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Executives

Christine Cannella – AVP, IR

Mohammad Abu-Ghazaleh – Chairman and CEO

Richard Contreras – SVP and CFO

Analysts

Brett Hundley - BB&T Capital Markets

Eric Larson - CL King & Associates

Fresh Del Monte Produce Inc. (FDP) Q4 2013 Earnings Conference Call February 18, 2014 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce Fourth Quarter 2013 Conference Call. (Operator Instructions). As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, Christine Cannella. You may begin.

Christine Cannella

Thank you, [Ashley]. Good morning everyone and welcome to Fresh Del Monte’s fourth quarter and full year 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 fourth quarter and full year 2013 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 reconciliation 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.

Mohammad Abu-Ghazaleh

Thank you, Christine and good morning everyone. 2013 was a year of progress for Fresh Del Monte Produce. Throughout the year we took steps to strengthen the foundation we have built, to position us for continued long term performance, which is our ultimate objective. The advancement in 2013 can be credited to our disciplined business strategy. This strategy calls for us to enhance our global distribution and value added footprint, expand our global production capabilities, expand our reach into existing and new markets and diversify our distribution channels and product offerings, to strengthen our company for long term sustainability and growth.

During the year, we executed our strategy by expanding our worldwide distribution network with the addition of a distribution and fresh cut center in Toronto, Canada, allowing us to offer our full North America product line in Canada for the first time. We opened a distribution and ripening center in France. We broadened our asset base and increased our production capabilities with the purchase of agricultural land and packing houses in Florida and Virginia for field grown tomatoes.

We increased our footprint for bananas and pineapples through acquisitions in Costa Rica and Nicaragua. In addition, we expanded banana production in Asia. We expanded our reach into new markets such as Turkey, Russia and Ukraine. We also continued to expand our distribution channels, one focus being opportunities to establish direct points of pressures for our products. For example, in our Middle East region, we continue to grow our fresh market store initiative. Our fresh market offers consumers quick, convenient and handpicked products that include such items as branded grab and go ultrafresh juices, fruit salads, fresh fruits, specialty sandwiches and salads and bakery items.

During the year, we also rolled out additional Del Monte refrigerated vending machines in the Middle East. While our ideas are just evolving, we expect consumer demand for convenient healthful products to continue to steadily rise. We are also actively pursuing strategies in other regions to put our healthy fresh products in the hands of consumers in more convenient ways.

I’m pleased with our many strategic achievements in 2013. While we did not accomplish all of our financial goals, we realized an 8% increase in net sales for the year at the 30% increase for the fourth quarter with all of our business segments contributing. However, we faced a number of challenges in the fourth quarter and that hindered our financial performance with increased ocean freight and fruit costs being the heaviest factors.

During the fourth quarter, we took decisive actions to address these challenges and address the shifting global economy and market place to drive better performance for the long term. We made the decision to stop production of bananas in Brazil in 2014 and adjusted our business model in Europe to better manage logistics as we encountered a decrease in consumption of fresh fruits and vegetables in certain markets due to economic factors.

Our ability to weather challenging quarters as we have done in the past is a testament to the strength and resilience we have built into our business. Today, I’m confident the decisions we’ve made in 2013 will be the driving force of our future performance. As we move forward, we do so with the knowledge that we are building value everyday in everything we do.

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

Richard Contreras

[Technical Difficulty]… $392 [ph] million, compared to $343 million in 2012. Operating income for the year was $108 million, compared with $166 million in the prior year and net income was $86 million, compared with $147 million in 2012.

For the fourth quarter of 2013, excluding adjustments on a comparable basis, we reported a net loss per share of $0.35 compared with earnings per diluted share at breakeven in the fourth quarter of 2012. Net sales were $880 million compared with $777 million in the prior year, an increase of 13%.

Gross profit decreased to $34 million, compared with gross profit of $39 million in the fourth quarter of last year. We incurred an operating loss of $17 million, compared with an operating loss of $2 million in the prior year and a net loss for the quarter of $19 million, compared with net income of $200,000 in the fourth quarter of 2012.

