Fresh Del Monte Produce Inc. (FDP) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Fresh Del Monte Produce’s Incorporated First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Christine Cannella. Ma’am, please begin.

Thank you, Liz. Good morning, everyone. And welcome to Fresh Del Monte's first quarter 2015 conference call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Richard Contreras, Senior Vice President and Chief Financial Officer. This call complements our first 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 two 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. We show solid progress toward our strategic initiatives to improve our long-term performance and increased our competitive position during the first quarter of 2015. We were successful in expanding our market reach in North America, Europe, and Asia, and we further increased penetration of our brand awareness highlighted by new innovative distribution channels in the Middle East. During the quarter, we benefited from strong demand for Del Monte bananas in North America and higher sales in our other fresh food use segments, supported by higher demand and increased selling prices in our fresh-cut and avocado product lines. This lead to a $26 million increase in net sales despite the unfavorable impact of foreign exchange. Even with these positive developments, our earnings performance was not in line with our expectations as a result of weather challenges in production areas in Florida, Chile, and Costa Rica, that adversely affected our earnings during the quarter. We experienced significantly higher banana procurement cost, decreased tomato and grape quality, along with reduced banana and pineapple yields. Looking forward, we have a strong track record of taking expenses out of the business and creating operational efficiencies, and we are steadfastly committed to that mission. We also see significant opportunities for continued growth in the value added product line through new products and channel development and we are investing heavily in these areas. We remain focused on seeking opportunities to tap unmet consumer needs for Del Monte’s healthful, wholesome, and nutritious fresh food use and prepared food products. Before I turn the call over to Richard, I would like to highlight that banana selling prices are too low, and this cannot be sustained. I want to make it very clear that pricing must be increased. I have challenged all of our employees to take immediate steps to improve margins in our banana business to keep pace with economic conditions. At this point, I would like Richard to take over.

