Jul 30, 2013
Executives
Christine Cannella – Assistant Vice President-Investor Relations Mohammad Abu-Ghazaleh – Chairman and Chief Executive Officer Richard Contreras – Senior Vice President and Chief Financial Officer
Analysts
Brett M. Hundley – BB&T Capital Markets Jonathan P.
Feeney – Janney Montgomery Scott LLC Eric J. Larson – CL King & Associates
Operator
Good day, ladies and gentlemen, and welcome to the Fresh Del Monte’s Second Quarter, 2013 Earnings 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 you to today’s host, Christine Cannella, for opening remarks.
Please go ahead.
Christine Cannella
Thank you, Jessica. Good morning everyone, and welcome to Fresh Del Monte’s second 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 second 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 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 on 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 over to Mohammad.
Mohammad Abu-Ghazaleh
Thank you, Christine, and good morning, everyone. We are pleased with our strong performance during the second quarter of 2013.
Where we said that last year’s second quarter in both net sales which were 7% higher and exceeded $1 billion, and in adjusted earnings per share. Our performance demonstrates the continuation of the strength of Fresh Del Monte’s core products and the vibrancy of the Del Monte brand across a broad range of distribution channels.
Our results were further shaped by our increased presence in emerging markets and the strength of our global fresh-cut product line. Now I’d like to touch on few highlights in our regions.
In our North America business, we generated net sales of $540 million, a strong improvement over last year’s second quarter. Our North American banana business grew with higher volume and increased demand.
We also benefited from exceptionally strong sales and volume growth in our fresh-cut business during the quarter due to increased demand and consumption. Not only did we further capitalize on opportunities to reach new customers with our growing presence in non-traditional distribution channels.
But, we also increased sales of fresh-cut products to existing customers. Driving organic growth and creating new opportunities for future growth.
Fresh-cut remains one of the fastest growing trends as consumers seek healthy, fresh, Do-It-For-Me convenience. All these factors and trends, we believe position us well for the future.
In Europe, net sales grew 4% to $204 million in the second quarter. We experienced substantial improvements in our European banana business with higher pricing during the second quarter and currently.
We expanded our Prepared Food business by penetrating countries, formerly part of the Soviet Union, where we foresee strong demand for our fresh and prepared products. Our Middle East region continued to gain momentum during the second quarter with net sales of 36% higher year-over-year.
Our Banana business was robust with strong sales and volume growth. Sales in our other fresh produce business was also higher with strong volumes and increased pricing.
We experienced strong demand for our prepared food products as well. With a successful introduction of a wide range of new products, during the quarter, we continued to expand in this region, establishing new operations in Turkey, further penetrating new geographies to capture additional markets share.
We experienced a much stronger quarter in Asia than last year, especially in terms of profitability, driven primarily by higher pricing in our banana and pineapple business. We continue to invest in production capabilities in the Philippines to meet growing demands for our products in Asia and the Middle East.
In summary, the future holds great promise for Fresh Del Monte. A key to our success continues to be our ability to leverage the power of Del Monte brand combined with the scale and scope of our vertically integrated operations, to create new in-roads in distribution channels, and any new and fast growing markets, offering fresh and prepared products and services that meets the needs of our customers.
At this stage, I would like to turn the call to Richard.
Richard Contreras
Thanks Mohammad and good morning. For the second quarter of 2013 excluding asset impairment, other charges, and a non-comparable item, we reported earnings per diluted share of $1.02, compared with earnings per diluted share of $1.01 in the prior year period.
Net sales were $1,024 million compared with $958 million in the second quarter of 2012. Gross profit was $106 million compared with gross profit of $116 million in the prior year.
In addition, excluding asset impairment, other charges and a non-comparable item, we reported operating income for the second quarter of 2013 as $63 million, compared with $71 million in the prior year. Net income was $57 million in the second quarter of 2013 compared, with $58 million in the second quarter of 2012.