Included in the adjustments to arrive at comparable net loss in the fourth quarter of 2013 was a $100 million write-off of goodwill and intangible assets related to the 2004 acquisition of our Prepared Food business, $11 million related to unfavorable settlements of lawsuits, $11 million related to the decision to exit banana operations in Brazil, $2 million related to the closure or downsizing of various distribution centers in Europe and $2 million related to a freeze in Chile.

Now as I turn to our segments, I will only give fourth quarter statistics as reported. In our banana business segment, net sales increased $65 million to $427 million, compared with $362 million in the fourth quarter of 2012, primarily a result of higher sales volume across all regions and higher pricing in Asia and the Middle East. Overall, volume was 15% higher than last year’s fourth quarter. Worldwide pricing increased 2% or $0.28 per box to $13.70 per box.

Total worldwide banana unit cost increased 4% primarily driven by higher fruit and ocean freight costs and gross profit was a loss of $4 million, compared with gross profit of $1 million in the fourth quarter of 2012.

In our Other Fresh Produce business segment for the fourth quarter, net sales increased $26 million to $360 million, compared with $335 million in the prior year. Gross profit increased $3 million to $32 million, compared with $29 million in the fourth quarter of 2012.

In our Gold pineapple category, net sales were $140 million, compared with $127 million in the prior year with strong sales in North America. Overall, volume increased 9% as a result of favorable growing conditions in Costa Rica. Unit pricing was 1% higher and unit cost was 4% lower.

In our fresh-cut category, net sales decreased 4% to $87 million, compared with $91 million in the prior year. During the quarter, higher net sales in North America, the Middle East and Asia were offset by lower net sales in Europe with lower sales in our fresh-cut fruit facility in the UK. Overall, volume decreased 4%, unit pricing was in line with the prior year and unit cost was 4% higher than the prior year.

In our melon category, net sales decreased to $20 million, compared with $23 million in the fourth quarter of last year driven by lower industry supply, a result of poor growing conditions in Arizona. Volume decreased 23%, unit pricing was 12% higher as a result of the volume shortages and unit cost was 12% higher.

In our non-tropical category, net sales increased 23% to $62 million, compared with $50 million in the fourth quarter of 2012, primarily driven by higher volumes and pricing of avocados in North America along with increased sales of apples in the Middle East. Volume increased 25%, unit pricing decreased 1% and unit cost was 5% higher than the prior year.

In our tomato category, net sales increased 19% to $18 million, compared with $15 million in the prior year. Volume increased 14%, pricing was 4% higher and unit cost was 6% higher. We expect to start seeing sales from our recently acquired tomato operation in the second quarter of 2014.

In our Prepared Food segment, net sales increased 16% to $93 million, compared with $80 million prior year and gross profit was $1 million lower than the prior year. In the fourth quarter, we wrote-off a $100 million of goodwill and intangible assets associated with this segment. The performance of our Prepared Food business did not meet our expectations, primarily due to the recession in Europe and a recent cyclical downturn in industrial products. We’re focusing our efforts on improving our European business and concentrating on higher growth markets such as the Middle East and Africa.

Now moving to costs, banana fruit cost, which includes our own production and procurement from growers increased 6% worldwide and represented 30% of our total cost of sales for the fourth quarter. The increase in fruit cost was driven by increased production cost and higher cost paid to independent growers.

Carton costs increased 9% and represented 7% of our total cost of sales and bunker fuel cost decreased 6% and represented 5% of our total cost of sales.

However, total ocean freight costs during the quarter, which includes bunker fuel, third-party charters and fleet operating costs was 5% higher. 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 $13 million, and at the gross profit level, the impact was unfavorable by $8 million.

Other expense income net for the quarter, expense was $2 million, compared with income net of $4 million in the fourth quarter of 2012.

