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Executives

Mohammad Abu-Ghazaleh - Chairman and CEO

Richard Contreras - SVP and CFO

Christine Cannella - Assistant VP, IR

Analysts

Heather Jones - BB&T Capital Markets

Mark Williams - Janney Montgomery Scott LLC

Eric Larson - CL King & Associates

Fresh Del Monte Produce Inc. (FDP) Q4 2012 Earnings Conference Call February 19, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's Fourth Quarter and Full Year 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 conference, Christine Cannella, for opening remarks.

Christine Cannella

Thank you, Camille. Good morning, everyone, and welcome to Fresh Del Monte's fourth quarter and full year 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 complements our fourth quarter and full year 2012 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 in 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 turn this call over to Mohammad.

Mohammad Abu-Ghazaleh

Thank you, Christine, and good morning, everyone. 2012 was a good year for Fresh Del Monte Produce. Our overall financial results for both the full year and fourth quarter reflect the solid execution of a number of initiatives we put in place earlier in the year. Our performance also underscores our resilience and core competencies of industry experience, innovation and financial discipline as well as our focus on long-term growth.

I would like to share a few highlights from 2012 with you. During the year, we achieved significant growth in our fresh-cut business. We focused on further solidifying our leadership position by aggressively increasing our market share and customer base in North America, the Middle East, Europe and Asia. We expanded our product line and non-traditional delivery channels such club stores, convenient stores, foodservice operators, quick serve and casual dining outlets.

Over the past 13 years, we have established an impressive foothold in the fast growing fresh-cut business by expanding our distribution and marketing capabilities to target a more diversified balance of global consumers. We are pleased to share with you that today we are the largest branded fresh-cut food supplier in the United States. Looking forward, we see significant potential in our branded fresh-cut category. Healthy eating habits and convenience are just two of the many trends that drive our strategies and opportunities to increase our global market share in 2013 and beyond.

We're justifiably proud of the results of our decision to take over the marketing, sales and distribution of Del Monte's fresh produce in key markets in Southern Europe. As a result of our decision, we delivered substantial profitability improvements during the year. We anticipate that our fresh business in Southern Europe will remain strong as we continue to increase our customer base.

In 2012, we continued to focus on product innovation, efficiency improvement and aggressive cost reduction in every segment of our business to increase profitability and to build a better business infrastructure for the future. We took steps to decrease costs and increase productivity in our production areas and our facilities. We increased efficiencies in our global logistics network and we also strengthened our prepared food business by introducing new products.

Before I turn the call over to Richard, I would like to reiterate how proud I am with our results. In many ways, 2012 was a tough year. In Europe, we contended with an intensively competitive marketplace, decreased demand for fresh produce and continued economic uncertainties. We experienced trade disruptions in some selling markets in Asia and the Middle East and aggressive banana contract pricing by competitors in North America.

We entered 2013 with tremendous growth opportunities. We have the powerful supply chain, a world-class brand and the financial strength to further our expansion in emerging markets and introduce our products to new and existing customers through an increasing range of distribution channels.

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

Richard Contreras

Thanks, Mohammad, and good morning. For the full year 2012, excluding asset impairment and other charges, we reported earnings per diluted share of $2.54 compared with earnings per diluted share of $1.82 in 2011.

Net sales decreased 169 million to 3.4 billion compared with 3.6 billion in the prior year and gross profit increased to $343 million compared with $318 million in 2011.

Also excluding asset impairment and other charges, operating income for the year was $166 million compared with $131 million in the prior year, net income was $147 million compared with $107 million in 2011.

For the fourth quarter of 2012, excluding asset impairment and other charges, we reported earnings per diluted share at breakeven compared with a net loss per diluted share of $0.15 in the fourth quarter of 2011.

Net sales were $777 million compared with $781 million in the prior-year period and gross profit increased to $39 million compared with gross profit of $29 million in the fourth quarter of last year.

Also excluding asset impairment and other charges, we incurred an operating loss of $2 million compared with an operating loss of $20 million in the prior-year period. And net income for the quarter was $200,000 compared with a net loss of $9 million in the fourth quarter of 2011.

Now, as I turn to our segments, I will focus on fourth quarter statistics as reported. In our banana business segment, net sales decreased $22 million to $362 million compared with $384 million in the fourth quarter of 2011, primarily the result of planned supply reductions in certain markets in Northern Europe and lower sales volume in our secondary markets in the Middle East.

Overall, volume was 7% lower than last year's fourth quarter. Worldwide pricing increased 2% or $0.24 per box to $13.41 with higher selling prices in Europe and North America. Total worldwide banana unit cost increased 1% and gross profit increased $4 million to $1 million compared with a loss of $3 million in the fourth quarter of 2011.