In order to arrive at adjusted net income and adjusted earnings per share of $57 million or a $1.02, we have excluded cash received as a result of a favorable court judgment of $16.6 million or $0.29 per share. In our Banana business segment during the second quarter, net sales increased $32 million to $457 million on higher sales volume in Europe, the Middle Ease, and North America.
Overall, volume was 5% higher compared to the last year. Worldwide pricing increased 2% or $0.33 per box to $15.16, primarily, due to higher pricing in Asia and the Middle East.
Gross profit decreased $3 million to $35 million, compared with gross profit of $38 million a year ago. The decrease was primarily due to higher production and procurement cost of fruit from Central America.
Total worldwide banana unit costs increased 4% compared with last year’s second quarter. In our other fresh produce business segment, net sales increased $24 million to $478 million, compared with $454 million in the second quarter of 2012.
And gross profit was 6% lower than the prior year period. In our Gold pineapple category, net sales decreased $9 million to $136 million, compared with $144 million in the prior year, primarily due to lower volume.
Volume decreased 5% due to lower production in the Philippines and Central America. Unit pricing was 1% lower and unit cost decreased 1%.
In our fresh-cut category, net sales increased $7 million to $117 million, compared with $109 million in the prior year, the result of increased demand in North America and the Middle East. Volume increased 5%, unit pricing increased 2%, and unit cost was 3% higher than the prior year.
In melons, net sales were $35 million, compared with $36 million in the second quarter of 2012. Volume decreased 8%, unit pricing was 4% higher, and unit cost was 1% higher.
In our non-tropical category, net sales increased $24 million to $135 million, compared with $111 million in the second quarter of 2012. The increase was primarily attributable to higher sales in our grapes and avocado product lines in North America.
Volume increased 20%, unit pricing increased 2% and unit cost was 6% higher. In our tomato category, net sales increased $2 million to $25 million, compared with $23 million in the prior year.
Volume decreased 6%, pricing was 16% higher and unit cost was 10% higher. In our Prepared Food segment, net sales increased $10 million to $89 million, compared with $79 million in the second quarter of 2012.
The increase was primarily driven by increased sales in our canned pineapple, poultry and meat, and industrial pineapple product lines. Gross profit decreased $4 million to $9 million primarily due to lower selling prices in our pineapple and our industrial pineapple product lines.
Now moving to costs, banana fruit costs, which includes our own production and procurement from growers increased 7% worldwide and represented 29% of our total cost of sales for the second quarter. It should be noted that during the quarter we experienced a strike and a blow down in Costa Rica.
The volume decrease not only caused our production cost to increase, it also forced us to purchase higher price fruit in Ecuador in the quarter. Carton costs increased 2% and represented 4% of our cost of sales.
Bunker fuel decreased 9% versus the prior year and represented 4% of our total cost of sales. And ocean freight costs during the quarter, which includes bunker fuel, third party charges and fleet operating costs was 5% higher, where the quarter ocean freight represented 13% of our total cost of sales.
The foreign currency impact at the sales level for the second quarter compared to the prior year was unfavorable by $19 million, and at the gross profit level the impact was unfavorable by $15 million compared to last year. Other income net for the quarter was $18 million compared with other expense net of $3 million in the second quarter of 2012.
The increase was primarily attributable to the favorable court judgment that I mentioned earlier. At the end of the quarter, our total debt was $123 million.
As to stock repurchases during the second quarter, we repurchased 2,386,400 shares for approximately $64.2 million as part of our share repurchase program. Income tax expense was $6 million during the quarter, compared with an income tax expense of $7 million in the prior year period.
As it relates to capital spending, capital expenditures for the six months ended June were $57 million and capital expenditures for the full year is expected to be approximately $120 million. This concludes the financial review.
We’ll now turn the call over to the operator to begin Q&A.
Operator
Thank you. (Operator Instructions) We’ll go first to Brett Hundley with BB&T Capital Markets.