At the end of the quarter, our total debt was $251 million. Income tax expense was $400,000 during the quarter, compared with income tax expense of $3 million in the prior year period. As it relates to capital spending, we spent $160 million on capital expenditures in 2013 and we expect to spend approximately $120 million in 2014.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Brett Hundley of BB&T Capital Markets. Your line is open.

Brett Hundley - BB&T Capital Markets

Hi, good morning everyone.

Mohammad Abu-Ghazaleh

Good morning, Brett.

Brett Hundley - BB&T Capital Markets

Richard, I just had a quick question for you. Can you go through how much of your Euro and Yen is hedged for 2014?

Richard Contreras

We typically don’t give those exact numbers, Brett, but as you probably know we hedge about 50%. We try to hedge overall of the following years’ needs.

Brett Hundley - BB&T Capital Markets

And then on your Banana volume for the quarter was up more than we had expected and I wanted to talk about this at a couple of different angles. So can you guys first discuss just where you’re seeing the majority of those gains or where you’re allocating the majority of your banana volumes right now?

Richard Contreras

As we said, it’s pretty much pretty well across the board, we’re seeing increases everywhere.

Brett Hundley - BB&T Capital Markets

Okay. And if we hone in on the U.S. market, you know U.S. volumes have been growing for you guys over the past five years or so and I’m just curious how you would characterize this growth and characterize this market at present. And Mohammad, I would love to get your thoughts, are you seeing a lot of the growth in the U.S. market being marketed as your own, your own brands, or they second-labeled and can you just talk about your strategy in pursuing U.S. market growth versus other areas in the world and has that changed more recently as opposed to maybe a couple of years ago?

Mohammad Abu-Ghazaleh

No. Our policy has been -- our focus has been the same all the time. The U.S. market or North America, in general, has been increasing in volumes in general sense, I am not saying for the -- in general the industry. And I think our growth and our focus have been also growing with that trend. I mean our share has been growing because the market has been growing, number one.

And secondly, because we have found new avenues for selling and marketing our bananas really through different channels, and not just being on -- focused on retail. And this has helped us over the last couple of years into expanding our banana, let’s say, supplies and volumes into the U.S. market. So, this is what is really happening in the U.S. We are not fighting to gain market share because – I mean to increase our volumes. As a matter of fact, as I have said it’s more the other way around by finding new locations and new areas where we can sell more fruit than the traditional, let’s say, outlets.

Brett Hundley - BB&T Capital Markets

Okay. I guess I mean going forward do you still see the U.S. market as a profitable market? Can you excel in that market? I guess the reason I ask is, you’re seeing a little bit of a change in the retail set, your competitive set has changed a little bit, there’s talk that one of your larger competitors might link up with or rather might become more vertical out of Latin America and would likely take those volumes to the U.S. market and so I’m just curious how you think about the U.S. market going forward and if any change is needed to be made from the multinational standpoint as far as driving profitability there?

Mohammad Abu-Ghazaleh

Our biggest impact is really the cost. I mean we have been facing increasing cost year after year. As we have actually decided many years ago that we would prefer to have our own production rather than just to be more on the independent or third party suppliers. Our decision at that time has proven to be right today that everybody now is looking to make more vertical integration and to have more supplies of its own, which we do have. Compared to other players in the market, we do have a majority or a big portion of our supplies coming from our own farms, but still not enough to mitigate the increase in cost that is taking place over the last two years.

And definitely that has impacted us tremendously in 2013, particularly, because we cannot pass this -- we can't cost increase, but you can change prices in the market because the market is the market. And what we are trying to do now is try to reduce our cost hopefully through different means in order to be able to provide these headwinds that we are facing today in the markets.

Brett Hundley - BB&T Capital Markets

So can you guys remind me what percentage owned production represents as a part of total marketing and then secondly, maybe where you need to get that to in order to start mitigating some of these cost risks?

Mohammad Abu-Ghazaleh

If you talked two or three years back, the percentage would have been much higher than today because today we have a lot more, let's say, in terms of sales -- I mean in terms of volumes. So our percentage has decreased over the last two or three years from owned production to third-party suppliers. But, Richard, do you have anything –

Richard Contreras

Right now, it’s 40% worldwide.

Brett Hundley - BB&T Capital Markets

And overall, you would look to take that higher. I mean do you foresee a situation where you get above 60% owned?

Mohammad Abu-Ghazaleh

I wouldn't be surprised.

Brett Hundley - BB&T Capital Markets

And could that happen rather quickly? I mean whether it’s you as a company or the industry overall, we see a general movement that way, but can that happen over a year's time, two years' time? I mean how should we think about that move towards greater ownership of land?

Mohammad Abu-Ghazaleh

I don't think that you will see it in less than five years at least. I mean this is not easy-to-find land, to plant, to start production and do the whole infrastructure. That’s not an easy job. Anybody that tells you they can do it little bit [ph] earlier, I think it would be very hard.

Brett Hundley - BB&T Capital Markets

Okay. And then just one last question kind of related to banana is can you talk about pricing that you are seeing as of late? And I am most interested in discussing kind of what you are seeing recently as far as pricing across Europe, the Med and Asia.

Mohammad Abu-Ghazaleh

It's being difficult, it’s still difficult as we talk now. The pricing in Europe, if you look year over year or looking at the same period 2013, 2014, we are seeing less pricing in Europe and difficult conditions. In Asia, the weather has been very also unfortunately a net [ph] effect to the sales there, but we have been, at least in our case, stabilized our prices in order not to lose too much money there at this time of the year because it’s a very difficult period.

And as far as the Med is concerned, there is an oversupply. Even as we speak now, there is an oversupply of fruit in this market. So pricing has not picked up as we have seen them in 2013. At this time, 2013 prices were in the $15, $16 range in this market. Now we are talking about $13 and maybe less.

Brett Hundley - BB&T Capital Markets

Okay. I wanted to ask a couple other questions. One was just on your Prepared Foods business. Can you guys talk a little bit more specifically about where you are seeing profitability being hurt either by line or region, et cetera and the steps that you are taking to improve this business? I know, Richard, you mentioned a couple broad topics as far as what you are doing. But I would love to just get more color on the actions that you are taking and when you think you can get profitability back to levels that make sense for you guys.

Mohammad Abu-Ghazaleh

Our major actually setback last year was the concentrate pricing. We produce a lot of concentrate in our operations in Kenya and Costa Rica. And unfortunately, the concentrate price has been so much down compared to the earlier 2012 and before and that has impacted us negatively and it was one of the major factors that hurt the Prepared Food business. And in general, canned stuff is not anymore an appeal. Everything is going into the produce aisle or produce section rather than the middle or the center of the store. And that is a fact that we are facing in Europe though we have a continuous progress and development and growth in markets like in the Middle East and Africa, but unfortunately the big markets are in Europe still.

And these markets have been suffering for two factors. One is Europe itself is economically in turmoil and secondly because the canned business itself is also stagnant or a declining business. So we are creating new products and new innovations, which gives us additional leverage in this business.

Brett Hundley - BB&T Capital Markets

Mohammad, are you rotating more towards fresh prepared in your own business? And if not, would that be attractive to you to go buy an asset that is more fresh prepared?

Mohammad Abu-Ghazaleh

We are doing that and we are ready to look at any possibilities and opportunities, yes.

Brett Hundley - BB&T Capital Markets

Okay. And then just one from me and I will jump back in the queue. But Richard, the debt, of course, did jump in Q4 and you guys called out the acquisition work that you've done, as well as CapEx and I just wanted to get more color on where exactly this investment money is being spent on the CapEx side.

Richard Contreras

Yes, I mean the debt jumped $151 million, right and of that -- in the quarter, $70 million of that was CapEx, plus if you add the $19 million acquisition of the pineapple, that’s $89 million of the $150 million. Of course, seasonally, this is the time when we add -- when our debt goes up. But we had the tomato acquisition, which was $39 million. We’ve got the DC in Canada, we've got the pineapple land I mentioned. So there is a lot of expansion CapEx going on all over.