In our other fresh produce business segment for the fourth quarter, net sales increased $19 million to $335 million compared with $315 million in the prior-year period. Gross profit increased $3 million to $29 million compared with $26 million in the fourth quarter of 2011.

In our gold pineapple category, net sales were $127 million compared with $123 million in the prior year, primarily due to higher sales volume in North America. Overall, volume increased 6%, a result of favorable growing conditions in Costa Rica. Unit pricing was 3% lower and unit cost was in line with the prior year.

In our fresh-cut category, net sales increased 12% to $91 million compared with $82 million in the prior year, driven by increased consumer demands, especially in our new distribution channels in North America. Volume increased 1%, partially offset by our previously announced closure of a fresh-cut facility in the UK. Unit pricing increased 10% with higher selling prices across all of our regions and unit cost was 4% higher than the prior year.

In our melon category, net sales increased 40% to $23 million compared with $16 million in the fourth quarter of 2011. Volume increased 27%, a result of favorable growing conditions in Guatemala. Unit pricing was 10% higher, driven by lower U.S. domestic industry volume and unit cost was 14% lower.

In our non-tropical category, net sales increased 7% to $50 million compared with $47 million in fourth quarter of 2011, primarily driven by higher sales of apples in the Middle East and avocados in North America. Volume increased 19%, unit pricing decreased 10% and unit cost was 8% lower than the prior year.

In our tomato category, net sales decreased 3% to $15 million compared with $16 million in the prior year, volume decreased 6%, pricing was 4% higher and unit cost was 5% higher.

In our prepared foods segment, net sales decreased 2% to $80 million compared with the prior-year period and gross profit increased $600,000 or 8% compared to the prior year.

Now moving on to costs. Banana fruit costs, which includes our own production and procurement from growers, decreased 2% worldwide and represented 31% of our total cost of sales for the fourth quarter.

Carton costs decreased 7% and represented 5% of our total cost of sales. Bunker fuel costs were in line with the prior year and represented 5% of our total cost of sales. And total ocean freight cost during the fourth quarter, which includes bunker fuel, third-party charters and fleet operating costs, was 16% lower. For the quarter, ocean freight represented 13% of our total cost of sales.

The foreign currency impact at the sales level for the fourth quarter was unfavorable by $6 million, and at the gross profit level the impact was also unfavorable by $6 million. Other income net for the quarter was $4 million compared with other expense net of $6 million in the fourth quarter of 2011, primarily due to the absence of foreign exchange losses.

During the fourth quarter, we repurchased 560,000 shares for $14 million as part of our share repurchase program. At the end of the quarter, our total debt was $126 million. Income tax expense was $3 million during the quarter compared with an income tax benefit of $17 million in the prior-year period.

We are projecting an effective tax rate of 15% in 2013. As it relates to capital spending, we spent $80 million on capital expenditures in 2012 and we expect to spend approximately $120 million in 2013.

This concludes our financial review. We can now turn the call over for Q&A, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Heather Jones with BB&T Capital Markets.

Heather Jones - BB&T Capital Markets

Good morning.

Mohammad Abu-Ghazaleh

Good morning, Heather.

Heather Jones - BB&T Capital Markets

I have a few questions. First on currency, was wondering if you could give us a sense of what your positioning is going into 2013 on the euro and the yen?

Mohammad Abu-Ghazaleh

We have some hedging of the yen and the euro, but we wouldn't -- I would like to keep it confidential not public.

Heather Jones - BB&T Capital Markets

Well, you're typically around this time of year going into a year you're at least 50% hedged. Is that a fair assumption for this year?

Mohammad Abu-Ghazaleh

Yes.

Heather Jones - BB&T Capital Markets

Okay. And you noted that banana pricing was higher in North America and Europe for Q4 but you didn't mention Asia. I understand that Asia strengthened considerably in late December. But was it just so weak at the beginning of Q4 that it wasn't able to offset?

Mohammad Abu-Ghazaleh

That is true. Actually the strength of the pricing was at the very tail end of the fourth quarter, Heather. That's why it didn't really show any significant impact on the pricing or results for Asia in the fourth quarter.

Richard Contreras

Heather, the fourth quarter in Japan, the local currency was about 21% lower than in prior year and Korea about the same.

Heather Jones - BB&T Capital Markets

Oh, wow. Okay. Now that we're into Q1 with what happened in the Philippines, is it fair to assume that pricing is higher? And if so, is it high enough to offset any related costs to the typhoon for you guys?

