Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Fresh Del Monte Produce Inc. (NYSE:FDP)

Q2 2010 Earnings Conference Call

August 3, 2010 11:00 AM ET

Executives

Christine Cannella – Assistant VP, IR

Mohammad Abu-Ghazaleh – Chairman and CEO

Richard Contreras – SVP and CFO

Analysts

Bill Chappell – SunTrust

Scott Mushkin – Jefferies

Heather Jones – BB&T Capital Markets

Jonathan Feeney – Janney Montgomery Scott

Eric Larson – Soleil Asset Management

Diane Geissler – Calyon Securities

Vincent Andrews – Morgan Stanley

Operator

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Second Quarter 2010 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) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference call, Christine Cannella, for opening remarks.

Christine Cannella

Thank you, Jill. Good morning, everyone, and welcome to Fresh Del Monte’s Second Quarter 2010 Conference Call. I’m Christine Cannella, Assistant Vice President of Investor Relations. Joining me today are Chairman and Chief Executive Officer, Mohammad Abu-Ghazaleh; and Senior Vice President and Chief Financial Officer, Richard Contreras, who will discuss our results for the second quarter.

Fresh Del Monte issued a press release this morning via Business Wire, e-mail and FirstCall. You may visit our website at www.freshdelmonte.com to register for future distributions. This conference call is being webcast on our website, and it 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. The press release may be found on our website. This morning, Mohammad will review our operating performance during the quarter, along with recent developments and our future outlook. Richard will then review our financial performance for the second quarter of 2010.

Please let me remind you that much of the information that we will discuss this morning, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the Securities laws.

Our actual results may differ materially from those in the forward-looking statements as a result of various factors, including those described under the heading “Description of Business Risk Factors” in our Form 10-K for the year ended January 1, 2010. 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.

With that, I’d like to turn this call over to Mohammad Abu-Ghazaleh. Mohammad.

Mohammad Abu-Ghazaleh

Thank you, Christine, and good morning, everyone. Thank you for joining us for today’s earnings call. The second quarter was a tough period for Fresh Del Monte. We faced a number of short venture events during the quarter, including tough crop in the global at our Guatemala banana farms. Weak banana pricing in Europe and ongoing uncertainty in the global economy, which continued to negatively impact consumer spending.

During the quarter, storm flooded our banana operations in Guatemala, and hampered logistics for a period of time throughout the region. While our banana operations in Guatemala were affected by heavy rains and wind, we worked diligently to address commitment to our customers with replacement volume from our growers in Guatemala and our own production in Costa Rica.

Though the severe weather damaged our banana production in Guatemala, we view this as temporary, and we are already in the process of replanting. We also continued to face intense competitive pricing pressure in our banana business in Europe. We acted by the working volume from key markets in this region. I believe Europe will remain highly competitive in the near-term. However, history has proven that irrational pricing behavior in the fresh produce industry is not sustainable long term.

In addition to severe storms and regional pricing competitions, we continue to be challenged by the weakness of the global economy. While we saw some trends improve in North America, Europe and Asia remained hindered. As a result, our earnings in these regions were negatively affected as consumer’s spending remained low. From my perspective, conditions in Europe would take some time to recover, while I see improvements in other global markets, I believe recovery will be significantly slower than we have both to see.

Obviously, during the quarter we responded aggressively to sustain our sales momentum, and I’m very proud of how our team reacted to this unexpected challenges. One of the key drivers of our success over the years has been our ability to focus on long-term growth while controlling costs. We have worked to create a strategy that allows us the flexibility to continue to grow while addressing tough market conditions and operating challenges when they occur.

During the quarter, we took action on a number of strategies and also implemented measures that will further streamline our business and cut cost for long-term growth. Still we entered into an agreement to sell our South African Fruit Canning business with plans to facilitate our canned fruit production will be taking two currently under utilized facilities, one in South Africa and the other in Greece, and consolidating them into one operation in Greece, which with a relatively minimal investment, will create a more efficient, well utilized, lower cost facility. Second, the decision was made during the quarter to stop planting melons in Brazil. We will now supply Europe in the offshore season with melons from other sources. Decisive switched actions such as these allow us to shift resources to customer product and growth areas of our business.

Despite the challenges during the quarter, we continue to generate strong cash flow, which enables us to significantly reduce our debt level and repurchase shares, thereby, increasing shareholders value. I believe it is important to remind everyone that Fresh Del Monte is not a company that focuses only on the short term. We have made a lot of decisions and investments over the years, and at differentiating our company and further enhancing our performance over the long term. Our second quarter was no difference. We continued this strategy during the quarter with product and packaging innovations and by market of new melon varieties.