Brett M. Hundley – BB&T Capital Markets
Good job this quarter.
Mohammad Abu-Ghazaleh
Thank you, Brett.
Brett M. Hundley – BB&T Capital Markets
I wanted to start with your banana cost. Of course, Richard, you noted some one-time issues in the quarter and I’m just wondering banana costs were up about 4% year-on-year and they were up about 1.5% year-on-year in Q1.
Noting those one-time issues, would it be fair to assume that your banana cost inflation would go back more towards Q1 levels or would you expect kind of something in between going forward? If you could just talk to that that would be helpful.
Mohammad Abu-Ghazaleh
Yes. Obviously there would be a recovery because of those one-time items, especially the purchases in Ecuador.
Pricing obviously is always lower in Ecuador in the second half of the year and we shouldn’t have to go out and buy as much, which has been our practice, so reducing those volumes. So it should go down from what you saw in the second quarter.
Brett M. Hundley – BB&T Capital Markets
And then, on Asia-Pac, sales there were down 5%. I think that area performed better than we had expected towards what you pointed out, and we had the yen model down about 13% year-on-year in the quarter.
So I was wondering if you can talk – and I’m parsing out businesses here, but if you can talk to banana in the region and local price trends there, I mean, are you seeing any local price trends there up in the double-digit?
Richard Contreras
Yes, that’s what we see right there and actually Japan and Korea performing this year compared to last year is quite significant in terms of higher pricing and better markets. As well as the Middle East markets were as well performing, let’s say, in much better way than last year as well.
Brett M. Hundley – BB&T Capital Markets
Okay. And are you seeing any issues now and going forward with the closure of Iran Philippine production going elsewhere, can you just talk about some of the issues in the region?
Mohammad Abu-Ghazaleh
No, there is nothing of the sort really. Iran has been a regular market and during the year, though they were out six, seven months there has been a reduction in volume going into Iran, but as we speak now I think markets are getting back to normal trend, which means that they are receiving more fruit now and I don’t see any problem in that respect at all going forward.
Brett M. Hundley – BB&T Capital Markets
Okay. That’s helpful.
Thank you. And then I wanted to focus on North America.
You guys noted higher volumes for the Company in banana. You pointed towards strength in your fresh-cut business, and I know that this – you saw North American sales up, I guess, 7% year-on-year.
I know this is little bit of a tougher banana market this year in North America, but I was wondering if you can kind of talk about if there are other product groups that are helping you offset what I imagine the tougher pricing environment in banana or is it largely just strength in your fresh-cut business there?
Mohammad Abu-Ghazaleh
Well, it’s in both. Our volumes in bananas have increased year-over-year.
I agree with you that the pricing in North America was a little bit softer than last year because of a competitive environment, but overall our business is changing. The mix of our business is changing.
So banana still is a very important part of our business, but we have become a very important player into the fresh-cut business, I would say a leading player in the fresh-cut business in terms of fruits and the channels that we have opened in the last, I would say seven months, eight months have transformed this business into a different kind of a game. And going forward, before the end of the year, we will be introducing new lines of businesses, which will be protein sellers and different kinds of offerings that will also give us, I believe, a very important entry in the market and leverage in satisfying our customer needs based on the retail side or the convenient side.
Brett M. Hundley – BB&T Capital Markets
Okay. And then, I just have one other question on the M&A environment and as the Company looks for future growth in that regard, I was wondering if you could just then update on, are you placing more of an emphasis on geographic growth, are you looking to grow specifically in a certain part of the world or are you looking more at asset, business type growth as you kind of evaluate what your targets would be?
Mohammad Abu-Ghazaleh
We are going all across. We are going geographic, we are going core business, we are going – increasing assets and I believe that we will do what’s right for the Company.
So that will be our objective.
Brett M. Hundley – BB&T Capital Markets
Okay. Thank you.
Operator
We’ll go next to Jonathan Feeney with Janney.