Mohammad Abu-Ghazaleh

Well, to start with, our farms -- not our farms but our grower plantations have not been impacted so much as the industry. We had a very small, about 800 hectares which were impacted by the typhoon. So really compared to the total size of the plantation was not -- more or less was around 11% of the production. So really we haven't been hurt in terms of volumes.

As far as pricing is concerned, the pricing in Asia actually just started improving in the last couple of weeks. Of course it has improved tremendously from the -- in the fourth quarter after the typhoon the prices has improved but not enough to offset previous losses or even or even come across at that time. Today, the price has improved in the last week or two and we see a strengthening there. But still I believe that it's not strong enough to give us a comfortable feeling about the market going forward.

Heather Jones - BB&T Capital Markets

And why is that? Is it still just the overhang from China not taking much Filipino fruit or is there other dynamics at work in that market?

Mohammad Abu-Ghazaleh

No. I think it's not only China. I think China now is taking fruit and -- they're not taking the fruit that they used to take before and because of the quality standard that they put in place. So, there is fruit going there provided it's fruit that meets their standards. And we have been selling fruit regularly without any interruptions or problems, and I'm sure others as well. What happened is that they were -- these spot growers or small growers shipping containers with no really [top] sanitary compliance. So that's what recreated the problem in China. However, I believe that what's happening in the Asian markets is that the markets themselves are a little bit weaker.

And secondly is that there is overproduction in the Philippines in general. We would see two, three months or four months of a good healthy market but I believe afterwards we will see a weakening again as we enter the summer. So, we as a company we don't have -- we have a very diversified market geographically, so we are handing our volumes in a very prudent way. So we are not really so much impacted by the markets. I mean we go to the markets were the price is reasonable. We're not going to go to the markets where we lose money.

Heather Jones - BB&T Capital Markets

Because aren't you guys -- because you said something about the Filipino market being overproduced -- oversupplied in general. Aren't you guys expanding production in the Philippines? So have the end markets changed since you made that decision or why would you be expanding production if Filipino production is oversupplied to begin with?

Mohammad Abu-Ghazaleh

To start with, there is of course with -- after the typhoon, the small growers are disappearing, there are not replanting. That's one thing. And the second thing is that we have other markets that we are very strong in these markets, let's put it that way. We have our own outlets in the Middle East, in Asia and that's where we need more fruit, especially during the first half of the year…

Heather Jones - BB&T Capital Markets

Okay.

Mohammad Abu-Ghazaleh

And that's why we're (inaudible) expanding.

Heather Jones - BB&T Capital Markets

And was wondering if you could share with us your thoughts about Latin American supply, because if we rewind back to the fall, there was this expectation that Ecuadorian volumes would be down significantly because of Sigatoka and -- I mean that seemed to have been widely believed. But now fast-forward and the volumes have actually been stronger than expected in general, European pricing is now down year-on-year pretty significantly. I mean, what happened in your opinion?

Mohammad Abu-Ghazaleh

What happened is exactly what I said in the last conference call, remember I think this question was raised and I said that there was no shortage. And the Central American companies, be it Guatemala, Costa Rica and others have been at very high yields, perfect weather conditions, much better yields than the years before. And there was -- I'm talking about speaking for ourselves, we had really more production than we anticipated. And we have to divert some of this into the Mediterranean and other markets.

So, I don't see that there is going to be -- unless a natural disaster happens in the next two, three, four months, but other than that I believe that the markets are well supplied. And you can see that the prices in Ecuador haven't hinted up like the normal years, but -- and that's because of the reason we have enough supplies from Central America. And our strategy is as what we have anticipated and that's what is happening right now.

Heather Jones - BB&T Capital Markets

Okay. My final question is on the U.S. I mean, like you noted, we've heard multiple reports of aggressive contract pricing. Could you give us a sense of how -- what kind of price decline we should expect for the U.S. market this year? I mean, are we looking at low-single digit?

Mohammad Abu-Ghazaleh

It will be single digits, but they pointed that we are surprised as much as anyone else why it would be competitive pricing because nobody is going to take anybody's market share. I mean, it's just a loss of revenue and net income for everyone. So, I really don't understand what's going on.

Heather Jones - BB&T Capital Markets

Okay, but you believe it's going to be a single-digit decline?

Mohammad Abu-Ghazaleh

Low single digit, I would say.

Heather Jones - BB&T Capital Markets

Low single digit?

Mohammad Abu-Ghazaleh

At least for our plan.

Heather Jones - BB&T Capital Markets

Okay. All right, thank you very much.