Operator

(Operator Instructions) Our next question comes from Eric Larson of CLK.

Eric Larson - CL King & Associates

Mohammad, a quick question on banana production where you talk about kind of the oversupply issues that we are seeing. Yet it seems like, and correct me if I am wrong, we are seeing more banana production coming in place. I think there is some production coming in in Panama, which I think you folks are interested in and elsewhere. Can you talk a little bit about that and has Ecuador continued to at least enforce the minimum pricing -- export pricing standards that they were enforcing in the first half of 2013?

Mohammad Abu-Ghazaleh

Well, if you look at the global picture, yes, there has been an oversupply. First, let's look at the weather. The weather has been perfect last year for the tropics. We didn't have any floods, we didn't have any really catastrophic wind damage or hurricanes, rain. So it was a perfect year and the trees were producing like crazy. I mean that’s what we noticed for South America throughout let's say the last four, five months of 2013.

So whatever happened to us happened to everyone else. So you saw a lot of volume going into the markets, not probably North America, but going into the Mediterranean, going into Europe and that has created such an overflow in other markets as well and that has decimated the markets. That’s number one.

Number two, yes, you are right that there is Panama and there is other areas that are hopefully potential for growing bananas there, but, of course, we will not go anywhere unless it is a good deal for us be it in Panama, be it in Nicaragua. I mean the whole idea behind expanding our production is to get a lower cost than what we are experiencing today and that will be our target as a whole for the future. So yes, there might be an overproduction in some areas during the year, but we haven't taken into consideration that weather is also a key factor in our business. And what can happen -- what happened in 2013 might not repeat in 2014 or in the future. And besides we need to take our destiny in our own hands. That’s our decision.

Eric Larson - CL King & Associates

Yes, sure. Just two other related questions to that. A couple of years ago, you made a really interesting acquisition where you fully integrated some banana production. I believe it was 2008. You might correct me on that, Mohammad. Do you see other opportunities like that available in the market or are those more rare these days?

Mohammad Abu-Ghazaleh

I think more rare. What we took in 2008 was a good deal for us. To do that same deal today that would cost us a lot, lot, lot more money.

Eric Larson - CL King & Associates

Okay. And then just as a follow-on to your third-party contracts, if you have an oversupply of banana production around the world, how come that does not translate into some lower pricing eventually into the third-party contracts that you are sourcing your bananas from or are those longer-term contracts on fixed prices?

Mohammad Abu-Ghazaleh

I mean we are not going -- I know we have fixed contracts, but for certain times of -- for a certain number of years and we know when they are going to end. But really it’s like a vicious circle. I don't want to be -- as a company, we don't want to be under the mercy of oversupply or someone else has volume. We want to make sure that our destiny is in our hands. We want to make sure that our cost is dictated by us and not taken advantage by third parties.

Eric Larson - CL King & Associates

Okay, sure; that makes sense. Then the final question, Mohammad, is your fresh-cut sales were down in the quarter. Obviously, it was related – it sounds like it was a one-time specific issue in the UK with the distribution center. Can you explain that? You saw a good growth, I believe, in every other region around the world with the exception of the UK. What specifically happened there?

Mohammad Abu-Ghazaleh

It's just because we lost an account in the UK, which was very -- an important element of the supply, which we believe within the next few months -- believe that this is going to come back because their experience with the other supplier has been very poor and we anticipate that this account will come back, as well as we have faced some weather-related issues in the U.S. during the fourth quarter, which have disrupted supplies and deliveries. And that has also affected the operation.

Operator

Thank you. I am not showing any further questions in queue. I'd like to turn the call back over to Mohammad Abu-Ghazaleh for any further remarks.

Mohammad Abu-Ghazaleh

Thank you very much everyone, today and we hope that we can give you better news on our next call. Have a good day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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