Fresh Del Monte Produce Inc. (FDP) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's Third Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I would now like to introduce your host for today's call, Ms. Christine Cannella for the opening remarks. Please go ahead, ma'am.

Thank you, Leah. Good morning, everyone, and welcome to Fresh Del Monte's third quarter 2012 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 compliments our third quarter 2012 press release we made 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. The third quarter of 2012 was another excellent period for Fresh Del Monte Produce, and a continuation of our strong performance so far this year. Our commitment to our core operating principles was key once again to this quarter's performance. The ability to adapt to ongoing economic and political challenges in certain parts of the world, our strategic focus, and the consistent commitment of our employees has led to solid improvements in operating margins in many of our product lines. I'll address a few contributors to our third quarter performance. First, our fresh-cut business delivered another strong quarter. Global consumer demand for Del Monte branded fresh-cut products is expanding rapidly, and we are intensely focused on expanding our reach into existing markets, on entering new markets, and creating new channels to amass greater market share. Secondly, earlier in the year, I discussed how we have achieved full control of the marketing, sales, and distribution of Del Monte's products in Southern Europe. Since that time, despite the European economic crisis, we have experienced growing sales and customer relationships. We have made inroads into cementing our strong leadership position, and are poised for future growth in these markets. Thirdly, our results were positively impacted by an industry shortage of bananas into Europe that drove the average selling price higher. However, the reduction in last day supply was short lived, and banana selling prices have since declined though still higher than last year at this time. During the quarter, economic conditions remain depressed in Europe, and banana performance in Asia was hampered by trade disruptions in some selling markets. These global events reinforce one of the keys to our success at Fresh Del Monte, our vertically integrated infrastructure. Over the past 16 years, we have continually identified our products and services, extended our presence into new markets, expanded our global production and sourcing areas, and driven flexibility in our logistics operations, while maintaining our focus on cost savings and efficiency programs. There are many other reasons for our success, our well recognized brand, our dedicated employees, our longstanding relationships, and of course the strength of our asset rich balance sheet. In summary, as we look to the end of 2012, our strategy remains the same. We will continue to seek opportunities to build upon our strong business. Our strong business model identify opportunities to leverage the presence of Del Monte brand and increase returns for our shareholders. At this time, I would turn the floor over to Richard.