Thanks, Mohammad, and good morning. For the first quarter of 2015, excluding asset impairment and other charges on a comparable basis, we reported earnings per diluted share of $0.83, compared with earnings per diluted share of $1 in 2014. Net sales increased $26 million, or 3%, to $1 billion, compared with $982 million in the prior year. Gross profit decreased $6 million to $101 million, compared with $107 million in 2014. Operating income for the quarter was $58 million, compared with $63 million in the prior year, and net income was $44 million, compared with $57 million in first quarter of 2014. Now, I will turn to our business segments. In our banana business segment, net sales increased $17 million to $454 million, compared with $437 million in the first quarter of 2014, primarily a result of increased demand in North America offset by unfavorable foreign exchange rates. Overall, volume was 6% higher than last year’s first quarter driven by increased demand and new customers. Worldwide pricing decreased $0.32 per box to $14.89 per box primarily due to unfavorable exchange rates. Total worldwide banana unit cost decreased 3% primarily driven by lower ocean freight and transportation costs. And gross profit increased $5 million to $36 million, compared with the first quarter of 2014. In our other fresh produce business segment for the first quarter, net sales increased $11 million to $465 million, compared with $454 million in the prior year. Gross profit decreased to $51 million, compared with $65 million in the first quarter of 2014. In our gold pineapple category, net sales decreased by 8% to $122 million during the quarter, primarily due to lower sales volume in North America and Europe. Overall, volume decreased 13%, due to lower yields from our plantation in Costa Rica brought about by poor weather conditions. Unit pricing was 6% higher and unit cost was 5% lower driven by lower food and transportation costs. In our fresh-cut category, net sales increased 8% to $95 million, compared with $88 million in the prior year. The increase was primarily the result of higher sales in North America driven by increased sales volume with existing and new customers, continued expansion in multiple distribution channels, along with higher selling prices in North America. Overall, volume was 7% higher. Unit pricing increased 1% and unit cost was 3% higher than the prior year. In our melon category, net sales were in line with the first quarter of 2014. Volume increased 11%, the result favorable growing conditions in Guatemala. Unit pricing was 10% lower due to higher industry supply and unit cost was 3% lower. In our non-tropical category, net sales increased 4% to $130 million, compared with $125 million in the first quarter of 2014. The increase in sales was primarily attributable to higher sales volume and pricing in our avocado product line. Volume increased 15%. Unit pricing decreased 9%, the result of quality issues with products sourced from Chile, and unit cost was 3% lower than the prior year. In our tomato category, net sales increased 38% to $26 million, compared with $19 million in the prior year, driven by higher sales volume. Volume increased 97%, due to our new production operations in Florida. Pricing was 30% lower as a result of our shift to a higher percentage of our sales in bulk form versus value-added re-pack. Additionally, inclement weather in our production area in Florida contributed poor quality. And unit cost was 7% lower. In our prepared food segment, net sales decreased to $90 million, compared with $91 million in the prior year, and gross profit was $2 million higher. Now moving cost for the first quarter, banana fruit cost, which includes our own production and procurement from growers increased 3% worldwide and represented 31% of our total cost of sales. The increase in fruit cost during the quarter was primarily driven by higher procurement cost and shortages forced us to buy higher price fruit in Ecuador at spot prices and higher production cost on our farms in Central America. Carton cost decreased 4% and represented 3% of our total cost of sales. Bunker fuel cost per decreased 35% and represented 2% of our total cost of sales. And total per unit ocean freight cost during the quarter, which includes bunker fuel, third party charters and fleet operating cost was 13% lower. For the quarter, ocean freight represented 11% of our total cost of sales. The foreign current impact at the sales level for the first quarter was unfavorable by $29 million. And at the gross profit level, the impact was unfavorable by $13 million. Other expense net for the quarter was $6 million and is comprised of foreign exchange losses. As far as our stock repurchase plan during the first quarter, we repurchased approximately 2.56 million shares for approximately $70 million. At the end of the quarter, our total debt was $342 million. We recently announced that we entered into a new unsecured five year credit facility. The $800 million facility bears interest at a rate of LIBOR plus a margin that varies with the company’s leverage ratio. That rate is currently LIBOR plus 1.25%. The facility replaced our former $500 million revolving credit facility that was said to expire in October of 2017. We plan to use the proceeds for general corporate purposes, which may include working capital needs, capital expenditures, the possible funding of acquisitions, and possible share repurchases. Income tax expense was $5 million during the quarter, compared with income tax expense of $6 million in the prior year period. As it relates to capital spending, we spend $25 million on capital expenditures in the first quarter of 2015. We expect to spend approximately $200 million in 2015. This concludes our financial review. We can now turn the call over for Q&A.

[Operator Instructions] Our first question comes from the line of Mark Williams with Athlos. Your line is now open. Please go ahead.

Good morning. Thank you.

Good morning Mark.

Mohamed you talked about the need to raise price, now given some of the pricing and currency headwinds in the near term with the euro and the ruble, doing what they are, do you expect pricing to improve in the near term?

Well as I can tell you, our objective is actually our major headwind and most of our sales increases that you saw in bananas that we – that Richard just mentioned few minutes ago has been in other markets than North America. And that’s where our major, let’s say emphasis will be on North America prices because it’s all contract pricing and these contracts have not been favorable to us at all in the last several years, you know prices haven’t increased for so many years, in spite of inflation and additional course that we incur every year. And when I said they have to increase prices, I meant for North America in particular because the other markets are not contractual and the gain on the spot actually is when the market is high we make our money and when markets are soft we can still survive, but in North America since everything is contracted, we have very little room to enjoy high markets during the shortages and still have to supply our customers even though we face so many issues like we said, we have incurred tremendous force during that quarter just to secure volumes to satisfy our customers and full fill their contracts, which in my opinion is unfair because we have incurred tens of millions of dollars to be able to meet our contractual demand and that has a cost and I believe that this cost should be reflected in the price and that’s what we are planning going forward in the future. I mean new contracts that we are going to discuss needs to have some adjustments.

Very well, that makes sense and in that same after a quarter of ownership in Chiquita haven’t changed hands, are you seeing any signs of maybe some more rational pricing behavior maybe improving some of the contractual pricing going forward? Do you expect further consolidation?

I cannot speak for my competition. I can speak for myself. We are not running after market share, we want to make sure that whatever we felt makes money to our shareholders and that’s the most important, that’s the bottom line. We are not here to just meet our customers demand at the very low prices, but not going to happen.

Okay. And the banana volume however has remained strong in North America, are there any near term benefit that you have been receiving from the California drop on demand?

I couldn’t hear that last …

Has the California drop benefitted your demand in North America at all?

No, no. the demand is good. The demand is steady and good, but however the pricing for us and I believe for the industry in general is really doesn’t reflect the cost that we are incurring and securing this fruit. It is not only securing the fruit, it’s times like when you don’t have all of a sudden because of weather condition you lose supplies and then you have to scramble around and go back $5, $6, $7, $8, and more per box to secure that supply and not only that, but all your logistics is messed around, I mean because you know you have to move ships from end to the other, you have to re-organize, you have to come to different ports in the North America and then have to shift from off course, when I mean off course you have to ship let’s say in the Eastern side, the Closter or Wilmington or whatever and then you cannot reach because of weather conditions and you know what happened during this winter in Northeast. The freeze and snow and we have to let they unload in Manatee, which is in Florida or unload in the Gulf Coast and then transship all the fruit all the way to the Northeast in order to keep our customers supply. Now this is our duty and this is our obligation and we have no question about that, but you see that has a course and that course has to be recognized and that has to be included in the price going forward because we cannot afford as a company to keep supplying at this price.

Sure. you speak about supply having to contract supply, has the dollar strength helped you or at least made you a little bit more incline to look for new sources of supply saying North and South America or Central America?

No, we, I mean as we get new customers and demand increases we go out after that additional supply, but the dollar hasn’t had a big impact on that?

Okay. And you did maintain, I guess the, the $20 million in capital expenditures, can you just remind me what that spending, are you guys spending that on again?

We are – little we are expanding our production capacity in different parts of the world. We are expanding our production in the Far East. We are doing many things actually on the concentrate front, on the production front, on securing new sources of supply, so all productive let’s say spending, but it’s all very well invested.

Okay. Actually speaking of the Far East, we heard – it may not affect your market that much, but spread of the Panama disease in Australia and there appears to be some research going on a giant Cavendish or disease resistant strain. What are your thoughts on that Mohammad? Do you think – are you guys working on anything, do you think there is anything in the near-term [indiscernible]?

We are definitely looking at – as I speak, there is nothing to replace the Cavendish, but we do have other strains, other varieties that might be more resistant to this. We cannot promise anything but however this is a big nightmare and if it happens, you can’t get lots of bananas for $100.

Right. So where were – on the other fresh side, the lower pineapples yields, where those caused by Costa Rican weather and how long do you expect that will last?

Again, I was in Costa Rica just last week, I came back couple of days ago and the weather there is very erratic, very volatile especially on the Atlantic side. And we’ve got to know, I mean it’s something that we cannot control. Sometimes you expect the production to be consistent and then all of a sudden it’s not consistent. Sometimes you get so much rain and then you cannot even spray the trees. So we expect that the weather hopefully should normalize going forward, but we definitely had very bad weather during the last I would say 12 months or five months.

And has that led to a tightening of supply or whether you are seeing a supply for pineapples?

Are you talking pineapple or bananas?

Pineapple.

You are talking pineapples. I think for pineapples, as far as we are concerned as Del Monte, I think we have enough supplies to fulfill our demand. There might be shortages in my opinion for the Atlantic side of the country where most of our competition is and I believe there will be shortage going forward and that we will see a big shortage probably by the beginning of next year.

Okay. And lastly, you obviously executed a big share purchase this quarter and it appears that some interest sales [ph] have continued. Can you just explain that dynamic and I guess what you would see going forward on the use of capital?

As we are opportunistic – if we see the price rise and if we see we have capacity to buy we will do that. As Richard mentioned a while ago, our new financial deal is for several reasons and none of them is the possibility of a buyback.

