let's say shortage in volume or capital production. Right now, we truly, in the last 3, 4 weeks we have seen very high prices in Ecuador, year ago from $9 to $16 at the highest of these stock prices. But today, if you look at today, Ecuador, it’s about $8.75, $9 a box fall, which is for this time of the year, it's expected. It’s very reasonable and we really have no justification whatsoever to go in the market and put a surcharge there.

Okay. My final question is if you look at 2012 versus ‘11, some of the headwinds include a weaker year-on-year Euro exchange rate. You've got some difficult comparisons in the first quarter with strong EU pricing last year. But some of the positives are the comparisons with the EU last year should -- in the banana side should be very easy, you've taken these cost cutting efforts. And I know this is a difficult business to predict, but here we are at the end of February, do you believe that it's realistic to believe that your 2012 should be better than your 2011?

As a company we believe that could be -- we cannot be worse than 2011, let me put it that way and we should improve on 2011. But as far as Europe is concerned, because you are touching on Europe, I think Europe in my opinion; I know that I said over the last several calls that Europe, I don't see a very big turnaround in Europe to be honest with you. And I think that the Europe market will remain weak as we speak today we see weaknesses in the market in Europe today, the movement of volume is not as strong as we expect. So I am worried about the European market going forward into the summer.

We’ll go next to Scott Mushkin with Jefferies & Company.

I just kind of had a broad question. I think Heather is right it’s very hard to predict kind of the earning stream near-term. And we’ve always looked at it from a longer-term basis, what the assets and you guys are fairly asset-rich company, can produce from a cash flow perspective. And I guess, as I kind of step back and look at things and I think you talked about the melon volumes are down and kind of remember my visit to Costa Rica and being on your melon -- melon properties, which I think you own, so I guess what’s going on with that land? And what do you think of like the cash flows off the melon business? What do you thing if the cash flows off the banana business, and then maybe to an extent, the tomato business, although that’s being redone. Have we just stepped down almost permanently on what we can expect these assets to throw-off or do you think we can get back to a more normalized level maybe where we were 3 or 4 years ago?

We’re rationalizing our business. I mean, when we see a kind of a product or a segment of our business is suffering and we continue seeing it suffering for several quarters, of course we take action to mitigate this losses, and we take whatever action that is needed, be it to cut down on production or to phase out of that product line or to close down these businesses because that’s the only rationale way to do. So it doesn’t mean that we are closing, or if we’re cutting down on one line, that means if our cash flow will be severe, because we’re concentrating on other areas where we believe we can compensate and make up for this shortfall into certain areas. And like for instance, in Costa Rica, we will just be very short now and within the next couple of weeks we will start shipping our sweet peppers from our Greenhouses projects, which is just completed recently. But this is an area where we’re going to be adding a new area of cash flow, positive cash flow compared to the other areas. So it’s an ongoing, let’s say, process and replacement.

So just a follow-up on it, like what – again, being down there like seeing the fairly large melon operations you guys were running 3 or 4 years ago, I mean what’s happened to all that I mean is it still there what’s happened to the land? As the volumes have come way down, I mean is it still being planted is it moth ball, do you have to take a write-off? I was just trying to kind of conceptually understand what’s happened to all those assets.

As if -- as to start with, you’ve seeing during the lost probably 2, 3, quarters we’ve written down a lot of our melon asset. So it’s been already taken care of. Secondly, some of these lands have been on lease I mean they’re not ours. Thirdly, the lands that we have and we don’t need and we don’t expect to use in the coming future, if we find the right value, of course, we would dispose of them with the right value and this is what’s happening right now.

All right, that’s really great color. So in pineapples, I know you had a tough quarter but you still believe that that’s a very strong vertical for you, is that correct?