Thanks, Mohammad. For the third quarter of 2012, excluding asset impairment and other charges, we reported earnings per diluted share of $0.45, compared with earnings per diluted share of $0.22 in third quarter of 2011. Net sales were $789 million, compared with $795 million in the prior year, and gross profit increased to $75 million, compared with gross profit of $63 million in the third quarter of 2011. In addition, excluding asset impairment and other charges, operating income for the third quarter of 2012 was $31 million, compared with $18 million in the prior year, and net income increased $13 million to $26 million in the third quarter of 2012, compared with $13 million in the third quarter of 2011. In our Banana business segment, net sales decreased $15 million to $360 million, compared with $375 million in the third quarter of 2011, primarily the result of lower sales volume in our secondary Middle East markets, and planned supply reductions in markets in Northern Europe. Overall, volume was 6% lower than last year's third quarter. Worldwide pricing increased 2% or $0.30 per box to $13.21 with higher selling prices in all regions. Gross profit increased $13 million to $12 million, compared with a loss of $1 million in the third quarter of 2011, and total worldwide banana unit cost decreased 1%. In our Other Fresh Produce business segment for the third quarter, net sales decreased $2 million to $335 million compared with the prior year, and gross profit decreased $1 million to $51 million, compared with $52 million in the third quarter of 2011. In our Gold Pineapple category, net sales were $123 million, compared with $129 million in the prior year, primarily due to lower selling prices in North America. Volume decreased 2%, unit pricing was 3% lower, and unit cost increased 4%. In our Fresh-Cut category, net sales increased 6% to $98 million, compared with $93 million in the prior year, driven by increased number of venues in North America and the Middle East in which our fresh-cut products are offered. Volume decreased 4% as a result of our previously announced closure of an unprofitable fresh-cut facility in the UK. Unit pricing increased 11% and unit cost was 6% higher than the prior year. In our melon category net sales decreased 46% to $7 million, compared with $13 million in the third quarter of 2011. Volume decreased 47% due to continued rationalization. Unit pricing was 3% higher and unit cost was 8% higher. In our Non-Tropical category, net sales increased 14% to $61 million; compared with $53 million in the third quarter of 2011. The increase was primarily attributable to higher sales of apples in the Middle East. Volume increased 16%, unit pricing decreased 2%, and unit cost was 7% lower than the prior year period. In our Tomato category, net sales decreased 3% to $16 million, compared with $17 million in the prior year. Volume decreased 1%, pricing was 3% lower, and unit cost was 2% lower. In our Prepared Food segment, net sales increased $11 million to $94 million during the quarter, compared with $83 million in the third quarter of 2011, primarily driven by stronger sales in our Jordan poultry operation. Gross profit was relatively flat as compared to the prior year. Now, moving onto costs, banana fruit costs, which includes our own production and procurement from growers, increased 3% worldwide and represented 32% of our total cost of sales for the third quarter. Carton cost decreased 9% and represented 4% of our total cost of sales. Bunker fuel decreased to 1% and represented 5% of our total cost of sales. And ocean freight costs during the third quarter, which includes bunker fuel and also third-party charters and fleet operating costs, was 24% lower. For the quarter, ocean freight represented 12% of our total cost of sales. The foreign currency impact at the sales level for the third quarter was unfavorable by $10 million and at the gross profit level, the impact was unfavorable by $3 million. Other expense net for the quarter was $3 million compared with $400,000 in the third quarter of 2011, primarily due to foreign currency losses. At the end of the quarter, our total debt was $28.4 million. Last week, we announced that we had finalized a new unsecured 5-year revolving credit facility to replace our facility that was expiring in January. The $500 million credit facility bears interest at a rate of LIBOR plus the margin that varies with the company's leverage ratio, currently LIBOR plus 1.25%. The facility is unsecured up to a leverage ratio of 3.25 times EBITDA, and replaces our former credit facility that was set to mature as I mentioned in January 2013. We plan to use the proceeds for working capital needs, capital expenditures, and funding of possible acquisitions and possible share repurchases. Income tax expense was $200,000 during the quarter compared with income tax expense of $2 million in the prior year period. We are now expecting our effective tax rate for the full year of 2012 to approximate 12%. As it relates to capital spending, for the 9 months ended September, we have spent $63 million on capital expenditures. Capital expenditures for the year are conservatively expected to be approximately $100 million. This concludes our financial review. We can now turn the call over to the operator for Q&A.

[Operator Instructions] And we'll hear first from Heather Jones with BB&T Capital Markets.

I want to follow-up on a comment you made earlier about banana pricing in Europe. You mentioned that it's weakened, but some of the data we're seeing, first of all showing significant year-on-year increases, but also some of the strongest pricing that we've seen in Northern Europe for several years. And so just wondering if the weakening you're seeing is that just consistent with typical seasonal patterns or just if you could give us more color on your comment.

The fact, as I said, the fact is that the pricing is well over last year, same time over last year. Now I don't have data going back, further back. But I believe that's -- it's a combination of weak markets. The European economy is really bad. Secondly I think little oversupply as well and less consumption. And that may be, hopefully that's what we are hoping that this is a market, happened during this time of the year, and we are hoping that by middle of next month hopefully that this situation can change and improve to the better. But that it is as we speak today.

And what are your expectations for 2013? Many, there's a lot of speculation out there, not speculation, but just projections that supply out of Latin America is going to be tight for at least the first part of 2013, largely due to Ecuador. So I was wondering if you could give us what your thoughts are on that and how you think that will impact the North American contracting season for 2013?

