Oct 29, 2013
Executives
Christine Cannella – AVP, IR Mohammad Abu-Ghazaleh – Chairman and CEO Richard Contreras – SVP and CFO
Analysts
Brett Hundley – BB&T Capital Markets Jonathan P. Feeney – Janney Montgomery Scott LLC Eric Larson – CL King & Associates
Operator
Good day, ladies and gentlemen, and welcome to the Fresh Del Monte’s Third Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode.
At the conclusion of our prepared remarks, we will conduct a question-and-answer session. (Operator Instructions) I would now like to introduce your host for today’s conference call, Christine Cannella, for opening remarks.
Christine Cannella
Thank you, Stephanie. Good morning everyone and welcome to Fresh Del Monte’s third 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 third 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 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 the call now over to Mohammad.
Mohammad Abu-Ghazaleh
Thank you, Christine, and good morning, everyone. I am pleased to report that during the third quarter of 2013, Fresh Del Monte generated strong top-line growth.
Net sales for the quarter increased 9% year-over-year to $861 million with higher net sales across all regions and a quarter that is generally the most difficult of the year for the produce industry. In terms of other highlights for the period, we continue to enhance our operations and further strengthen our global business platform.
We gained new customer relationships and expanded our distribution channels to drive additional sales and increase global market share. We firmly believe there are significant opportunities for continued long-term growth through new channel development bringing our products closer to end-customers.
During the quarter, we introduced an attractive range of new products in our value-added fresh cup and prepared food product lines to meet growing consumer demand for convenient healthier nutritious meals and snacks. For example, we benefited from our presence in the Middle East, a rapidly growing market for Del Monte brand in our Fresh and Prepared businesses.
We certainly have every reason to be excited about our progress in this region. As we continue to break new grounds as the first multi-national branded fresh produce company to establish direct sales, a distribution network and a number of innovative points of sales.
Going forward, we will continue to introduce new products that we can sell through a variety of distribution channels in our markets. During the quarter, we also continued to explore sourcing opportunities to increase our core products volume and to further leverage our vertically integrated business models and strengthen our leadership position.
At the same time, we were faced with a number of difficulties that limited our ability to deliver optimal earnings for the quarter. Our biggest challenge was an industry-wide oversupply of bananas.
In addition, while we succeeded in attaining price increases across almost all of our business segments, price increases were not high enough to offset a range of higher operating costs including increased logistics and through procurement costs. Additionally, these factors were compounded by unfavorable exchange rates.
We also continue to face a very competitive banana market in North America and challenging conditions in Europe. We are very bullish on our long-term prospects.
We will continue to do everything we can to keep our expenses low. However, while we have seen signs of rationalizations in some markets, we also recognize that selling prices of bananas need to improve across the industry.
In summary, we have always believed the foundation of Fresh Del Monte’s long-term success is our adherence to a cost strategy that includes a focus on diversification, efficiencies and a powerful combination of assets. We have a diverse product line that is sourced globally.
We hold commanding positions in several product categories and we have a powerful distribution network that enables us to meet growing worldwide demands. We have a strong balance sheet and we have proven time and time again that we are a company that moves in the right direction.
Now I will turn the call to Richard.
Richard Contreras
Thanks Mohammad and good morning. For the third quarter of 2013, excluding asset impairment and other charges, we reported earnings per diluted share of $0.09, compared with earnings per diluted share of $0.45 in the prior year period.
Net sales were $861 million, compared with $789 million in the third quarter of 2012 and gross profit was $53 million, compared with gross profit of $75 million in the prior year. In addition, excluding asset impairment and other charges, we reported operating income for the third quarter of 2013 of $7 million, compared with $31 million in the prior year and net income was $6 million in the third quarter of 2013 compared, with $26 million in the third quarter of 2012.
In our Banana business segment during the third quarter, net sales increased $43 million to $402 million compared with $360 million in the third quarter of 2012 with higher sales volume in all of our regions and increasing sealing prices in Asia, the Middle East and Europe. Overall, volume was 3% higher compared with last year, worldwide pricing increased 8% or $1.09 per box to $14.30, partially offset by lower selling prices in North America due to competitive market pricing.
Gross profit decreased $11 million to $1 million, compared with gross profit of $12 million a year ago with almost the entire decrease in North America where higher cost were combined with lower pricing. Total worldwide banana unit costs increased 12% compared with last year.
In our Other Fresh Produce business segment, net sales increased $31 million to $366 million, compared with $335 million in the third quarter of 2012. And gross profit was $10 million lower than the prior year primarily due to the non-tropical categories.
In our Gold pineapple category, net sales decreased $8 million to $115 million, compared with $123 million in the prior year. Volume decreased 10% due to lower production in the Philippines and Central America.