When you look at Fresh Del Monte having about 45%, 43%, 44% of the North American market and market share, and looking around the world more or less it’s the same story in different markets and even more in some other markets, that shows you the extent. I know that there oversupply, I know there is competition, I know there are 100 or 200 small players, different brands, God knows what, that shows up in the market. But I believe this business; long term is a business for the professionals like Del Monte, for instance. So I’m not worried that we will definitely have some uphill, going forward in the next year or so. But I think long-term, this business will be rationalized again and I think small players, small producers or even medium size producers will not be able to support the kind of pricing that they are realizing in the market. And I don’t believe that this business can continue the way it is. It’s not like bananas. It’s a lot more capital-intensive and it needs a lot of more, let’s say, technical knowhow that I don’t think is available to many people around. In addition to that, I’d just like to throw in a piece of information that Fresh Del Monte within the next 2 years will be coming up with new variety in pineapples, which would be I think very significant.

[Operator Instructions] We’ll go to Diane Geissler with CLSA.

Well, I was wanting to get back to your question earlier about since the level of earnings you had sort of back in the peak years, sort of pre-credit crisis. And it sounds you’ve heard quite a bit over the last couple of years about rationalizing businesses whether it was melons, taking out some production assets from growing areas in the prepared food business as well as production facilities, the processing facilities. And I guess my question is, is it possible given the asset base you have today, kind of fully rationalized to reach that level of profitability again, or do you feel like you've kind of pared away some things and will never get back to that level again? I guess, I'm just confused because we've heard about rationalizing over the last couple of years because of how difficult the industry has been and just thinking if there had been, just some step change in the level of profitability you can expect from assets that you have today?

I am always positive and I will believe in the good times. So I believe that we have, in the last couple of years, especially in the Far East and Europe, these markets have been, especially in Japan, on total Japan and Europe have been extremely difficult. And very unfortunately negative in terms of returns to us, but that's -- we cannot write-off these markets. We just have to keep that and maybe rationalizing our volumes into these markets and improving our efficiencies to be able to weather the storm. But if you ask me, what do you think about the future, nobody can predict the future except God. And we are doing our best to do the right thing to our shareholders and for the company. And I'm very positive that we will be able, one day to return to where we were. We are working on many projects, new projects in different parts of the world, which I believe is going to payoff handful in the near future.

Okay but I guess I am just thinking about for instance the melon business, which actually used to be pretty profitable, I mean obviously, it wasn't your biggest business, but it was generally fairly profitable. And it sounds like you pretty much rationalized that almost out of your portfolio. So I guess the question I have is, have you added other things into the portfolio that will not only make up for what you are missing there in the profitability from the old melon business, but actually get you to a position where you'll have higher earnings, because it's all about earnings growth, right? I guess that's my question. Is the things that you've added into the portfolio, enough to make up for what you have taken out of the portfolio?

Yes, that's exactly what I said few minutes ago. I said we are replacing whatever assets that are not producing cash flow into new projects or new products that are replacing this and helping to offset any shortage in cash flow that we have or are phasing out.

I guess the question that is, when can we expect to see that because it's been a new product development factor of -- it just take time, is that the message?

That is the message.

Okay. Can we just talk a little bit about Europe and the prepared foods division? I know you've done a lot of work there; I know it's been a little bit of a struggle with some of the competitive issues particularly in the UK, et cetera. Can you talk about your expectations for that business for ‘12, just what you're seeing on the competitive front there and how you are thinking about the prepared foods division for this year?

I can tell you that our market share in the UK, for instance is improving year-over-year, that's for a fact. We're doing extremely well in Southern Europe in the food segment of our business and the same thing in almost every market that we are in. We are just started introducing our products into some parts of Africa where it's meeting very good reception and demand. So it's not going to be overnight, but I can tell you that the food segment of our business has improved tremendously over the last several years and I expect that business to even improve further as we go forward.

Okay, terrific. And then maybe just one for Richard on -- those fuel prices that are up pretty aggressively here. When -- I know you guys intend to do some hedging in bunker fuel, et cetera. So could you just talk about how you would expect your freight costs to track through 2012, if we kind of keep fuel cost where they are today on a spot basis?

We have very, very little hedged. We have some small hedges but very little. So I mean, we'll see where it goes. Obviously, we have a natural hedge in the U.S. with our bunker fuel surcharges but in the rest we have to see where pricing goes.

Okay. And historically has the pass-through been fairly immediate, in terms of when you see the rising fuel prices you see it...

You know there is a 3-month lag.

We'll take a follow-up from Scott Mushkin with Jeffries & Company.

So wanted to get back to the melon, just to try to understand a little bit more what went wrong in kind of a strategy, where I think you went, you went kind of vertically integrated and the idea was to produce, say, a superior quality product at the same price or even the lower prices than your competitors, given the advantage of that vertical model that you were deploying. Anecdotally, in retail, I think the quality of the fruit; the melons, cantaloupe has really decreased in the last couple of years. Now I was just wondering, was the strategy wrong or it’s just a wrong economy. In other words, are people just going for lesser quality fruit so like, that whole strategy you were deploying just didn’t work or do you have any thoughts on what went wrong?

I think what went wrong is that the economy has made very big impact on the field of melon. Melon, as I said before, I mean I said it before that it’s the cheapest maybe type of fruit on the shelf. And it’s not the primary, let’s say, item on the supermarket cliff. I mean if you go into supermarkets maybe -- there will be of course bananas and pineapples and other fruits during the season, but that’s one of the items. The other, it’s less consumption and less demand. The third, most important, in my opinion, which really made this business even more difficult is, the all the cases that have happened especially in the last few months you remember in Colorado with the Listeria and people stopped eating as a matter of fact. They stopped buying the melons. Supermarkets, different large and small supermarkets stopped even stocking melons in their supermarkets. So you can imagine what effect that can happen on the category. So on top of that, additional to that, the FDA has been very strict and very difficult in terms of sampling and allowing and approving entry of melons in the U.S. So it’s been a battle on all kinds of fronts. So that’s the reason why the melon category has been suffering from an economic point of view, from a technical point of view, from health point of view, so all these factors have really taken a toll on this segment of the business and what we have done, actually, is the right thing that to address this issue.

No, it makes a lot of sense. And if you were going to look at the economy maybe the retailer you deal with, because I guess melons are primarily North America. I mean, is there, broadly speaking, a tread with these retail partners to basically go to the lowest common denominator from a quality perspective? I mean, so I guess what I’m getting at is you transfer and try to get the peppers. I think you talked about tomatoes, is the basic kind of philosophy of a lot of the retailers in North America friendly to higher quality product where they’re not going to be pushing on price all the time and go to the lowest common denominator?

No, I think that, let’s be very honest. I mean the retailers are looking for the highest quality in the market. I mean they’re very strict in terms of quality and condition of the fruit and vegetables that they receive. Of course it’s a buyer-seller relationship. So everybody tries to get the best for his -- the best deal for himself. But that doesn’t mean that they will have to go and -- I mean, if you, as a buyer, if you keep squeezing me and killing me, I mean at the end of the day, I cannot deliver to you neither top quality or low quality, then, we will be out of the business. So it’s a mutual relationship, I think. And I believe that the retailers are realizing that, if they need the highest quality and the top kind of fruit or vegetable then it is a price for that.

But most of the growth in North American retail has been in guide I’d say Dollar Stores, Wal-Mart. And I should send you a picture Mohammad, I think I took a picture of the world’s smallest green pepper at a Wal-Mart the other day. So I just wonder if those trends actually kind of hurt what you’re trying to do?

Well, it’s unfortunate, but as far as we’re concerned, the long-term, we have our standards and our quality specs that we cannot move from. Safety, hygiene, all these methods for us and we cannot compromise on them. We have a brand that we have to protect and we will not be able to do that if it’s not to meet our standards and our quality in terms of safety, hygiene, freshness. I think the consumer at the end of the day will decide where to buy and what to buy.

And there are no further questions in the queue at this time. I’d like to turn the conference back over to Mr. Mohammad Abu-Ghazaleh for any additional or closing remarks.

I would like to thank everybody for attending this call and I hope to talk to you soon on our next call. Thank you very much and have a good day.

And that concludes today’s conference. We thank you for your participation.