As I see today, have that day truly Ecuador is less in supply in volumes compared to the previous years on a weekly basis or monthly basis. But however for Central America has been flushed with fruits during the last 3, 4 months. As a matter of fact, we have been ourselves supplying a lot of fruit, extra fruit that we don't go to our traditional markets into the Mediterranean for spot sales during the last 3, 4 months. And we still have maybe extra fruit for the next couple of weeks. And then we see, we'll see back a normal trend to the market. Now hoping that no unforeseen events take place, I mean, some type of floods or wind or weather related issues, I believe that we should see some tightening as we go to the end of the year, early next year. But unfortunately what we see as well is a lot of pressure on the pricing -- contracted pricing for the next year in North America, which is not a very good sign.

You're saying retailers they are wanting to lower prices in 2013?

Yes.

Now you talk about you've been selling some fruit into the Middle East and all. Your volumes for the quarter were down 6%. So that does not sound like excess volumes to me. Just wondering what caused your volumes to be down 6% and are your shipments into core Europe down much more than that. So that's why you're shipping into Middle East or just, if you could help me to resolve those 2 different scenarios?

That is true I mean that the market in Europe would not take these volumes. As a matter of fact, during the summer we have to reduce the volume drastically into Europe and we moved a lot of that extra fruit into the Mediterranean to be sold to the non-traditional markets like Turkey, Iran, Iraq, all these Mediterranean countries. And they were depressed as well. But as far as our markets as well don't forget that we're having issues, now in Asia. China has almost stopped import of Philippine bananas because of sanitary issues. Now we don't know if it's political or sanitary but they almost stopped, very few volumes go into China now from the Philippines. At the same time, Iran has not been able to import anymore the volumes that they used to take this not even 10% of what they used to take from the Philippines or from even other sources like Central America. So, all this factors have depressed the market in Japan, in Korea, and in the Middle East as well. I mean these volume that we're not being able to ship to China and Iran has been diverted to other markets, which is there is not too many choices there except that the Middle East markets and either flood more into Japan and Korea, which has depressed the prices, as well. And that it's not our problem only but it's a universal problem for all other suppliers. So, we are having issues now in Asia as we speak and we're having issues now in Europe, hopefully that this situation in Europe can improve shortly.

If you could give us a sense for Q3 that 6% volume decline is for total bananas. Was the majority of that related to the issues in Asia or if you could just give us a sense of how that broke out by geography?

Richard, do you remember that?

Heather, total volume in Europe was down 30% and in Asia was down 11% but most of it as Mohammed said was in Northern Europe and that was a business we decided to walk away from couple of quarters ago.

This is the U.K. business?

No, no all over Europe, I mean all over Europe --

All over Europe. And then a final question. Your balance sheet is very strong, and just if you could give us more color on what your thoughts are there? You basically have no net debt. Wonder if you could give us a sense of where your bias is? Is it acquiring assets? Would you consider a special dividend given the possibility of tax rate changes next year or just how -- where your priorities lie?

As Richard, I think in the last phrase that he mentioned that we are looking right now at possible acquisitions, buying back all shares and continuing with our regular dividend that we pay. Also, we are looking at several alternatives which as you said, I agree with you that we have a very strong balance sheet and know that and we are looking at several options which I hope we can by the next 2, 3 months can have some news.

Is your focus more on like the Middle East in growing out those assets? Would you like to bolster your prepared food business? I mean, what would your preference all things being equal?

Well, I mean, we have invested already a lot in the Middle East and all these investments as a matter of fact are just starting operation, be it the can juice plant we just started a few weeks ago, frozen potatoes project also started couple of months ago, all these projects have just started operating. And we will see the results as we go forward in 2013 and we are building up the fresh cut operation there further. So, we have done -- the investments in the Middle East have been done and there will be additional investments but not as large as we did in the past. Africa is our next target. We are planning to hopefully start juice operations in West Africa in one of the major markets there hopefully by 2013. So, we are looking at where our -- the best way to employ our funds and make returns on them. And that includes everything. The door is open for many alternatives.