Jonathan P. Feeney – Janney Montgomery Scott LLC
Good morning. Thank you very much.
Mohammad Abu-Ghazaleh
Hi, Jonathan. Good morning.
Jonathan P. Feeney – Janney Montgomery Scott LLC
Mohammad, what’s allowing for a better tone in banana prices specifically, both in – since the middle of May it appears that European spot banana prices have improved somewhat significantly and now with that those, but also the types of increases you were just talking with Brett about in Asia, what’s allowing for that?
Mohammad Abu-Ghazaleh
I think from Europe it’s a short of supply, let’s say, in one respect, which is very important. The second thing that Ecuador definitely has an impact on the market because Ecuador short supply has impacted the markets in Europe, particularly in the Mediterranean in a normal year where you have the normal supplies of Ecuador.
We have a flood of fruits in the Mediterranean and the Eastern European countries and this year we don’t see that the case. So it has not been spinning over into the western market, let’s say the European Union markets and that has, if you look at the whole picture, the macro picture that’s really what’s helped in stabilizing prices in these markets.
And the same thing, it’s like a trend. It’s overall trend.
If this happens in Europe, it reflects on the other markets as well and that’s what really happened. In our case, I think our diversification and our graphical coverage, and I believe this year in particular, our geographical coverage on a global basis has been so well positioned that we are placing the product where it is needed, let’s say, and that has helped us a lot in achieving better results and better performance.
Jonathan P. Feeney – Janney Montgomery Scott LLC
Thank you. Just one follow-up.
I would just ask broadly. Has there been anything structural in the past, say, a year or 18 months that would change your view as to the average, say, profitability of bananas over the next three years to five years knowing full well it’s going to have its ups and downs, or just say if there’s any structural changes positively or negatively?
Mohammad Abu-Ghazaleh
I believe structurally, yes. There is definitely a structural change in the banana business and especially coming from Ecuador.
If Ecuador continues at the same pace that we see today, I think the banana business will definitely change going forward in the future. And I think what Ecuador is doing via the government through its new regulations and new procedures, I think they are doing the right thing even though that many people believe that it’s against the producers and in the final analysis I think it will be a better solution for the producers, for the country, less fruit, more money and more income makes more sense to what’s happening.
And that has changed the game that is in the market to-date. That’s one thing The other thing is that definitely it was like a speculation market in the past and now we are seeing a more structural, more organized and disciplined, let’s say, way of marketing bananas.
So, in summary, I believe going forward I do believe that markets will improve and the banana business in general will improve, maybe not significantly, but definitely. It will not go to the ways that we saw in the last two, three years.
Jonathan P. Feeney – Janney Montgomery Scott LLC
Great. Thank you very much.
Operator
(Operator Instructions) And we’ll go to Eric Larson with CL King.
Eric J. Larson – CL King & Associates
Yeah. Good morning, everyone.
Congrats on a really nice quarter, Mohammad.
Mohammad Abu-Ghazaleh
Thank you, Eric.
Eric J. Larson – CL King & Associates
A couple of questions. Just to dial back on your industrial pineapple production, which was a difficult issue in your first quarter, I guess I was assuming that that might be more of a profit issue for you in maybe the next quarter or two, but it seems that that did not penalize you.
Did you see a major turnaround in the industrial pineapple side in the quarter?
Mohammad Abu-Ghazaleh
Yes. You know the first quarter and the beginning of the second quarter, there was a lot of cheap prices coming out of Thailand.
Thailand is one of the biggest producers of industrial [percentage] pineapple and that was the reason why the prices were depressed and markets were also depressed. Now in the last two, three months the situation has changed because they had bad weather in Thailand during the last several months, which reduced their production significantly, but however that doesn’t translate into immediate change into the market, but we do have an improvement, and we’ve been seeing improvement on pricing on industrial products, but it will take there will be a couple of more months to see significant development.