Additionally during the quarter, we further increased the penetration of our grand awareness in emerging markets, highlighted by our new operations in Saudi Arabia, which are doing well and proceeding as planned.

In summary, Fresh Del Monte is a solid company, our top line is growing. We have the strength of an eligible management team, a cost effective vertically integrated infrastructure, a portfolio of helpful value-added product and a strong balance sheet and asset base.

At this point, I would like to turn the phone to Richard to provide you with the net update on our second quarter financials. Richard?

Richard Contreras

Thanks, Mohammad, and good morning. For the second quarter of 2010, excluding asset impairment and other charges net, Fresh Del Monte delivered earnings per share of $0.85 per diluted share, compared to $1.11 in the prior year period, and net sales increased $22 million to $1 billion, compared with $978 million in the second quarter of 2009. In addition, excluding asset impairment and other charges net, gross profit was $92 million, compared with $108 million in the second quarter of 2009. Operating income was $52 million, compared with $68 million in the prior year second quarter, and net income was $53 million, compared with $70 million last year.

The second quarter results include $9 million of charges above the gross profit line, related to inventory write-offs as a result of both damage in our Guatemala banana operations and our decision to stop planting melons in Brazil. We also incurred another $23 million of asset impairment and other charges net, related primarily to exiting our prepared foods canning operations in South Africa and another $6 million related to Guatemala. The write-off in South Africa is due to accumulated foreign exchange losses on these investments.

Now let’s turn to our segment performance for the quarter. In our Banana business segment, net sales increased $39 million to $452 million compared with $413 million in 2009 driven by higher sales in our North America and Middle East regions. Volume was 14% higher than last year. Worldwide pricing decreased 4% or $0.65 per box to $14.49. Price increases in our North America banana business were not enough to offset an oversupply of bananas and lower than expected demand and selling prices in Western and Eastern Europe. Gross profit excluding asset impairment and other charges net related to the storms in Guatemala decreased $14 million to $33 million compared to with $47 a year ago. The decrease in gross profit was partially offset by higher selling prices in North America and the higher global volume.

Worldwide unit costs were in line with the prior year period although costs in North America were higher primarily due to the storms in Guatemala, which I will discuss in a moment.

In our other fresh produce business segment for the second quarter, net sales increased $2 million. Gross profit for the quarter excluding other charges increased $4 million to $49 million. The increase was primarily the result of higher grape selling prices partially offset by lower gold pineapple selling prices and higher fruit and fuel costs.

In our gold pineapple category, net sales increased 12% to $143 million. Early flowering resulted in a 20% increase in pineapple volume. Unit pricing was 7% lower, a direct result of the higher supply and unit cost increased 3% excluding other charges.

In our melon category, net sales decreased 23% to $55 million. Volume decreased 25% due to the continued scaling back of our melon program. Unit pricing was 2% higher and unit costs were 4% higher excluding other charges. As a result of our melon operation closure in Brazil, we wrote off $5 million of inventory and incurred another $1 million in other charges. In 2009, we sourced approximately $2 million boxes of melons from Brazil for our European markets.

In our fresh-cut category, net sales were in line with the prior period. Volume decreased 4%, unit pricing increased 5% and unit costs were 5% higher. In our non-tropical category, net sales decreased 3% to $94 million. Volume decreased 1%, unit pricing declined 2% and unit costs were 12% lower. In our tomato category, net sales decreased 10% to $31 million. Volume decreased 13% due to extended cold weather and crop delays earlier in the year. Pricing increased 3%, however unit costs were 5% higher.

In our prepared food segment, net sales increased $4 million to $90 million during the quarter. The increase was primarily due to higher sales in our poultry and prepared meat businesses in Jordon and our canned pineapple and beverage product lines, partially offset by lower sales in our canned deciduous product line and weak economic conditions in Europe mainly in the UK and Spain. Gross profit was $11 million compared with $17 million in the prior year period. The $6 million decrease is primarily the result of higher production costs, the result of planned volume reductions in response to the current economic weakness in Europe. In our other products and services business segment, net sales for the quarter decreased $34 million to $10 million and gross profit decreased by approximately $800,000.

