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Executives

Christine Cannella - Assistant Vice President, IR

Mohammad Abu-Ghazaleh - Chairman & CEO

Richard Contreras - SVP & CFO

Analysts

Brett Hundley - BB&T Capital

Jonathan Feeney - Janney Montgomery Scott

Eric Larson - CL King & Associates

Fresh Del Monte Produce Inc. (FDP) Q1 2013 Earnings Call April 30, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte's First Quarter 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. Please go ahead ma’am.

Christine Cannella

Thank you, Brian. Good morning, everyone, and welcome to Fresh Del Monte's first quarter 2013 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 2013 press release we made public this morning. And you can find that release or register for future distributions by visiting our website at 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.

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 turn the call now over to Mohammad Abu-Ghazaleh. Go ahead.

Mohammad Abu-Ghazaleh

Thank you, Christine, and good morning, everyone. As stated in our press release earlier this morning, we continue to manage our business in the face of challenging times during the quarter.

In Europe, Fresh Del Monte continued to confront economic uncertainty. Lower consumer demand, the results of unseasonably colder weather and stronger than normal banana production. In Asia, we experienced tough market conditions in Japan in the first half of the quarter. Additionally, we encountered poor growing conditions in Chile which negatively impacted product quality. Together these factors adversely affected our performance during the first quarter of 2013.

Despite these pressures on our margins and earnings, I am pleased with the progress we made towards our strategic initiatives in the first quarter of 2013. We continue to focus on aggressively establishing a presence for Fresh Del Monte in markets which offer us strong growth potential, including our progress in the Middle East, our fastest growing region and expanding our product lines to keep base with consumer trends for healthy fresh convenient and ready-to-eat products.

We also saw an increase in net sales along with strong demand for our fresh-cut products; a business that has grown significantly and continues to carry strong potential for us in the future. As the global leader in this category, we are exceptionally well positioned to leverage our vertically integrated structure through several key initiatives. One of these initiatives is the further expansion of our non-traditional distribution channels where our customers include some of the largest convenient stores, quick-sell outlets and food service operators, positioning our products at new and innovative freshness products.

During the quarter, we engaged in marketing opportunities that provided excellent exposure for our Del Monte Gold Pineapples, which led in part to a 2% increase in selling prices year-over-year. We continue to expand our pineapple presence in existing and emerging markets, with much promise, proving once again the quality of the Del Monte Gold Pineapple is a differentiator amongst customers and consumers worldwide.

In summary, I am very proud of our team’s performance during these challenging times. I believe our passion, dedication and hard work are reflected in our strong balance sheet and standing in the industry. We are building value every day in everything we do.

At this time, I will ask Richard to take over the call. Thank you.

Richard Contreras

Thanks, Mohammad and good morning. For the first quarter of 2013, we reported earnings per diluted share of $0.71 compared with earnings per diluted share of $1.08 in the first quarter of 2012. Net sales were $919 million, compared with $898 million in the prior year. Gross profit was $99 million compared with gross profit of $112 million in the first quarter of 2012. In addition, operating income for the first quarter of 2013 was $54 million compared with $66 million in the prior year and net income was $41 million in the first quarter compared with $63 million in the first quarter of 2012.

In our Banana business segment, net sales increased $8 million to $406 million compared with $398 million in the first quarter of 2012, primarily due to higher sales volume in our Middle East, Europe and North America regions along with higher pricing in Asia and the Middle East.

Overall volume was 3% higher compared with last year’s first quarter. Worldwide pricing decrease 1% or $0.11 per box, to $14.97 primarily due to lower pricing in Europe and gross profit decreased $8 million to $31 million compared with gross profit of $39 million a year ago. Total worldwide Banana unit cost increased 2% compared with last year’s first quarter.

In our other fresh produce business segment, net sales increased $13 million to $434 million compared with $421 million in the first quarter of 2012 and gross profit was 2% lower than the prior year period.

In our Gold Pineapple category, net sales were consistent with last year’s level, volume decreased 2%; unit pricing was 2% higher primarily in Europe and North America and unit cost increased 1%.

In our fresh-cut category, net sales increased $7 million to $99 million compared with $92 million in the prior year driven by our ongoing expansion into new food channels. Volume decreased 1%. The decrease was the result of the closure of unprofitable fresh-cut prepared salad facility in the UK in 2012 partially offset by higher fresh-cut fruit sales worldwide, and unit pricing increased 8% while unit cost was 10% higher than the prior year.

In our Melon category, net sales increased $4 million to $52 million compared with $48 million in the first quarter of 2012. Volume increased 20%, the result of improved yields from favorable growing conditions; unit pricing was 10% lower, the result of competitive market pressures and unit cost was 3% lower.

In our non-tropical category, net sales increased $5 million to $116 million compared with a $111 million in the first quarter of 2012. The increase was primarily driven by higher sales in our avocado and apple product lines, the result of increased demand. Volume increased 4%, unit pricing increased 1% and unit cost was 2% lower than the prior year period.

In our Tomato category, net sales decreased $1 million to $17 million compared with the prior year period; volume decreased 14%, pricing was 8% higher and unit cost was 10% higher.

In our Prepared Food segment net sales were inline with the prior year period. Gross profit decreased $4 million to $9 million. Gross profit for the quarter was negatively impacted by lower selling prices in our industrial product line, the result of industry over supply.

Now moving to discussion on costs; banana fruit cost which includes our own production and procurement from growers increased 1% per unit worldwide and represented 29% of our total cost of sales for the first quarter. Carton costs decreased 12% and represented 4% of our total cost of sales. Bunker fuel decreased 6% versus the prior year and represented 5% of our total cost of sales, and ocean freight cost which include bunker fuel, third party charters, and fleet operating costs, was 1% lower. For the quarter, ocean freight represented 13% of our total cost of sales.

As to foreign currency the foreign currency impact at the sales level for the first quarter compared to the prior year was unfavorable by $14 million. And at the gross profit level the impact was unfavorable by $12 million compared to the first quarter of 2012. Other expense net for the quarter was $2 million compared with other income net of $500,000 in the first quarter of 2012, primarily attributable to foreign exchange losses during this quarter. At the end of the quarter, our total debt was $151 million. During the first quarter we repurchased 1,038,209 shares for approximately $27.9 million as part of our share repurchase program. Income tax expense was $10 million during the quarter compared with income tax expense of $2 million in the prior year period. We expect our effective tax rate for the remainder of 2013 to approximate 15%. As it relates to capital spending; capital expenditures for the year are expected to be approximately $120 million.

That concludes our financial review. Operator we can now turn the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And we right to our first question from Heather Jones with BB&T.

Brett Hundley - BB&T Capital

This is Brett Hundley standing in for Heather. I had a quick question actually on prepared. It missed our estimate by a pretty wide margin and I know it’s a smaller portion of the mix but its certainly an area of differentiation and leverage as you grow in the places like you know the Middle East for example, and margins there have steadily been declining. You guys called up the industrial component across the industry for this quarter, but can you just give further clarity on some of the factors at play here in your prepared foods business and how you look at developing this segment going forward.

Richard Contreras

Yeah the two main reasons prepared is declining; you mentioned Middle East, prepared is actually doing very well in the Middle East and growing everyday. The two main factors for the decline in the profitability of prepared, one is the industrial products, the concentrate and IQF; there is an over supply in the market and that's much more of a commodity than the other products we sell when pricing is very low right now and the other one is just Europe in general that the majority of the prepared that we sell is in Europe and just like we're in bananas, we're struggling in Europe.

Brett Hundley - BB&T Capital

How long do you see the concentrate issue lasting? Do you have any visibility in to that?

Richard Contreras

That’s very hard to tell. I mean over the years; it's very cyclical also. So we've seen very high pricing and very low pricing and right now we are in the downward cycle but it's very hard to tell when that will turnaround.

Brett Hundley - BB&T Capital

Okay, I just wanted to focus in on Europe in your banana segment, and I am just curious if you can give me the impact of how Europe came in versus relative to your initial expectations?

Mohammad Abu-Ghazaleh

This is Mohammad speaking. Actually we were not expecting better picture than what we saw this past quarter. What made it works was actually the bad weather that Europe has experienced during the last three months of the year and that was probably one of the factor that we did not anticipate. But Europe in general, that’s what I’ve been saying for several quarters that Europe market is very weak and still struggling there.

Brett Hundley - BB&T Capital

Have you seen any improvements since quarter end as far as weather wise and pricing trends?

Mohammad Abu-Ghazaleh

Weather wise it has improved modestly, but as far as pricing trend, very small improvement, but not significant in any way.

Brett Hundley - BB&T Capital

Okay, and then just rotating over to North America, there has been a lot of talk about competitive pressure there amongst industry players, and so I just want to ask a question on the retail environment there and whether that’s become any more competitive, less competitive and what your outlook is for that region this year?

Mohammad Abu-Ghazaleh

Well our outlook still stands the same as I said in the first quarter, and the last quarter as well, and we see some competitive pressure on pricing in the market, but we don't anticipate anything different because most of our contracts have been signed for the year and we don't see much difference from now to the end of the year on what's going on.

Brett Hundley - BB&T Capital

Okay. And then I just wanted you to touch broadly if you could on the Banana supply situation across Latin America, and just if you are still seeing some over supply across Central America, if you could just touch on supplies coming out of Latin America do you see them today?

Mohammad Abu-Ghazaleh

When historically that during the first quarter and early second quarter usually we have a lot of pressure on supplies coming out of Central America and Ecuador. This year so far we have not seen any pressure really and you can tell that from the prices in Ecuador have not increased significantly like in the previous years. We could see prices in the $17 or may be more, FOB this year we would not see this at all, which means that supplies were actually abundant in Central America, which did not put any pressure to start sourcing out of Ecuador and that in my opinion is going to continue unless other than climatic catastrophe somewhere hurricane or flood or a very strong wind that can make the difference today to the supply chain. But as we speak, we see abundant supply coming through.

Brett Hundley - BB&T Capital

Okay, thank you, that is really helpful. I just have one other question on your balance sheet, I think there was some hope that you could use your strong balance sheet to maybe level up on some projects for the benefit of shareholders. Now the past couple of quarters you have increase and debt given low reduce cash flow levels and I am just curious, I just want to get your overall thoughts, are you concerned at all about the industry‘s operating environment drawing what is typically very strong Q2, from a working capital standpoint, I was just wondering if you could address that?

Mohammad Abu-Ghazaleh

From our point of view, as far as we are concerned we don't see any problems with our cash flow. We have a very strong cash flow, we know that how our business is operating and we have so much diversified and we have so many projects that are still kicking in right now and we have new productions in different parts of the world, so we are not very concerned at all about our cash flow.

Operator

And our next question comes from Jonathan Feeney with Janney Montgomery Scott.

Jonathan Feeney - Janney Montgomery Scott

Mohammad, I just want to talk about the Middle East little bit, it still seems like a great potential growth opportunity, but it seems like pineapples have grown and canned continue to grow nicely, but the prepared food business where it seems where most of the potential upside, I would think from a margin and profit standpoint are. Just I haven't seen a tremendous amount of growth of late and I kind of wanted to see where we were from a longer-term perspective versus your aspiration say a few years back?

Mohammad Abu-Ghazaleh

I don't know what do you mean by prepared, is it the prepared the canned?

Jonathan Feeney - Janney Montgomery Scott

Yeah the canned.

Mohammad Abu-Ghazaleh

The canned.

Jonathan Feeney - Janney Montgomery Scott

Exactly yes.

Mohammad Abu-Ghazaleh

We are expanding year by year, but I mean the canned business, what I would like to highlight here is that we are leveraging the brand not only on the canned business really, we are leveraging the brand on many other areas that we started in the Middle East, be it in juices, be it in fresh, prepared meals and offerings that have made a tremendous growth in that market. In addition to that, we have -- you know we are starting; we actually started a year back a fresh market process which is like a quick service store but only for healthy snacks and healthy food.

And this is taking off very nicely and so there will be -- and in Dubai and we believe that this over the next few years is going to make a big you know kind of difference to our kind of mix of business. We are doing so many projects as we speak that I think will pay off as we go forward, I mean not in a month or two but in a year or two we will see quite a significant difference to our sales mix and margins in the Middle East as we go forward.

Jonathan Feeney - Janney Montgomery Scott

And just one follow-up question for Richard, you've been active in the share repurchase market as you've alluded to, and I think the last time you updated us you prioritized the acquisitions and correct me if I'm wrong but as a little bit more highly than share repurchase. So just a commentary on what the acquisition environment looks like and that your stock is relatively attractive here or you just advocate me on your thinking please?

Richard Contreras

Well, yeah, obviously it is, but we are still looking out for, we find a good acquisition, we still feel we can do both.

Jonathan Feeney - Janney Montgomery Scott

I guess what's the practical level of debt you think the company could handle in terms of return to EBITDA, it’s still very you know underleveraged or conservatively leveraged?

Richard Contreras

We really don't have a magic number there. If we found a very large acquisition there that was accretive and fit in, we wouldn’t have to face to do it.

Jonathan Feeney - Janney Montgomery Scott

But nothing like that on the horizon?

Richard Contreras

Nothing like that on the horizon.

Operator

And next we have a question from Eric Larson with CL King & Associates.

Eric Larson - CL King & Associates

Two questions. Could you talk a little bit about the North American banana market, I know that you are probably struggling with modestly lower contract prices from last year and yet it doesn't look like it had a demonstrable impact on your business in the first quarter? Could you just give us a quick update on what the North American banana market did in the quarter?

Mohammad Abu-Ghazaleh

I can tell you that our volume has increased in the first quarter year-over-year, and I can tell you that our efficiency and costs have been contained which has helped us in kindly offsetting some of the price erosions that we have seen over the last few months. That’s in essence what really is taking place in North America.

Eric Larson - CL King & Associates

Okay. So you want to fill, up volumes and cost containment has been a benefit and obviously there is enough fruit to be able to divert to the North American market where you can make a better profit and it obviously helped you in the quarter. Richard, the other question that I have is in the quarter, foreign exchange had a much bigger impact on your gross profit margins than I would have expected. You know obviously we know the movement of some of the currencies, the relative currencies. It doesn’t reflect the producing countries had potentially huge negative impact on that. Can you talk about that? And I thought that you were probably as much as 50% hedged. You know where do you fit on 4X and why was the impact so big in this quarter?

Richard Contreras

The impact was in the euro and the yen, but for the most part in the Europe. So more than half of the impact you saw was in the Europe. And yes, we're about 50% hedged right now.

Eric Larson - CL King & Associates

That will continue to be a headwind for you I suspect. If rates stay where they are, that will be a headwinds, you know, pretty much through this calendar year but more so in the second quarter, would that be a safe statement?

Richard Contreras

Yeah, I would say so.

Eric Larson - CL King & Associates

Okay. And then Mohammad just another quick question on, just your overall view point, again you did allude to the supply coming out of Ecuador and you have been absolutely dead correct on the direction of where this is all going, do we need do you think some bad weather somewhere, some bad winds or some fluttering or hurricane in order to correct the supply problem that you see across the globe?

Mohammad Abu-Ghazaleh

I guess you are right. I hope that they happen but nothing our part of the [farms].

Eric Larson - CL King & Associates

But Ecuador is not being, it doesn’t sound like Ecuador is being sort of the nasty, plenty of over supplier of fruit at this point, so maybe we have self correcting process already taking place?

Mohammad Abu-Ghazaleh

And then one way, yes, but I still believe that Ecuador is over, they still have over production, I still believe that Ecuador could still if they want to maintain the decent price, I think the government had taken good steps in terms of regulating industry in a more rational way in terms of production as well as pricing, but I hope that this can hold and continue. But if they can -- Central America hasn’t been increasing production really any significant way over the last few years. The only reason why we are having good production out of, because we didn’t have any adverse climate conditions in the last, let’s say two years and it's been perfect. So that's why we see good and consistent supplies from Central America.

Eric Larson - CL King & Associates

Okay. And then just a final question Mohammad and this is something that you and your organization I think it’s been really good at the last five or better a years, is that you are not shy about exiting businesses that don't have the potential, i.e., your melon business and you have done a lot of things in your business. And looking at your industrial concentrate business in Europe with the Del Monte brand, this periodically comes in and nips your P&L periodically, my mind is getting old and I can't pinpoint exactly on the [capital] before, but is there a business that net returns good profit still, is it worth the volatility of earnings that you have in your business to hang onto that particular product segment?

Mohammad Abu-Ghazaleh

It’s a different, you are right that we are not shy to exit any business that is not performing, but that is a completely different from businesses that stand alone. This concentrate for instance business which is a byproduct of the pineapples, I mean we do have plantations and canning operations in Kenya and we do have the production in Costa Rica which is for mainly fresh, but we do have a lot of revenues that come out of that [be fast] that do not go into canning or do not go into fresh that we have to use, part of that is being used as (inaudible) which is doing quite well and grows there.

However, the concentrate which is the juice itself has -- since the last five, six months has not been doing well at all. And the reason for that is because of the oversupply from Thailand. Thailand is the determining factor in this business area in the concentrate business. A year and a half ago over the last two years Thailand had a draft and they have shortage and prices of concentrate shot through the sky and we did extremely well. We made a lot of money and unfortunately now Thailand has so much production which has created oversupply and depressed the prices significantly.

So we cannot just get out of the business because you know the prices have come down because I'm sure that there will be a vessel of what we are seeing today. We just have to go through the pain that we are experiencing today and wait for the bright future, I mean bright period later on.

Eric Larson - CL King & Associates

Well, yeah, and that's a perfect explanation. I guess the answer is, you just need to grow your fresh cut business awful lot faster and find a more profitable outlet for your excess concentrate.

Mohammad Abu-Ghazaleh

You bet.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Mohammad Abu-Ghazaleh for any further or closing remarks.

Mohammad Abu-Ghazaleh

Thank you very much for everyone that was on this call and I hope to speak to you in our second quarter results. Thank you so much. Bye.

Operator

And this does conclude our conference for today. We thank you again for your participation.

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