[Operator Instructions] And due to no response we will move on to the next caller. We will now hear from Eric Larson with CL King.

Just a couple of questions, first on the prepared foods side. Obviously, you had a big increase in sales and it was probably due to the poultry business. You obviously didn’t get a lot of profit translation on that unless your core U.K. business was little softer in the quarter. Is it really that you had good poultry sales and there wasn’t a lot of profit translation there or was the core piece weaker in that mix?

You are right, Eric. The weaker part of the core business was the industrial sales, the concentrate, those products, there is a bit of an oversupply. So those products were where the weak sales were.

Okay, and why such a nice pickup in your poultry business? Is it sustainable or is it one-off event for the quarter?

No, no, it is sustainable. As a matter of fact last year, probably I said it in our conference call that we had a strike of disease, a lot of diseases or viruses that struck the France and the region. I am not only saying our operation but in the region, which has affected productivity and yields and increased costs tremendously. So that was an event that was exceptional last year. And now we are getting back to normal pattern and better production, but don’t forget that also we have much higher feed cost than the years before. So, there are several factors but I believe that, so far, national poultry is back on track and hopefully that should show us better results as we go forward, as long as we don’t get into any like unforeseen events.

And then, just a little follow-up on your total ocean freight costs. Obviously, oil prices have gotten little bit weaker due to I think just a general global softness, economic softness, but is it a combination of that and your shipping rates? Could you give us a little more flavor as to what that is, and should we expect some lower ocean freight going forward?

No, I don’t think that we should expect that I’m sure that you heard like everyone else that the container ship companies are increasing their freight rates worldwide, I mean, they're between $50 and $100 and $2,000 in some cases and almost all the routes around the world. And that probably would translate into higher freight going forward. Using our leverage as far as Fresh Del Monte is concerned and our flexibility and our logistics operation have given us probably an advantage over others in terms of putting our resources in a much better manner which translated into better freight rates. Hopefully, we can maintain that and improve even further as we go forward in the future.

Now, Mohammad, a few years ago I remember some of your own ships were pretty old and I think you scrapped a few and you moved -- your strategy then was to move more toward leased ships. With your balance sheet, I would assume if freights are going back up then the cost of boats are going up as well. Have you shifted your strategy, maybe use your balance sheet to buy a ship or 2 now or are you going to stay on your same path?

Now, you are reading our minds. We already brought 3 ships in the last 3 months.

I figured that may have happened, yes, okay. And then, what you’re doing is just terminate, as your lease runs out on the other ships, you’re just dropping those ships, is that correct?

Not necessarily but we scrapped few of the old ships which already were overage and we are replacing the 3 ships that we have bought recently have been actually late -- almost '90. So they are good, very good condition second-hand ships.

Well, you must be getting good prices on them because your CapEx numbers have been you know, very reasonable and so you must be finding good rates on those ships.

Well, we were lucky, I would say.

Okay. Yes, I'd rather have luck sometimes than intelligence, believe me. It works more often. And then finally, Richard, on ForEx, you’re hedging practice there again, I know you were about -- last quarter you were about 50% hedged for the year. Have you gone forward on anything in 2013 -- where are you on hedging? Let me just leave it at that.

Yes, on 2013, we always try to be around 50%. So, we are not quite there yet on 50%, we are still working on putting those together. We are where we usually are at this time.

And we will hear next from Diane Geissler with CLSA. Please go ahead, ma’am. [Operator Instructions] Diane, you do have an open line, please go ahead. Okay, ladies and gentleman, this is all the time we have allotted for the question-and-answer session. I'll now turning the call back to Mohammad Abu Ghazaleh for additional remarks.

Thank you very much. I appreciate your presence and under the circumstances that you are facing now in the northeast, and I hope everybody will be safe and in good shape and let’s hope that tomorrow will be a normal day again. Thank you very much and talk to you soon, bye.

Ladies and gentleman, now we will conclude today’s presentation. Thank you for your attendance. You may now disconnect.