Mohammad Abu-Ghazaleh

Thanks.

Operator

(Operator Instructions). We'll take our question from Jonathan Feeney with Janney Capital Markets.

Mark Williams - Janney Montgomery Scott LLC

Hi, this is Mark Williams on for Jon. My first question is regarding pineapple fundamentals. You noted good flowering conditions and I was hoping to get your outlook there on pineapple pricing going forward in the next few months?

Mohammad Abu-Ghazaleh

Well, the market right now is short. We had a very strong volume into the fourth quarter which has influenced prices a little bit in a downward trend. So at this time, pricing is quite strong and because of supply, supplies are short. And we hope that this will continue even in the next, let's say, three months to the summer period. Our pricing is more or less -- most of our fruit is contracted, so our pricing is more or less stable. What really makes a difference is the extra volume that we keep for the open market which makes the difference. But so far, the market is strong at least for ourselves.

Mark Williams - Janney Montgomery Scott LLC

Great, thank you. And you are pretty much at zero -- close to zero financial leverage. Can you just talk about your priorities for cash flow? I know that you bought back some stock here and talked about CapEx plans next year. Any color on that would be appreciated? Thank you.

Mohammad Abu-Ghazaleh

Like I always say, we are always open to look at opportunities, be it stock repurchase. And we will do that continuously when the opportunity and the window is there. We are investing in new projects across the different parts of the world, be it in North America and outside North America. And we look at opportunities. So we are always open to look, but we are very prudent and we don't take hasty decisions just for the sake of revenue or expansion in sales.

Mark Williams - Janney Montgomery Scott LLC

Thank you.

Operator

We'll take our next question from Eric Larson with CL King.

Eric Larson - CL King & Associates

Yes, good morning, everyone.

Mohammad Abu-Ghazaleh

Hi, Eric.

Eric Larson - CL King & Associates

Mohammad, just a quick thought here, you had a really good year in a tough banana environment. Your adjusted gross profits were actually up a little bit, which is really strong performance for a really difficult market. You're going to have difficult markets again this year obviously with what's going on in the U.S. pricing and in Europe, et cetera. Can you -- this year with lower unit costs and your productivity and maybe your lower freight, that all adds into your lower unit costs, can you protect your gross profits that you earned in 2012 in 2013?

Mohammad Abu-Ghazaleh

That's our target. That's what we are here for, that our mission is to hopefully even improve on them. So, I would like to say that we are probably the only fruit company that understands what fruit's about. So that's our mission, how to make money out of our business.

Eric Larson - CL King & Associates

Okay, all right. Well, that's a very -- it's nice to know that that -- obviously that is your target and that's what we'll kind of center on and good luck with that. It's going to be a tough year but you guys have proven you can do that in the past.

Your fresh fruit -- your fresh-cut business really is becoming a meaningful piece of your business and someday it'd be nice if that is what you'd call the tail of the dog today -- if you can grab a hold of that tail and shake the whole dog with that one because it's got a better margin profile, et cetera.

What kind of a sustainable growth rate -- how do you view your top line and what can that business do over the course of the next few years, Mohammad? Not necessarily just in the next 12 months, but I mean how big can that business get for you do you think over a reasonable period of time?

Mohammad Abu-Ghazaleh

We would like to have North America at around $500 million in a few years. That's our target for the fresh-cut operation. And that has been the target from day one and we are slowly but surely achieving that every year. So that's only North America, but you have to take into consideration that we are a fresh-cut fruit leader worldwide, not only in North America.

We are now becoming the leader in the Middle East. We are becoming also in some countries in Asia. We are introducing now in other countries, in the ex-Soviet Union countries. So we are moving and that's why I always said that our business is -- our core business is bananas and pineapples and fruits, but we are moving towards the added value and that's why you see our operation improving year-over-year.

Eric Larson - CL King & Associates

Yes, absolutely. Would you rank your fresh-cut business as your best growth opportunity over the next few years? How would you kind of in order of importance rank your top two or three growth opportunities to grow your profits in total, not just that business but your total profits?

Mohammad Abu-Ghazaleh

Fresh-cut, prepared foods, these would be our top priorities along with our core business.

Eric Larson - CL King & Associates

Wonderful. Thank you, Mohammad. Good luck, guys.

Mohammad Abu-Ghazaleh

Thank you.

Operator

At this time, I would like to turn it back over to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Mohammad Abu-Ghazaleh

Thank you very much. I would like to thank everyone for joining us on this call today and I hope to talk to you next quarter hopefully with good news. Thank you very much and have a good day.

Operator

This concludes today's presentation. Thank you for your participation.

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