Now moving on to costs, banana fruit costs were higher this quarter as were bunker fuel and containerboard prices compared to the prior year period. For example, banana fruit costs, which include our own production and procurement for growers increased 3% worldwide and represented 29% of our total cost of sales for the quarter. However, heavy rains associated with tropical storm Agatha in early June and a blowdown that occurred in late April in our Guatemala banana production areas resulted in a loss of approximately $4 million.

We are projecting that the loss in volume on our Guatemala banana farms alone will negatively impact our profits by approximately $9 million in the second half of 2010 as compared with our previous projections.

Carton cost increased 4% and represented 6% of our total cost of sales. Bunker fuel cost increased 47% versus the prior year and represented 4% of our total cost of sales. But ocean freight costs during the quarter, which include third party charters, bunker fuel and fleet operating costs were in line with the prior year period, the result of greater efficiencies in our shipping operations offset by the higher bunker fuel costs. Ocean freight costs represent 14% of our total cost of sales.

The foreign currency impact at the sales level for the second quarter compared to the prior year was favorable by $5 million. The foreign currency impact at the gross profit level in the second quarter of 2010 was unfavorable by $2 million compared to the prior year. SG&A expense during the quarter was $43 million compared with $42 million in the second quarter of 2009, the increase versus last year was primarily the result of our expansion in the Middle East.

Other income net was a loss of $600,000 compared to with income of $3 million in the prior year period primarily due to foreign exchange.

For the quarter, interest expense net was in line with the prior year period at approximately $3 million. At the end of the quarter, our debt was $216 million as we paid down $93 million during the quarter. Also during the quarter we spent approximately $33 million to repurchase an additional 1.6 million shares as part of our share repurchase program.

On income taxes, during the second quarter of 2010, our tax provision included $7 million benefit related to a change in estimate. We are now projecting a 17% full year effective tax rate in 2010. Capital expenditures for the year are expected to be approximately $100 million.

This concludes our financial review. Operator, we can turn over to Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from Bill Chappell with SunTrust.

Bill Chappell – SunTrust

I guess first just trying to understand a little more color on the competitive environment in Europe, what that means for where you think banana prices will be for the second half. And then also on pineapple side with the early flowering, this happened last year as well, but just trying to understand what that does, does that dramatically change the pricing in the size for the second half as well?

Mohammad Abu-Ghazaleh

Well, as far as bananas is concerned, Europe, what we see right now is the prices are, year-over-year for the same period, we are below last year prices. Of course, we have to take into consideration as well the weakness of the euro compared to last year. So definitely there is now a bull (ph) market. Usually we for the last several weeks the price has been going down weekly. So we don’t know if this is going to continue as well this week and the following week or not. So far it’s a very weak market in Europe in terms of consumption and pricing.

As far as pineapple is concerned, we have quite a large oversupply situation in the last, I would say six, seven week period to the end of the quarter. And now we are seeing a more stable and short supply. So prices have rebounded significantly from where they were two weeks ago. And we believe that going forward the prices will be much stronger than what we saw during the second quarter.

Bill Chappell – SunTrust

Okay, and then just couple of clarification questions. Richard, did you say that the full year tax rate would be 17%? Because that would seem like it’s much higher in the September and December quarter. And then also, was there a reason why you didn’t exclude the gain on the sale of investments in your reported EPS numbers?

Richard Contreras

As far as the gain on sale of investments, we have never really excluded that. We used to have that included in our other line, in our other income line and a couple of quarters ago, we broke that out separately but we have never excluded that from our reported EPS. As far as the taxes, yes, that will cause a higher rate. So there is a few things going on in taxes from what we had previously forecasted earlier in the year. One is that, obviously, our tax structure is somewhat complex and it really depends on which jurisdiction you are making the money on. So that mix has changed somewhat throughout the year and the other thing is some of these unusual items such as the sale on South Africa and then the related loss there, the storms in Guatemala, you don’t get a tax deduction for a lot of those.

So while your income before tax, your denominator definitely is going down, your tax line is not. So for those and some other reasons, we are now projecting for the full year 17%. Now in the future, we should come back a more normal level after this year. But right now for us a normal level is probably around 15% ever since we reversed the valuation allowances in North America.

Bill Chappell – SunTrust

Just double checks, that’s kind of implying like a 35% to 40% rate for the second half?

Richard Contreras

Could be.

Operator

And our second question today comes from Scott Mushkin with Jefferies.

Scott Mushkin – Jefferies

Just to reiterate what you said there on the tax issue, you think 15% is the right number as we model this out over the years, we are not jumping to a new rate obviously, pretty important for cash flow analysis, so just want to make sure.