Unit pricing was 3% higher and unit cost increased 3%. In our fresh-cut category, net sales increased $7 million to $106 million, compared with $98 million in the prior year, the result of increased demand in North America and the Middle East.
Volume increased 8%, unit pricing was in line with the prior year and unit cost increased 5%. In melon category, net sales increased $3 million to $10 million, compared with $7 million in the third quarter of 2012.
Volume increased 4%, unit pricing was 32% higher, and unit cost was 20% higher. In our non-tropical category, net sales increased $21 million to $82 million, compared with $61 million in the third quarter of 2012.
Volume increased 25%, unit pricing increased 7% driven by higher selling prices in our avocado product lines and unit cost was 17% higher than the prior year primarily the result of quality issues with grapes sourced from Chile. In our tomato category, net sales increased $6 million to $22 million, compared with $16 million in the prior year.
Volume increased 20%, pricing was 16% higher and unit cost was 14% higher. In our Prepared Food segment, net sales decreased $1 million to $93 million, compared with $94 million in the third quarter of 2012 and gross profit decreased $1 million to $11 million.
Now moving to costs, banana fruit cost, which includes our own production and procurement from growers increased 11% worldwide and represented 31% of our total cost of sales for the third quarter. Carton costs increased 16% and represented 4% of our total cost of sales.
Bunker fuel decreased 6% versus the prior year and represented 5% of our total cost of sales. And ocean freight costs during the quarter, which includes bunker fuel, third-party charters and fleet operating costs was 16% higher, primarily due to increased shipments of bananas to the Middle East from Central America as a result of an oversupply.
For the quarter, ocean freight represented 12% of our total cost of sales The foreign currency impact at the sales level for the third quarter compared to the prior year was unfavorable by $15 million, and at the gross profit level, the impact was unfavorable by $10 million compared to the third quarter of 2012. Other expense net for the quarter was $200,000 compared with other expense net of $3 million in the third quarter of last year.
The decrease was primarily attributable to lower foreign exchange losses. At the end of the quarter, our total debt was $100 million.
Income tax expense was $2 million during the quarter, compared with net income – I am sorry, compared with income tax expense of $200,000 in the prior year period. As it relates to capital spending, capital expenditures for the nine months ended September 2013 were $90 million.
Capital expenditures for the year are expected to be $120 million. This concludes our financial review.
We can now turn the call over for Q&A.
Operator
Thank you. (Operator Instructions) We’ll go first to Brett Hundley with BB&T Capital Markets.
Your line is open.
Brett Hundley – BB&T Capital Markets
Hi, good morning everyone.
Mohammad Abu-Ghazaleh
Good morning.
Brett Hundley – BB&T Capital Markets
I just wanted to start on your banana costs, so clearly the spike in the quarter was due to continued increases in fruit costs and then carton and ocean freight, as you mentioned, Richard, would you expect carton cost to remain high over the short-term?
Richard Contreras
Over the short period, we expect carton cost to remain relatively stable to what they are right now.
Brett Hundley – BB&T Capital Markets
Okay, and then when I think about your comments which certainly matches others. You have all this banana supply out there right now, your costs are remaining considerably higher.
So I’m trying to understand that disconnect. But then of course, you talk about total banana cost up 12%, your volumes were up 3%.
So seemingly, it’s costing you much more to bring incremental fruits to market of course. And so, I am just curious about, first if you can help reconcile with all that higher supply why fruit cost continue to move higher and then, secondly, what steps you can take to address this issue?
Richard Contreras
As far as the cost, cost of purchased fruit, especially from the independent growers has been higher all year. That’s been a fact all year.
As far as what can be done to offset that, we need to increase pricing.
Brett Hundley – BB&T Capital Markets
Okay, and so to that point, I mean, early reports of the North American market are that, contract pricing is not going as well as one would hope. And so, can you describe the North American environment for me?
And has it become more difficult in dealing with retailers or what is happening in North America? Because I don’t understand why competitors would be irrational against the backdrop that we are seeing right now?
Mohammad Abu-Ghazaleh
That is exactly the question I want to ask myself, why would competitors be irrational to go and offer just to get volume. That’s the irrational question that we are asking ourselves every day.
But however, we have to co-exist with this fact and continue with our business. We are probably one of the largest companies that own our own farms.
The increase in costs really comes from independent or third-party growers. It doesn’t come from our own production and that is a trend that is continuing year-over-year that unfortunately we – to maintain the volumes, we need to absorb this additional cost that we are facing on a yearly basis.
Of course, we are – we continuously expand our production and hopefully we will come to this point sometime in the future where we can have our own production to fulfill our needs. And by diversifying our sourcing as well, replacing some sourcing with other areas to either to mitigate logistic costs and we are having some ideas and we are working on some plans, how can we mitigate or overcome these headwinds, considering the – all the consensus we are going through now.
I mean, whatever is happening right now, is something that we cannot control, but we can control by creating new opportunities, which we are working on right now.
Brett Hundley – BB&T Capital Markets
So, Mohammad, so owning more of your own production is attractive for a number of reasons, but you are also saying that it allows you to compete at a more attractive margin because third-party growers won’t have as much control over you.
Mohammad Abu-Ghazaleh
Exactly, and not only – we are not talking about adding our own production, but geographically diversifying our own production and not just depending on one source. We are trying to mitigate the logistic cost as well into this picture.
Brett Hundley – BB&T Capital Markets
So, Mohammad, just longer term, is the North American market a place where you would like to strategically gain share?
Mohammad Abu-Ghazaleh
We are happy with our share in the market, I mean, as we speak, we would like to grow as the market grows and that is of course, an annual growth into the market demand. The market is growing year-over-year.
And we would like to maintain our share of that growth, but not necessarily to go and undercut our prices to gain a 1% or 2% additional share to the market.
Brett Hundley – BB&T Capital Markets
And Richard, can you remind me what type of ROIC you guys look for when you make investments?
Richard Contreras
We don’t have a magic number, Brett. We look at a lot of different factors when we invest.
We look at payback, we look at how much our earnings can be on that, it is a lot of different factors.
Mohammad Abu-Ghazaleh
There are two different types. I mean, we have strategic investment and we have other types of investment and that’s how we look at this.
We would look at the strategic side of it and then we look at the pure commercial way of looking at an investment.
Brett Hundley – BB&T Capital Markets
Okay, so, I would be curious to get your thoughts, Mohammad, on the East Coast brokers land that you guys purchased in Florida and Virginia. I just wanted to get kind of your rationale behind the purchase and what you are looking for strategically going forward?
Mohammad Abu-Ghazaleh
Well, this actually be – it’s been our view to grow our own products in North America in here in – be it in Florida or up in the Northeast. And, we’ve been in tomato business for so many years now.
But however, we have not had production on land in North America. We do have production outside offshore which is the green houses we have in Guatemala and Costa Rica.
However, this is a very big move for us. That same opportunity has been presented to us about the year-and-a-half ago.
Unfortunately or fortunately, we did not agree at the time and then we have been lucky enough to gain these assets into the option. And I believe this is a very strategic and important acquisition for us that will put us now on the local – as a local producer in the U.S.
which makes a big difference to the retailers as they request any supplier to be in any significant volume has to be a local producer and which we are in right now. So it fits perfectly with our offshore production to combine this both and have a 12 month supply for our customers.
Brett Hundley – BB&T Capital Markets
And to that point, I mean, I can get to some pretty favorable accretion levels, given current tomato prices et cetera and so, just my last question, I’ll jump back in the queue, is just, what kind of investment is needed to get that land back in order and how quickly should we think about that investment starting to yield production for you and a top-line impact? Thank you.
Mohammad Abu-Ghazaleh
We will start production actually as of January, hopefully next year. So, we will not use all our land.
We just started, we will be starting planting soon in some of these lands. We are not going to start planting the 7200 acres right away.
But we will start into phases and we will see of course the impact of this acquisition going forward in 2014.
Brett Hundley – BB&T Capital Markets
Thanks guys.
Operator
Our next question comes from Jonathan Feeney with Janney. Your line is open.
Jonathan Feeney – Janney Montgomery Scott LLC
Good morning. Thank you.
Mohammad Abu-Ghazaleh
Good morning.
Jonathan Feeney– Janney Montgomery Scott LLC
My first question, guys is, over the course of the quarter, it seems like we really had strong banana prices in July and August and they kind of tailed off at least in Europe anyway through the course of September, even to a much greater extent than would be expected from the regular seasonal fall off. Was that consistent with how you experience profit in the banana segment did it trail-off over the course of the quarter in a way, you might not have expected?
Mohammad Abu-Ghazaleh
Yes, this is a normal trend, but this was more severe this year than normal years. You know, Jonathan, if you would recall, I mean, years back, sales of fourth quarter were always been elusive quarters.
Jonathan Feeney – Janney Montgomery Scott LLC
Yes, right.
Mohammad Abu-Ghazaleh
We post losses every third quarter in the past. Now we are posting profits in the third quarter which is a great achievement considering all the headwinds that we have been facing and which means our business, I am talking about our business.
I am not talking about the industry. But our business has transformed in a way that at least we can overcome problems or headwinds regarding our core business where, because we diversified our business and that’s why we can come even with a very difficult quarter with not so big net incomes, but at least to come with black trigger than red triggers.
Jonathan Feeney – Janney Montgomery Scott LLC
And just as you look at this quarter, if I look at your total banana unit cost, which I think we are up 11% would you say that was about in line with your competitors for this particular quarter? Because I know you are a little more vertically integrated than others.
Richard Contreras
We don’t know what our competitors’ cost is. We really come up…
Jonathan Feeney – Janney Montgomery Scott LLC
Let me ask the question this way then, if I just thought about this quarter and what’s been happening to banana prices recently, I mean, is – are companies at a short-term advantage, probably not a long-term advantage, but short-term advantage who had less owned fruit, because there is cheaper fruit out there or is that not right?
Mohammad Abu-Ghazaleh
Most of this – most of the fruit that we contract are competitors’ contract, because using them annual basis. So it’s not a matter that we cannot go and speculate in the market, say, I will buy this fruit today and not buy it tomorrow.
Jonathan Feeney – Janney Montgomery Scott LLC
Gotcha.
Mohammad Abu-Ghazaleh
The only difference is – only in the peak, in the high season where we are short, we go and buy on spot basis, that’s where the only time we buy let’s say outside our contract farmers.
Jonathan Feeney – Janney Montgomery Scott LLC
Gotcha and that happens every year.
Mohammad Abu-Ghazaleh
And that happens every year.
Jonathan Feeney – Janney Montgomery Scott LLC
I see.
Mohammad Abu-Ghazaleh
However this year in particular we had so much fruit. Us and our competitors, be it small or large, but everybody had a lot more fruit starting July onwards which had to be disposed of and mainly it was disposed into the Mediterranean markets where prices have suffered tremendously, greatly.
And that has also had a very negative impact on our income.
Jonathan Feeney – Janney Montgomery Scott LLC
I see. And if I could, the North American business, where we are seeing quite a bit of competition, did that business get more competitive this quarter?
Mohammad Abu-Ghazaleh
No, the competition continues, because you know, we have contracts that is been since January for instance, December last year. So that, the competitive environment is there not only month-by-month but the whole year.
Jonathan Feeney – Janney Montgomery Scott LLC
And am I right, the fall is a little bit heavier renewal period for North American contracts, right? That tends to be more contracts proportionately?
Mohammad Abu-Ghazaleh
That’s true. Yes.
Jonathan Feeney– Janney Montgomery Scott LLC
And you would say the tone is still somewhat competitive in North America?
Mohammad Abu-Ghazaleh
Yes.
Jonathan Feeney – Janney Montgomery Scott LLC
Great. Okay, well, thanks for answering all my questions.
Richard Contreras
Thanks Jonathan.
Mohammad Abu-Ghazaleh
Thank you.
Operator
(Operator Instructions) Our next question comes from Eric Larson with C.L. King.
Your line is open.
Eric Larson – CL King & Associates
Yes, good morning everyone.
Mohammad Abu-Ghazaleh
Good morning, Eric.
Eric Larson – CL King & Associates
Just a few follow-up questions sort of the banana market. I saw that there was a fair amount of supply coming out of Ecuador, I think in the month of August.
And I think there were also some increased supplies in Asia. Is that true and is that still a problematic issue, Mohammad?
Mohammad Abu-Ghazaleh
It is, yes, it is.
Eric Larson – CL King & Associates
And so, as we look into the first half of the next year into your seasonal peak selling season, do you still expect to see a fair amount of fruit available relative to maybe last year?
Mohammad Abu-Ghazaleh
I think it would be more or less the same line of last year. During the second winter months, banana production goes down because of the climatic conditions and demand goes up.
So both of them were together to make it a positive market environment. And that’s what we hope for.
Eric Larson – CL King & Associates
Okay, okay. Yes, for sure.
And when you contract with your independents for production that’s outside – or fruit that’s outside of your own farms, those are annual contracts and those – are those set prices or do they vary by quarter?
Mohammad Abu-Ghazaleh
No, no, no, by annual – annual prices.
Eric Larson – CL King & Associates
So they are annual pricing, okay, all right. The next question, Mohammad is, if you look at your overall competitive situation right now, we typically know who is, kind of a big price discounters, yet the fact is that Europe actually seem to be a lot better in the quarter than I would have expected relative to the amount of fruit.
Was there also additional fruit available in Asia in the quarter outside of Ecuador?
Mohammad Abu-Ghazaleh
Yes, there was – I mean, the fruit unfortunately was abundant, be it Central America, the Philippines and the Ecuador. But mainly, the major amount of fruit that came was from Central America and the Philippines.
Eric Larson – CL King & Associates
Okay, all right. That helps.
I’ll get back in the queue. Thanks.
Mohammad Abu-Ghazaleh
Thank you.
Operator
And I am currently showing no further questions. I will now turn the call back over to Mr.
Abu-Ghazaleh for closing remarks.
Mohammad Abu-Ghazaleh
Thank you very much everyone. I wish we could have given you more brighter news, but these are the facts and I hope that we can have better news in the coming quarter.
Thank you very much and look forward to talk to you again.
Operator
Thank you ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.