Eric J. Larson – CL King & Associates
But is it fair to say that it didn’t have the same drag on your earnings this quarter as it did in the first quarter. Correct?
Mohammad Abu-Ghazaleh
Significant improvement, yes.
Eric J. Larson – CL King & Associates
Yes, okay all right. And Mohammad, the two impressive things I thought, obviously your North American sales as well as the Middle East, but in your prepared comments, you’ve talked about new channels where your Fresh Cut Produce is going into North America, and I would assume that your expansion markets in the Middle East was also significant, but what are some of the new channels that you are pursuing and having successful in fresh cut sales.
Mohammad Abu-Ghazaleh
I will give you an example, schools, universities, games, convenient stores, petrol stations, I can give you a whole list of names, but this is not.
Eric J. Larson – CL King & Associates
Okay, yeah, it’s important that our [convex] has some good fresh fruit, but the other thing is the Middle East obviously had a really big improvement you mentioned Turkey, can you, have you opened new distribution centers, can you tell, talk a little bit about the substantial year-over-year improvement their in the Middle East?
Mohammad Abu-Ghazaleh
It is a continuing success story, I mean actually, I mean our presence there in just we are scratching just the surface that I found. I believe that we have a very, very substantial opportunity going forward.
So we are doing a lot of things there as we speak. We have things that we are not doing in Europe or in North America and hopefully we can replicate in these markets going in the future.
So we are doing so many things that are really changing our business from a pure let’s say, fruit company into a more fruit added value product lines, which have different margins, which has different client base, and it’s opening a new horizon for Fresh Del Monte.
Eric J. Larson – CL King & Associates
Okay. And then just a final kind of a sales marketing question, and really to highlight your growth again here too, your grapes, your non-tropical, your grapes and avocado business also showed a substantial year-over-year increase.
And I know that the avocado business have been very strong in units and growth in that, do you good unit growth in grapes and stuff as well or was it pricing related to those. Can you talk a little bit about the non-tropical side of your North America business?
Mohammad Abu-Ghazaleh
Which is like the deciduous, are you referring to?
Eric J. Larson – CL King & Associates
Yes, your grapes and avocado, your deciduous, yeah.
Mohammad Abu-Ghazaleh
Well, the deciduous our main volumes come from Chile during the off season, which comes between December, and let’s say April.
Eric J. Larson – CL King & Associates
Right.
Mohammad Abu-Ghazaleh
The major, the bulk of our deciduous program, we do have as well some programs from Mexico and some programs from California, which is really minimal compared to our volumes coming out of Chile. So this is our deciduous.
Our avocado business is a 12 months operation, and mainly it comes from Mexico. The majority of the fruit as well as from California as well as Chile and Peru, but the majority comes from Mexico.
And this business is growing. We are growing slowly but surely, and I believe that Del Monte, Fresh Del Monte will become a very important player in the next two to three years from now.
Eric J. Larson – CL King & Associates
Okay, and just a final question Mohammad just on sort of capital allocation, obviously you guys you bought back a lot of stock in the quarter, which was great to see your debt is $125 million, it’s very low. Is the debt level, are you comfortable with the debt level, and your incremental cash flow would still maybe partially go towards the share repurchase activity.
Mohammad Abu-Ghazaleh
We are open to all kinds of opportunities, I mean repurchasing the shares we did that time and we have been doing that and we look at capital expenditure, where we need to expand, and whatever our opportunities that come our way.
Eric J. Larson – CL King & Associates
Okay. Thank you, Mohammad.
Mohammad Abu-Ghazaleh
My pleasure.
Operator
This does conclude today’s question-and-answer session. At this time I would like to turn the conference back over to Mohammad Abu-Ghazaleh for closing remarks.
Mohammad Abu-Ghazaleh
Thank you so much. Thank you for joining us on this conference call today and hope to being with you again next quarter, and have a good day.
Thanks everyone.
Operator
This does conclude today’s conference. Thank you for your participation.