Richard Contreras

That’s right, Scott.

Scott Mushkin – Jefferies

Second issue, I know we just talked about pineapples and then I think, what I guess I am looking for is color about the early flowering, do we believe as we move through the rest of the year, there is going to be some kind of shortage of pineapples or was it going to just go back in the balance, kind of how do envision the rest of the year playing out, maybe you said a little bit of that, I might have just missed it, but I just want to make sure I got it.

Mohammad Abu-Ghazaleh

I think for the short term we would see a shortage. However I think volumes will come to stabilize in the next five to six weeks. However we will not see the overproduction that we saw during the last, let’s say couple of months.

Scott Mushkin – Jefferies

So do you believe that earnings on pineapples, as we get into the third quarter and fourth quarter should begin to normalize or will you guys be at somewhat of a disadvantage or is this early flowering something that happen throughout in –

Mohammad Abu-Ghazaleh

I think that it will normalize for us and hopefully we will see a better pricing going forward.

Scott Mushkin – Jefferies

Melons, I was wondering if you kind of get into the long-term plans there and where we see the melon business you know going forward how we should be thinking of it as investors as one of your key verticals but clearly you are taking volumes down and just your thoughts on where over the next maybe one to three years you are going to drive that business?

Mohammad Abu-Ghazaleh

We definitely are not exiting the melon business for sure. What we are doing is rationalizing this business in response to the market, let’s say conditions. We see Europe as being a very weak market in the last, I would say 18 months and it has really impacted our result as you could see from the last two to three quarters and that’s why we took the decision to discontinue Brazil. That’s becoming a very expensive place to produce there with the exchange rate in the country has become a big hindrance as well as the cost envelope (ph), it has been increasing steadily without any devaluation or depreciation in the currency and the company (inaudible) appreciation. That’s one side. The other side, we have new varieties which will be exclusive to Del Monte starting the offshore season, which hopefully will be starting by end of October, early November and these will make a difference for us as well as rationalizing our volumes into the market. Our focus really is on the stability and we are not going to produce just for the sake of production, we are going to produce for what the market needs and our customer needs and especially that we will have certain varieties and certain types of melons that will be exclusive and that I think will make a big difference.

Scott Mushkin – Jefferies

That’s a huge difference. I know we have talked about this before on the development of Melons and what you are trying to do there. I mean do you guys think that what you are doing in Melons is going to be anywhere near what happened in pineapples, I mean is it that significant as we see the introduction of that production –

Mohammad Abu-Ghazaleh

Yes, I always pray at night before I sleep that this would be the case but we never know, if God will answer my prayers.

Scott Mushkin – Jefferies

Do you want to talk about this weakness in the color differences and give us any –

Mohammad Abu-Ghazaleh

These will be very special melons that we have actually exclusivity on and we have been testing them during the last six months and the response from our buyers and retailers had been very, very positive with the big difference in pricing actually between the normal traditional varieties and this exclusive variety.

So we do hope that this will be with the new packaging, with completely a new look and that will be hopefully it will make a difference.

Scott Mushkin – Jefferies

When you look – sorry to just keeping hopping on this but there is obviously a fairly significant development. When you look at this in volumes next year on the offshore season, do we any fell on how much volume will be dedicated to the new varieties versus volume dedicated to traditional?

Mohammad Abu-Ghazaleh

It would be sufficient for the market but I would just like to speculate on the right now.

Scott Mushkin – Jefferies

My final question would be cash flow. You paid some debt, bought back some shares. The way you guys are generating cash flow, I guess you are going to get rid of the debt and just kind of thoughts on how we are going to use this strong cash flow. The quarter obviously had some challenges, the cash flow dynamics of the company were quite strong, but maybe some color on that.

Richard Contreras

I think we are always open to acquisitions, there is nothing in the works but we are always looking for opportunities there. You are right, we will continue to pay off debt, what’s left of it and we have a stock buyback program out there and will be opportunistic when it comes to buying back shares. So any of those three things is development.

Operator

We will go next to Heather Jones with BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

Wanted to talk about bananas. Before I go there though, I want to just a quick follow up on the melons. I think that you (ph) said volumes were down 25% and clearly you exited Brazil but seems like you cut your volumes from other sources too. And I just wanted to confirm that.

Mohammad Abu-Ghazaleh

Yes, that is true.

Heather Jones – BB&T Capital Markets

And then this new variety that you are working on, you talked about a significant price delta relative to the regular variety at retail, and is there a difference in the cost profile or would the higher price be up here passthrough the margin?

