Fresh Del Monte Produce Inc. (FDP) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Fresh Del Monte Produce Incorporated Fourth Quarter and Full Year 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 be given at that time [Operator Instructions] I would now like to introduce for today's conference, Ms. Christine Cannella, Assistant Vice President of Investor Relations. Ma'am, you may begin.

Thank you, Chelsea. Good morning, everyone, and welcome to Fresh Del Monte's fourth quarter 2015 conference call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer, and Richard Contreras, Senior Vice President and Chief Financial Officer. This call complements our fourth quarter and full year 2015 press release we made public this morning. 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 the property of Fresh Del Monte Produce. Redistribution, retransmission, or rebroadcast of this call in any form without our written consent is strictly prohibited. Let me now turn this call over to Mohammad.

Thank you, Christine and good morning, everyone. I am pleased to report that the 2015 momentum in sales growth was again very strong in the fourth quarter. Net sales for the quarter grew by 5% to $978 million, compared with $929 million in the period. As a result, in 2015 we surpassed $4 billion in sales for the first time in the company's history. We also increased margins of several products in our prepared food and other fresh produce businesses during the fourth quarter, despite significant currency headwinds. Throughout the year and keeping with our vision and strategy, we invested for our long term growth by building our core businesses. We expanded our footprint by opening new distribution centers and fresh-cut facilities. We advanced our global presence through new sourcing initiatives and we increased our market share in several product categories, led by strong sales of our other fresh produce business. We continue to capitalize our global position as the leader in fresh-cut produce with substantial growth in this category across all regions. The fresh-cut business remains attractive for farewell group with no globally branded competition. We believe that its tremendous potential for us to leverage our experience and expand our global distribution network to meet rising consumer demand for health for convenient and safe Fresh Del Monte branded products. We further benefited from our competitor advantage in the high margin Avocado business in 2015. We have built an impressive foothold in North America with avocado sales 34% higher over the prior year. However, these achievements were more than offset by unusually strong banana production cycle in the last two months of 2015 that resulted in a substantial industry oversupply that overwhelmed already saturated global banana markets. Today I'm happy to report the markets are better and pricing is climbing. The oversupply was an unfortunate short term situation that resulted in us missing several key financial targets in the fourth quarter and constrain our ability to deliver optimal earnings for the full year. As we move forward into 2016, I'm excited about our future prospects and look forward to continue pursuing our vision of having Fresh Del Monte Produce uniquely positioned to meet expanding worldwide consumer demand for health food products. At this point I will ask Richard to discuss our financial results.

Thanks, Mohammad, and good morning. For the year 2015 excluding adjustments on a comparable basis, we reported earnings per diluted share of $2.49 compared with earnings per diluted share of $2.74 in 2014. Net sales increased 3% to $4.1 billion compared with $3.9 billion in the prior year, and gross profit decreased to $343 million compared to $365 million in 2014. Operating income for the year was $161 million compared with $185 million in the prior year and net income was $132 million compared with $154 million in 2014. For the fourth quarter of 2015 again excluding adjustments on a comparable basis we reported a net loss of $0.11 per share compared with earnings per diluted share of $0.20 in the fourth quarter of 2014. Net sales increased 5% to $978 million compared with $929 million in the prior year and gross profit decreased to $45 million compared with gross profit of $63 million in the fourth quarter of 2015. Operating loss for the quarter was $6 million compared with operating income of $15 million in the prior year and net loss was $6 million compared with net income of $11 million in the fourth quarter of 2014. Included in the adjustments to arrive at comparable net loss in the fourth quarter of 2015 was a $66 million write-off of goodwill related to the tomato and vegetable business that we acquired in North America in 2003. Now as I turn to the segments I will only give fourth quarter statistics as reported. In our banana business segment, net sales increased $35 million to $474 million compared with $439 million in the fourth quarter of 2014, a result of higher sales volume. Overall volume was 15% higher than last year's fourth quarter. Worldwide pricing was down 6% or $0.82 per box to $12.94 per box. The lower selling prices were primarily in response to competitive pressure from higher industry supply as well as unfavorable exchange rates. Total worldwide banana unit cost was in line with the prior year period and gross profit for bananas was a loss of $25 million compared with gross profit of $6 million in the fourth quarter of 2014. In our other fresh produce business segment for the fourth quarter, net sales increased $17 million to $418 million compared to $401 million in the prior year period. Gross profit increased to $54 million compared with $49 million in the fourth quarter of 2014. In our Gold Pineapple category, net sales were $133 million compared with the $142 million in the prior year, a result of lower volume in our production areas. Overall volume decreased 9%. Unit pricing was 2% higher due to increased pricing in the Middle East and North America and unit cost was 4% higher. In our fresh cut category, net sales increased 36% to $122 million compared with $90 million in the prior year. The increase was driven by higher demand in all of our regions along with higher selling prices in North America. Overall, volume increased 36%, unit pricing decreased 1% and unit cost was 2% lower than the prior year. In our avocado category, net sales increased 27% to $39 million, compared with $31 million in the prior year. Volume increased 42%, price was 10% lower and unit cost was 15% lower. In our non-tropical category, net sales decreased 15% to $37 million compared with $43 million in the fourth quarter of 2014. Inclement weather in Chile earlier in 2015 resulted in lower production and quality issues for Chilean products. Volume decreased 2%, unit pricing decreased 13% and unit cost was 15% lower than the prior year. In our prepared food segment, net sales decreased 4% to $86 million compared with $89 million in the prior year period and gross profit was $8 million higher than the prior year. Now moving to cost in the fourth quarter, banana fruit cost, which includes our own production and procurement from growers, increased 2% worldwide and represented 36% of our total cost of sales for the fourth quarter. The increase in fruit cost was the result of lower yields and higher production cost and company owned farm in Costa Rica and higher spot pricing in Equator. Cotton cost decreased 4% and represented 4% of our total cost of sales. Bunker fuel cost decreased 47% and represented 2% of our total cost of sales and total ocean freight cost during the quarter, which includes bunker fuel third party charters and fleet operating costs was in line with the prior year period. For the quarter, ocean freight represented 10% of our total cost of sales. As to foreign currency, the foreign currency impact at the sales level for the fourth quarter was unfavorable by $18 million and at the gross profit level the impact was unfavorable by $5 million. Other expense net for the quarter was $3 million compared with other expense net of $5 million in the fourth quarter of 2014. As far as our stock repurchases, during the fourth quarter we repurchased approximately 160,700 shares for approximately $6.3 million. Total debt at the end of the quarter was $254 million and income tax expense was a $3 million benefit during the quarter, compared with a $1 million benefit in the prior year. As it relates to capital spending, we spent $132 million on capital expenditures in 2014 and we expect to spend approximately $180 million in 2016. This concludes our financial review. We can now turn the call over for Q&A.

Thank you. [Operator Instructions] And our first question comes from the line of Jonathan Feeney with Athlos Research. Your line is now open.

Good morning. Thanks for the question.

Good morning, Jonathan.

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

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

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

There are unfortunate I would hate to say that, but unfortunately we see a lot of drug smuggling in banana ships and pineapple containers, which they spoilt this whole picture. It seems that bananas is becoming a very easy conduit for this trade and the banana becomes irrelevant compared to the other cargo inside and I’m sure that business is going on this is unfortunately effect that will have because we read it in the news all the time. Discovery of certain drugs into ships at different ports which spoils the whole business and prices that we see in the markets in Europe and Russia and doesn’t make any sense unless there is some others subsidies that make up for this business. So I think what really is distorting this business is not supply and demand, its other reasons that we don’t have any control of.

Do you think that -- is that more true in the fourth quarter of this year that in general this year than it’s been in the past?

I’m sorry.

You said, you mentioned the drug smuggling and the subsidy aspects.

No, no the drugs has been going on for throughout the year. It's not only fourth or fifth. It's ongoing, it's an ongoing business.

And has that become of greater effect do you think recently or is it just…

No I'm just saying in general. I’m talking in macro vision, when you see prices in the market and central market that is $4, $5 a box and then still that market repeats using the same volumes. It makes you wonder how can anybody can survive with such loses forever. I think what is lacking is more interventional and government control and government let's say supervision worldwide and I think that is something that we as a company cannot do much about.

So why don't some of the Latin governments had been enforcing minimum reference prices a little bit more aggressively? Would you say that’s still going on?

The only one is Ecuador actually and I think that I'm not very successful at that to be honest with you because they're not supplying around. You cannot show pricing. You have to let supply and demand and the markets decide what is the price and it wouldn’t work if you put the reference price or not. It might drive people to go somewhere else and buy the fruits from other sources.

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

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

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

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

Are you selling avocados in the same place as you’re selling bananas and pineapples in the U.S. using the same relationships and sales force.

Yes of course we're not only bananas and pineapples, but we have so many products that we sell to the same customer. So we have here different situation than other suppliers.

Great, last question is with some of the pretty dramatic changes in currency, strengthening of the dollar, change in global capital flows for a long time it was very hard to get once hands on land and particularly some of your more deer markets like Honduras or Guatemala or Costa Rica, are land prices still as for land like yours still as high as they everywhere.

Yes, they are -- you see they never, they don’t care above the currencies, for your info currencies etcetera America hasn’t been depreciating as much as other countries. So their currency has been more or less stable in terms of strength. However land owners, they don’t talk about local currencies, They always talk about dollars, So, price haven't come down as a matter of fact may be, being stable or on the rise as well.

Understood. Okay, thank you very much for your time.

My pleasure.

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

Yeah, hi good morning.

Good morning, Mitch.

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

Yes, that’s of course.

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

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

I’m sorry.

And it depress the market.

Yeah, so in the fourth quarter was an over-supply condition, but you're talking -- generally speaking, we’re talking the -- you are seeing pressure from commodity bananas being priced at rationale levels, is that -- over the longer -- over longer period is what you're saying.

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

Okay. So just getting back to the fourth quarter issue, you talked about obviously it was a big oversupply and you said there is an explosion of production in the farms I think Costa Rico, Philippines everywhere.

Yes.

But, you guys had lower yields on your farms in that period and therefore higher production cost is that correct? You guys didn’t see the oversupply or…

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

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

Yeah, that was an annual comment.

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

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

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

That is true, that is true we have a coverage, today we have 24 DCs across the country and we can reach any customer at any time within two hours range. So that tells you the story. That tells where we are today and these DCs don’t deal only with avocados or bananas or pineapples. Probably they have 30, 40 different types of fruit and vegetable that they give to their customers -- the customer base where they are in. And I think that tells you the leverage that we have with in the business in general, but when you cater to the customer the pressure that you need for that avocado, the condition that is arrives into their store and the velocity of sales, which is very important because we demonstrate to everybody that we can sell more but avocados in their store than what they have been selling before. And that has been demonstrated and proven and that I think in my opinion another way why customers slowly believe that Del Monte has the average -- they leverage and a better service than anyone else in the market.

So and these are all branded avocados, is that correct?

It’s all Del Monte, yes.

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

It’s the volume. It’s supply and demand, but don’t forget we buy cheaper, we sell cheaper. So its…

Yeah, okay. And then just couple of things, inventories were down 7% year-over-year. What’s driving that?

That was the conscious effort to focus on less packaging and a lot of it was conscious, better management of inventory let's say, more control.

Okay. It’s not -- it’s okay and then when I look at your balance sheet still underleveraged, you’re buying back stock, is that -- what are your thoughts on your balance sheet and capacity?

It’s an ongoing process.

Okay. Meaning ongoing where you are -- would you look in an acquisitions have you is -- have an appetite for that what’s…

If that is the right thing, yes we will, but wouldn't do it unless it is very, it's an added value or very rational to us otherwise.

Are there a pipeline of ideas or do you have -- is there anything in pipeline or is it just -- there is nothing happening at the moment.

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

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

Some of that Mitch, some of that is legal cost that's just ongoing cases and so on, nothing new, but just the states that they're in and then some of it is add management in certain regions where we're growing. Yeah we're in where -- all the expansion is obviously the administrative cost will increase there in these new areas.

Okay. Thank you very much. Appreciate your time.

Thank you.

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

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

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