Great. All right. That’s all my questions. Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from the line of Eric Larson with Janney Capital Markets. Your line is now open.

Eric?

Hi, all, can you hear me?

Yes, Eric. You can speak.

Sorry about that. I thought I was asking my question already. I said, Mohammad, you never seem to catch a break, you get some benefits on bunker fuel and then you give the majority of it back on your procurement cost, so it’s unfortunate. Let me ask this question, Mohammad, on the supply of bananas, obviously if you are sourcing out to Ecuador, you need volume to supply your contracts. Is there anything going on in terms of the number of plantations or it sounds like it’s all weather related or the majority, but are you seeing a shortage of or maybe some shut down of some poor banana capacity or how would you look at that?

No, we don’t see actually shut down or lower banana. It’s a consistent – I would say more or less it’s the same product, the same production, it’s just yearly. I mean you are supposed to get extra amount of boxes per hectare and then all of a sudden you see that it’s like 30% or 20% less, plus the qualities as well is not there. So you have more rejects and discards than what your normal percentage is, which means at the end of the day less fruit to export to the markets where you have to go and compensate some other else which in this case is Ecuador.

Yeah. And that – I was just making sure that it was mostly weather related and not something from a broader term perspective where the market might be tightening as well by the number of plantation, so that’s helpful. The other question that I have is, is related partially to your avocado business. You said that, that was particularly strong. You had good volumes. Is that a function of market demand or is that a function of bigger supplies?

No, its market demand and better sales team and sales force from our side as well. So it’s a two-fold effort. It’s the market demand plus our better penetration in the market and reaching more customers and getting to new places.

Okay, good. And then this question might be for Richard. Richard, I am sort of – I’m blanking on what your guidance was kind of for the year at the end of your fourth quarter for your CapEx. I thought it was more like a $150 million, but you stated $200 million this year. Is this kind of a one year – you’ve been spending more capital in the last few years for all your growth initiatives, but is it particularly high this year and where is the majority of your capital being spent?

It is a little bit higher this year but in the fourth quarter we did say $200 million as well.

Okay, that was my…

We would have expected that all along. As Mohammad said, we are spending a lot of it in the Far East in the Philippines to feed our increasing demand in the Middle East and in addition Asia Pacific and a lot of products, just a lot of projects around the world. As we enter into new products, we start producing them ourselves as close to co-packing them, we’ve got some concentrate plant in Latin America as we mentioned is pretty much across the board.

Okay, good. And then finally, Mohammad, when you made a strategic decision not too long ago to start producing your own tomatoes in the U.S. both in the Carolinas as well as Florida, does that seem like a strategy that’s working for you and you might even pursue more vertical integration on that side.

Actually, let me [indiscernible] honestly, the tomato unfortunately for the last several months, the weather hasn’t been helping us a lot in Florida and even in Virginia. So we didn’t had a very good let’s say outcome of these crops. We are restructuring our operation and streamlining our people. So I believe that within the next month or two with the new season coming soon, our operation will be getting better. Don’t forget that we are new into this as well like a learning kid, so – but I have very high confidence that we will be on the right track in a very short period of time.

Okay, good. And then just one final question and I’ll pass it over to whoever else is on the line. It looks like possibly that your banana supplies will continue to be relatively tightened in the second quarter. That might even be helpful for you in Q3 and Q4 when – give me a little bit of a timeline on when you might see the supply actually come back and improve a bit. Obviously I am asking to be a weather forecaster but how should we look at the next six to 12 months on banana supplies?

As we speak, the supply is coming back to normal. So we don’t have that what we faced during the last three, four months. It’s over, now all supplies are back on track, normal again. But who knows, in three, four, five months, what will happen.

Yeah. Okay. Thank you very much.

We can discuss [ph] this offline.

I am showing no further questions in the phone lines at this time. I’d like to turn the call back to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Thank you everyone and I appreciate your attending this call. I hope to speak to you with better news on our next call. Thank you very much and have a good day.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.