Mohammad Abu-Ghazaleh

No, it’s a higher price. The seeds from this variety is much more expensive than the normal traditional seed definitely. But the difference in price is – cover that and a lot more in premium as well.

Heather Jones – BB&T Capital Markets

So it will be enhancing the margins.

Mohammad Abu-Ghazaleh

Yes.

Heather Jones – BB&T Capital Markets

Okay. As far as your banana volumes in the second half, up double digit in the first half, but per your comments, about 4 million hedge (ph) from Guatemala, are you anticipating purchasing some of that in the spot market or replacing the other markets, or just overall volumes can be lower, (inaudible) kind of gains in back half that you saw in the first half?

Mohammad Abu-Ghazaleh

I think the volumes we have now, I believe we do have enough volumes at least for the next several months to fulfill our requirements for the markets. We don’t need to go outside to buy more fruit. As a matter of fact, we have more bananas at this time to go on. But you can never tell. I mean we are in August, anything can happen in the next two to three months that can change the picture. But as we speak, I don’t think we need to go outside and buy fruit.

Heather Jones – BB&T Capital Markets

But I mean should we still expect double digit year-on-year volume increases in the back half?

Richard Contreras

It will be a little less because like you sound, the 4 million boxes – the storm was, I think was in the morning of a day, weekend. So they have only impacted a small piece of the quarter just in the June. So the biggest impact will be at the back half of the year.

Heather Jones – BB&T Capital Markets

And then wondering on the cost side for bananas, you mentioned – I was wondering how much did say containerboard was a percentage of your COGS?

Richard Contreras

It was 1%.

Heather Jones – BB&T Capital Markets

1%, and how much was that up year-on-year?

Richard Contreras

I said carton cost in total. We are now quoting carton cost as opposed to just containerboard, because we buy whole boxes from producers as well.

Heather Jones – BB&T Capital Markets

Okay.

Richard Contreras

Carton costs were up 4% in the quarter, represented 6% of our total cost to sales.

Heather Jones – BB&T Capital Markets

Okay but if we looked at containerboard separately, that’s only 1% of your COGS.

Richard Contreras

Oh I am sorry. I misquoted that. It’s 6%.

Heather Jones – BB&T Capital Markets

Okay, carton. Okay because I am wondering, I assume some of those costs are up simply by virtue of having 14% increase in volume, because if you look at unit costs for bananas, they are flat year-on-year following, I don’t know how many quarters of – it’s pretty substantial year-on-year increases and this comps despite unfavorable year-on-year comparisons for bunker fuel. So, my question is are you seeing improved yields in your own production, or just what’s driving the fact that you are able to keep unit banana cost flat despite these headwinds?

Richard Contreras

There’s a lot of working parts within that total cost. As I mentioned earlier, the bunker fuel is pretty much offset by the efficiencies in shipping. We are seeing some better yields, but a big factor there too is that on the Asia product, some of that is related to the price. So, because the price is weak there, the cost becomes weak. Some of that is profit shared with growers. So, that’s skewing the worldwide cost. But if you look at the Central America side and especially obviously because of Guatemala, cost is higher.

Heather Jones – BB&T Capital Markets

Okay, so if I am looking at back half and let’s just satisfy with Asia, because we’ll see what happens on the price front, your cost will be up year-on-year on a unit basis?

Richard Contreras

Yes.

Heather Jones – BB&T Capital Markets

Even without Guatemala, just even if Guatemala – Agatha hadn’t happened your Latin American cost would be up year-on-year?

Richard Contreras

Probably somewhat even without Agatha because of foreign exchange in Costa Rica, which is weaker this year or stronger I should say this year, and then the carton continues to go up.

Heather Jones – BB&T Capital Markets

Okay, going to (inaudible) 4 million boxes. How long or is that on annualized basis?

Richard Contreras

That’s yes – we should be 100% backup to our own production by about March of next year, March or April of next year. So, it’s all going to be replanted. So, that’s between now and then.

Heather Jones – BB&T Capital Markets

Okay, so between August and March, you will launch about 4 million boxes.

Richard Contreras

Right.

Heather Jones – BB&T Capital Markets

Okay and then finally moving on to Europe, I understand that local price is down year-on-year, but last year was record prices. And it seems like relative to the last conference call, volumes into Europe have tightened pretty substantially. So, and also you get affected by the Russian fee which is hurting pricing. Just wondering as you look out, say a month or two, when comparisons become easier, I mean, what are your expectations for pricing at that point?

Mohammad Abu-Ghazaleh

I think from now until – I would say until mid of September is, end of September, I don’t think that we are going to see any significant improvement in pricing in Europe. I think it will take sometime for that market to recover. As you just mentioned, you know, Russia, I mean, they are selling bananas now at around $8 a box, which even (inaudible). So this is really – and a lot of that will be spilling in the nearby markets. So, I don’t feel the heat wave as well as you mentioned in Europe is also affecting the consumption of bananas, and the weak economies in that part of the world is really hampering consumption. So all of, you know, that’s why I don’t feel that Europe is going to really improve before the end of September hopefully that we can a see a turnaround in pricing.

Heather Jones – BB&T Capital Markets

But you would expect an improvement, you know, all things equal, in Q4.

Mohammad Abu-Ghazaleh

I do believe that we should see an improvement. Otherwise it would be really a bad situation if we don’t see an improvement in pricing in the fourth quarter.

Heather Jones – BB&T Capital Markets

Okay. Thank you for answering my questions.

Operator

We will take our next question from Jonathan Feeney with Janney Montgomery Scott.

Jonathan Feeney – Janney Montgomery Scott

Good morning. Thank you very much.

Mohammad Abu-Ghazaleh

Good morning.

Jonathan Feeney – Janney Montgomery Scott

Just a follow-up question, Richard. You know, you talked about your priorities, I was surprised to hear you first mention your open acquisitions as part of easy cash flow. I mean maybe –

Richard Contreras

I mean there is no specific format.

Jonathan Feeney – Janney Montgomery Scott

Okay, well I guess the substance of my question is, you know, at the returns you are making and the cost of debt right now, it would seem to me to be a best possible use of capital to buy back stock. And I guess I was taking it as, you substantially increased the rate at which you were doing that. Let me ask you this way, do you – over the course of the quarter, was there a point at which you sort of reached a level where you were comfortable at debt retirement, then turn to share repurchase, and so we should expect more of that over the course of the year or is it just that – what drove the timing I guess of accelerating that share repurchase?

Mohammad Abu-Ghazaleh

We do time this according to our needs. Really we monitor the repurchase in relation to other priorities that we have. So, we don’t have – we do have a repurchase program in place, but we don’t implement it as a kind of continuous pattern. We do decide as we go along. So, there’s nothing fixed in that I would buy so much every day or every week or every month. It’s a decision that we take in relation with our other priorities.

Jonathan Feeney – Janney Montgomery Scott

But I guess, just talking ballpark here, could you – what’s – Rich, what’s the marginal funding cost here?

Richard Contreras

Well, very low right now. About 3% right now.

Jonathan Feeney – Janney Montgomery Scott

So, I guess gist of the answer is just going to be opportunistic that doesn’t necessarily signal anything about accelerating share repurchase.

Richard Contreras

Correct.

Jonathan Feeney – Janney Montgomery Scott

Okay, and just turning to bananas for a second. You talked – and we’ve talked a lot the past of couple of quarters about how tough the trends are in Europe, yet it seems that the – it seems that towards the end of the quarter you saw that counter seasonal move in pricing on supply. Can you just – what makes you – it seems that there are some others in the industry, you know, couple of other publicly traded companies that seem a little bit more sanguine about the pricing prospects in Europe. I mean, can you be more specific as to recently, what makes you convince that Europe is going to remain a top pricing environment for banana?

Mohammad Abu-Ghazaleh

I mean the supplies are abundant. I mean supplies are all over the place. There is no problem in getting volumes from Ecuador or any other source as we see. And the consumption in Europe is not as strong and vibrant as it appears in the old days. Even though with a reduction of the tariffs, you know, they didn’t help in increasing, let’s say consumption.

Jonathan Feeney – Janney Montgomery Scott

Okay, thank you. And just finally, I know it’s been an ongoing and sort of steady thing, and your position in the company, Mohammad is enormous, but it looks like there’s been some selling by you and members of your family recently. I guess, in the context of – over the long term it seems like that there’s been in reduction in sort of ownership. I mean, and well that’s fair to put your ownership is enormous. Can you tell us anything about the future of your ownership plans and if there is another you know sort of a reduction in the worth?

Mohammad Abu-Ghazaleh

No, I cannot, you know, we cannot influence one vendor from selling some of his shares. I mean this is his personal decision. But as a family in whole we are not anticipating to reduce our involvement in the company, and I personally don’t have that intention.

Jonathan Feeney – Janney Montgomery Scott

Great. Okay, thank you very much.

Operator

Your next question comes from Eric Larson with Soleil Asset Management. Maybe you might check your mute button.

Eric Larson – Soleil Asset Management

Good morning everybody. How are you?

Mohammad Abu-Ghazaleh

Good morning.

Eric Larson – Soleil Asset Management

Just a quick follow-up again on the European sort of banana situation. You know, obviously we have the reduction in tariff, Mohammad, and we’ve, you know, my notion has been that in a very competitive market such as the fresh group business, that tends to always get bit away, and obviously that could be part of what the pricing issue is here along with supplies. One of the things that I did here though is that with global banana supplies were starting to tighten up, you are saying there’s adequate supplies. Are you starting to see a shift toward may be some banana supply tightening going forward and then what might that tariff/pricing issue be having on the European markets?

Mohammad Abu-Ghazaleh

As we speak we have no supply to end demands, I mean in terms of supply and demand I’m not talking about you but in general.

Eric Larson – Soleil Asset Management

Yes, okay.

Mohammad Abu-Ghazaleh

So this is for unforeseen reason we had terminal floods whatever, if we say we defense weather conditions, if we say with advanced variable I would see more supply than demand until the – towards the end of the year. Usually when winter comes in and cold is there definitely supplies will tighten as we see every year and everybody would be looking for volumes in different places, but as we speak we have not I believe the industry in general has more supply than demand, I mean we do have enough supplies to cover our market and more.

So I don’t think this is going to change for the next, three to four months, five months until the winter comes in unless we have hurricane, or a flood, or a storm or something that curtail supplies or production significantly, then it would be a different picture.

Eric Larson – Soleil Asset Management

Okay and Mohammad, give us a quick update again the really, the very big bright spot in your business is Middle East and you saw significant ramp up in sales volumes in the second quarter, not just in just year-over-year numbers but how was the building sequentially. Can you give us a little bit and this is obviously going to help you with your volumes finding new markets for that. Could you talk a little bit about the Middle East again, and what your expectations might be going forward given your strong second quarter?

Mohammad Abu-Ghazaleh

As I mentioned (inaudible) I believe that we will get as what we have said in the beginning, the revenues that we projected for the next three or four years. We are going ahead of our original plan. We see a huge potential there. We will be going to fresh up fruits, vegetables in Saudi Arabia and vegetables as well which will be a new in this market. We have several things that on the pipeline that will not show up in 2010 but hopefully 2011 and forward. So we have a lot of things going on there. Its expanding, I mean we are just in the initial stages of our penetration especially in Saudi Arabia, I mean Dubai and the UAE have been there for several years.

So and still we are expanding and consolidating our position in this market as well but for Saudi Arabia which is the largest market in the Middle East, we are just at the beginning of the – I would say we had been there for almost 12 months. So it’s not really very long period in terms of developing the business but we are very pleased with what’s going on right now.

Eric Larson – Soleil Asset Management

Yes, now it looks very strong. Just one of the final question and it relates to partially to a potential use of future cash. You’ve always been pretty opportunities in buying a ship or two here and there and I know that you’ve been scrapping a bunch in recent periods. And given sort of the, I guess softness in that the whole freight market right now might give you opportunities to add a ship or two on a owned basis to your fleet, I mean how are you viewing owning versus leasing or continuing to farm out some of your freight rates?

Richard Contreras

Well we are nationalizing our fleets right now, we have scrapped several ships during the last seven, eight months, we have they have come to twice on old age which helps create small cost into operation. So we have already crafted ships of our ships of our fleet sorry and we are nationalizing our business in shipping by being opportunistic, right now the lease is much cheaper than buying so that’s our kind of orientation sight. We do have enough ships, we do have enough capacity and I don’t see that we are going into the market for and that we continue new ships.

Eric Larson – Soleil Asset Management

Okay, thank you.

Operator

(Operator Instructions) And our next question comes from Diane Geissler with Calyon Securities.

Diane Geissler – Calyon Securities

Hi good morning.

Mohammad Abu-Ghazaleh

Hi good morning Diane.

Diane Geissler – Calyon Securities

I just wanted to ask on the Brazilian operations. So are you completely out of melons now in Brazil and I guess what do you plan to do is with your facilities there. Are you planting something out?

Mohammad Abu-Ghazaleh

No we are ceasing operations in the melon there and we would be disposing a lot assets there but we don’t at least, we are in bananas there.

Diane Geissler – Calyon Securities

Right.

Mohammad Abu-Ghazaleh

And we are expanding gradually into bananas in Brazil. However as far as melons are concerned we are completely freeze operations there, and we will be selling our disposing of all the assets being land or equipment or whatever we have there and we are in that process right now.

Diane Geissler – Calyon Securities

Okay and then on the (inaudible) I’m assuming you have insurance, business interruption and or –

Richard Contreras

We do have some insurance for it, I mean we don’t have insurance on the fruit if we lose the fruit, we lose the fruit but we do have insurance on infrastructure and it will be probably on some business interruption but we are in that process, this takes time, I mean it’s not overnight but hopefully we will be recovering some of our losses into that.

Diane Geissler – Calyon Securities

Okay and then can you just talk a little bit about your expectations, the closure of the facility in South Africa and the consolidation in degrees and what you would expect that would, how that would benefit your gross margins, because your gross margins in the prepared fruit segment were down pretty significantly in the quarter on a year-over-year basis and I think you sited production, I don’t remember exactly how you worded in the press release but you did say it production cost, so could you just talk a little bit about what’s going on there and what is your shift goal in terms of a margin in that business?

Mohammad Abu-Ghazaleh

Well there is a few things that we’re doing strategically there Diane, one as we mentioned is combining two what were underutilized facilities into one which should now be highly utilized efficient facilities, so that obviously in the next year and forward should make us quite a bit lower cost. The other thing we’re doing which is a fact that this quarter’s profit and also the next couple of quarters is that we’ve scaled back some of the production in that same product line on camp product so we’re incurring some fixed costs that otherwise would have been capitalized into inventory that would have been sold next year, we’re expensing that now. So that’s also causing the decline there in profitability there but both of those things we think position us well going into next year and beyond. We don’t have stated margin that we’ll give our but we think there will be improvement there.

Diane Geissler – Calyon Securities

Okay, so the decision to curtail some production in the deciduous product is that just if the market, it’s more competitive than you originally thought or (inaudible) your return targets or what –

Mohammad Abu-Ghazaleh

There is an oversupply in that market. So we want to bring that over supply down to more normal levels?

Diane Geissler – Calyon Securities

And what falls into the deciduous, is that like peaches and pears and –

Mohammad Abu-Ghazaleh

Exactly can peaches can pears, (inaudible).

Diane Geissler – Calyon Securities

Okay and then I guess my final question is have you repurchased shares since the close of the quarter?

Mohammad Abu-Ghazaleh

Since the close of the quarter?

Diane Geissler – Calyon Securities

Yes.

Mohammad Abu-Ghazaleh

No we haven’t.

Diane Geissler – Calyon Securities

Since July 2.

Mohammad Abu-Ghazaleh

No.

Diane Geissler – Calyon Securities

Okay, thank you.

Operator

And we’ll go next to Vincent Andrews of Morgan Stanley.

Vincent Andrews – Morgan Stanley

Hi I think actually all my questions have already been answered. So I’ll just pass it on. Thanks.

Mohammad Abu-Ghazaleh

Thank you.

Operator

And we have a follow-up from Heather Jones with BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

Hey thanks for taking my follow-up, just one question. Looking at the North American banana market, wondering if you could give us an update on given the (inaudible) rough estimate of portion of fruits spot and wonder if you could give us your initial thoughts for 2011 than it did going to 2010. So just wonder if you could give us a sense of your expectations for the contracting season?

Richard Contreras

Yes, as far as our supply into North America is normal and regular as even during the after the storm, we were not short North America at all, I mean we gave North America exactly the same growing when they needed, don’t forget that we have growth have actually compensated for our loss at some part of our loss into our (inaudible). So we don’t see there will be a shortage – we do have contracted going on from as we told we take it weekly basis into the West Coast. Other than that we haven’t seen any really significant changes into our supply chain, however I would love be able to answer your question as far I will next year plans for supply and (inaudible). This is something we cannot disclose on a conference call.

Heather Jones – BB&T Capital Markets

Okay, all right. I appreciate it. Thanks.

Richard Contreras

Thank you.

Operator

And we have no more questions at this time. So I would like to turn the call back to Mohammad Abu-Ghazaleh.

Mohammad Abu-Ghazaleh

Thank you very much and I would like to thank everyone on the call and I appreciate your attendance and patience with us and we hope to speak to you on our next conference call. Thank you and have a good day.

Operator

That concludes today’s call. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fresh Del Monte Produce Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts