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Edited Transcript of FDP earnings conference call or presentation 2-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Fresh Del Monte Produce Inc Earnings Call

Coral Gables Jun 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Fresh Del Monte Produce Inc earnings conference call or presentation Tuesday, May 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine Cannella

Fresh Del Monte Produce Inc. - Assistant VP of IR

* Mohammad Abu-Ghazaleh

Fresh Del Monte Produce Inc. - Chairman and CEO

* Richard Contreras

Fresh Del Monte Produce Inc. - CFO and SVP

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Conference Call Participants

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* Jonathan Patrick Feeney

Consumer Edge Research, LLC - Senior Analyst

* Mitchell Brad Pinheiro

Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce Q1 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Christine Cannella, Assistant Vice President, Investor Relations. Ma'am, you may begin.

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Christine Cannella, Fresh Del Monte Produce Inc. - Assistant VP of IR [2]

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Thank you, Ashley. Good morning, everyone, and welcome to Fresh Del Monte's First Quarter 2017 Conference Call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Richard Contreras, Senior Vice President and Chief Financial Officer.

This call complements our first quarter press release we made public this morning, and you can find that release or register for future distributions by visiting our website at ww.freshdelmonte.com (sic) [www.freshdelmonte.com] or clicking on Investor Relations.

This conference call is being webcast and will be available for replay approximately 2 hours after the conclusion of this call. Our press release includes reconciliations of any non-GAAP financial measures we mention today to their corresponding GAAP measures.

Before we start, please remember that matters discussed on today's call may include forward-looking statements within the provisions of the federal securities safe harbor laws. Forward-looking statements involve risks and uncertainties, which are more fully described in today's press release and our SEC filings. These risk factors may cause actual company results to differ materially.

This call is the property of Fresh Del Monte Produce. Redistribution, retransmission or rebroadcast of this call in any form without a written consent is strictly prohibited.

Let me turn this call over to Mohammad.

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [3]

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Thank you, Christine. Good morning, everyone. I'd like to state that we made excellent progress on our strategy to enhance our global diversified business model during the first quarter of 2017. We broadened our higher-margin product portfolio with new, innovative snacks and kits and value-added services. We expanded our presence in new markets in the Middle East. We also expanded our global production and sourcing, all while maintaining our constant focus on cost savings and efficiency programs in all areas of our business.

One of the highlights during the quarter was the continued growth and strengthening of our global fresh-cut business. We increased volume both with our existing and new customers as demand for healthy, quality, convenient, ready-to-eat fresh-cut fruit and vegetables keeps rising. We also increased our presence in nonconventional delivery channels, bringing our products closer to consumers, adding new business daily.

We see the growth trend for convenient healthy meals and snacks remaining strong as consumer demand continues to rise, and the fresh-cut category will be a major driver of our future growth. We also had a strong quarter in our avocado business, successfully gaining market share in this rapidly growing category.

To leverage these trends and build upon our leadership position in the fresh and prepared products industry, we are in the process of expanding our distribution and fresh-cut capabilities with new operations in Houston, Texas and Newark, Delaware.

During the quarter, these operational achievements were encountered by a number of headwinds on many fronts. However, despite the challenges, we remain steadfast and focused on our mission and strategy. We know the direction we are headed, and we are confident we will get there. We remain committed to growing our diversified product portfolio and geographic presence, solidifying our position as an industry leader.

Looking ahead, I'm very optimistic we will continue to seek and capitalize on opportunities to increase our presence as a major fresh produce and prepared food supplier as we deliver long-term benefits to our shareholders.

At this time, I would like to turn the call over to Richard to discuss our financials in more detail. Richard?

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Richard Contreras, Fresh Del Monte Produce Inc. - CFO and SVP [4]

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Thank you, Mohammad.

For the first quarter of 2017, excluding asset impairment and other charges, on a comparable basis, we reported earnings per diluted share of $0.84 compared with earnings per diluted share of $1.56 in 2016. Net sales increased $14 million compared to last year. Gross profit decreased to $99 million in the first quarter compared with $141 million in 2016. Operating income for the quarter was $51 million compared with $90 million in the prior year and net income was $44 million compared with $81 million in the first quarter of 2016.

The first quarter was almost a perfect storm in which we experienced a weak banana market, shortage of pineapples and a significant over -- industry oversupply of grapes.

In our banana business segment, net sales decreased to $445 million compared with $459 million in the first quarter of 2016 as a result of lower net sales in all of our regions.

In Europe, net sales were lower due to lower selling prices, a result of unfavorable exchange rates and higher industry volume.

Net sales in Asia and North America were negatively impacted by lower sales volumes.

In the Middle East, selling prices were significantly lower, a result of a competitive market.

Overall, volume was 1% higher than last year's first quarter. Worldwide pricing decreased $0.63 to $14.18 per box compared with $14.81 in the first quarter of 2016, a 4% reduction.

Total worldwide banana unit cost decreased 1% due to lower transportation and fruit costs. And accordingly, gross profit decreased $14 million to $35 million compared with $49 million in the first quarter of 2016.

In our other fresh produce business segment for the first quarter, net sales increased $25 million to $506 million compared with $481 million in the prior year period and gross profit decreased $29 million to $48 million compared with $77 million in the first quarter of 2016.

In our gold pineapple category, net sales decreased 11% to $111 million during the quarter, primarily due to lower volume in North America, the result of lower yields in our Costa Rica operations.

Overall, volume decreased 8%, unit pricing was 4% lower and unit cost was in line with the prior year.

In our fresh-cut category, net sales increased 21% to $141 million compared with $117 million in the prior year. The increase was a result of higher sales volume in all of our regions, along with higher selling prices in North America.

Overall, volume was 20% higher, unit pricing was 1% higher and unit cost was 2% higher than the prior year.

In our avocado category, net sales increased 59% to $71 million compared with $44 million in the prior year due to increased customer demand and tight industry supply. Volume increased 4%, pricing was 53% higher and unit cost was 54% higher.

In our nontropical category, net sales decreased 6% to $78 million compared with $83 million in the first quarter of 2016, principally due to lower net sales of grapes, a result of industry oversupply. Volume increased 6%, unit pricing decreased 11% and unit cost was 13% higher than the prior year.

In our prepared food segment, net sales were $81 million compared with $79 million in the prior year. The increase was driven by higher sales volume of processed pineapples. And gross profit was $16 million compared with $15 million in the prior year.

Now moving to costs. Banana fruit costs, which includes our own production and procurement from growers, decreased 2% worldwide and represented 30% of our total cost of sales. Carton costs decreased 6% and represented 3% of our total cost of sales.

Bunker fuel cost per ton increased 68% and represented 2% of our total cost of sales, but total ocean freight cost during the quarter, which includes bunker fuel, third-party charters and fleet operating costs, was in line with the prior year period. For the quarter, ocean freight represented 9% of our total cost of sales.

As to foreign currency, the foreign currency impact at the sales level for the first quarter was unfavorable by $6 million and at the gross profit level was unfavorable by $3 million.

Other expense net for the quarter was an expense of $100,000 compared with other income net of $3 million in the prior year period. The change principally attributable to foreign exchange gains during the first quarter of 2016.

As far as our stock repurchase plan, during the first quarter, we repurchased approximately 303,000 shares for approximately $17.5 million.

At the end of the quarter, our total debt was $267 million.

Income tax expense was $7 million during the quarter compared with income tax expense of $11 million in the prior year, the decrease primarily due to lower earnings.

And as it relates to capital spending, we spent $36 million on capital expenditures in the first quarter of 2017, and we expect to spend approximately $160 million in 2017 total year.

This concludes our financial review. Operator, we can now turn it over for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jonathan Feeney from Consumer Edge Research.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst [2]

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I want to -- a few questions. First, I want to understand, am I right in thinking this -- the Chilean business, the nontropical fruit business, that's over now. You move on to a new season and you kind of -- how did it happen that you wound up with higher costs when prices -- in a market where prices were falling? And what, if anything, does that tell us about that nontropical business for the rest of the year? I don't think it tells us much, but if you could kind of walk us through what will kind of happen in nontropical would be helpful.

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [3]

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Jonathan, the Chilean business this year compared to 2015/'16 season is completely different. 2015/'16 season was good in 1 -- in 2 different ways. First, the quality of the fruit was excellent in that season, '15/'16. Secondly, the inventory of California was on the low side so -- and the fruit volume in Chile was shorter in general. So it was like a perfect scenario. Excellent quality, short volume and low inventory in California. And '16/'17 was the opposite completely. Bad quality because of rain and very bad weather conditions during the growing season in Chile. The inventory in California was record high and the quality was -- I mean, the volume was much higher than the previous year. So it was bad on all sides. The quality was bad. The volume was over the market needs and a lot of inventory in California. And that, in my opinion, is the case. I don't believe never -- we can never tell. But next season, which starts in December this year, could be a completely different scenario. However, in our case, we try to mitigate this by quality problems should go back to the grower pockets and not our pocket. So this is a business that every few years, you will get a hiccup, and we need to adjust as well because the red grapes usually -- now are not becoming a very favorable start -- I mean, to start the season, you have to start with more white grapes rather than red grapes because of the Californian inventories. So it's like a scenario where we have to live with every few years.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst [4]

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Understood. But that doesn't necessarily repeat in next year being a whole new set of variables?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [5]

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I doubt that it will be the same that we saw this year. I doubt very much that we will see the same thing that happened this year.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst [6]

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Can you -- Mohammad, can you give us a sense, how do we think about what the margin profile is of this fast-growing fresh-cut business? Can you tell us whether that gross margin is higher or lower than the other fresh produce average?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [7]

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It is in one way higher than the other produce for sure margins, but it's a consistent business, Jonathan. That's the difference. This is a growing, consistent business. And the more we mechanize, the better margins we will get. And that's the kind of target and course of action that we are taking right now is because of the increase of volumes and increase of demand, we cannot depend 100% on labors because it's very intensive in terms of labor needs. So we are mechanizing. We are automating the process. And that should help us in reducing cost and improving margins.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst [8]

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Last question. Your rate of capital expenditure remains elevated. What are the primary areas where above the maintenance of your infrastructure that you're investing in right now?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [9]

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Mainly, actually, infrastructure and production. As I mentioned earlier that we are already in the build out of Houston -- our new Houston facility, which should be operational by end of August this year. And that's about $25 million in capital expenditure. That -- another one that we are just closing on is the Delaware facility. We are investing in production in Costa Rica, with production in Philippines. You know that we have already concluded our agreement with the Panamanian government regarding the -- our new plantations there. So that before the end of the year, we should start spending as well there on infrastructure and preparing lands for plantation in 2018.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst [10]

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And just as a follow-up, Richard and Mohammad, you've talked in the past about a -- I think it was a 5-year targeted payback. Would you say that still is the rule of thumb to think about in your capital expenditures over and above the maintenance needs, something like targeting a 5-year payback?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [11]

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That's a policy. That's something that is -- it's like -- we don't change that. That every investment that we do has to be in compliance with that strategy.

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Operator [12]

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(Operator Instructions) Our next question comes from Mitch Pinheiro from Wunderlich Securities.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [13]

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So Mohammad, a question for you regarding sort of your statement about optimism. So I certainly understand optimism in your other fresh produce segment, particularly your fresh-cut business was -- had a terrific quarter. But how would you describe your optimism on the banana business? Are you equally as optimistic on the banana business? I mean, margins were down. How do you view that in this near term and then, obviously, with an eye towards the longer term?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [14]

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Let me just state one thing. The banana business is banana business. It will -- we are exposed to several factors: weather, supply, demand and markets. Last year, for instance, this time, the Asian market was like sizzling. We couldn't cope even with supplying the markets. Unfortunately, we noticed from beginning of this year that the market demand has declined and we didn't know what was the reason. I mean, the supply wasn't that oversupplied in Asia during the first 3 months of this year, and we realized that the market is not there. Now according to our survey and our research and questioning customers what was going on, according to them, "Is that because of our shortage last year, the prices went up and they had to fill the shelves with other types of fruits." Now according to them that they continue using the same prices that they used last year to have more margins and rather than not to have more volumes on the shelves. That's according to them. But that's actually what is happening in Korea and Japan as we speak. As far as North America is concerned, North America hasn't changed. It's the same. The same competitive environment that we had all over the years. Europe hasn't been bad. I think what happened during the first couple of months of this year is that we had a lot of carryover from 2016. At the end of 2016, we had a lot of fruit, a lot of supply that spilled over in the first 2 months of 2017 and has actually impacted pricing in terms of excess volume that had to be sent to other markets where it was sold below cost. Saying that, I would like just to highlight one thing, Mitch, which is very important to look at. A few years ago, our total banana, I mean, the pie and the pie was like 50% or over 50% of our total pie. Today, we are about 38%, 39%, and our target is not to exceed 34%, hopefully, within the next year or 2. So that tells you we are shifting our business, not reducing our volumes in bananas or reducing our market share in bananas, but we are shifting our business from being dependent on bananas as a major source of income to other diversified products. And that's why I'm saying I'm optimistic. I know where we're going. I know what we are doing. And not so much concerned really about because -- about the bananas, in particular, because I know the bananas are cyclical. They can go from $3 a box to $0.50 a box or less and -- but what we are doing is we are building all the other businesses that will take care of this kind of cyclicality.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [15]

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Okay. I mean, and then -- I mean, how about in the very near term? So for the last year, you -- banana margins were significantly higher than its historical averages. How do you view 2017 relative to historical averages? Do you think -- I mean, I know you have a month in to the second quarter here, but do you see it still being -- are the banana margins kind of revert back to the old days or is there a new paradigm perhaps?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [16]

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We have seen better -- we have seen improvement in the last 6 weeks, which I hope will continue going forward in the year, but we have seen improvement.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [17]

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Okay. Do you look at avocado, the prices that I see in the marketplace when I kind of do my own price surveys is that it's up maybe 15% to 20%. Your pricing was up in the last -- in the quarter, up, what, 52% or 53%, I forgot the number. How are you outperforming on price while gaining share? How's that happened?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [18]

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That's our secret. How can I tell you? We are now #3, I mean, leading the third largest exporter out of Mexico or the third largest, let's say, distributor in the U.S. And that's in a short time. And hopefully, that we will be ahead of that in the future.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [19]

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So I mean, was pricing that good or was it just your channels, the way your mix -- I mean -- it was a very, very...

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [20]

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We manage the business intelligently, let's put it that way. Our infrastructure and our -- that's our leverage, I believe, our distribution and our reach to our customers, our quality -- consistent quality, I think, and our ability to deliver to customers timely without any -- I mean, we see a lot of consumers that work with competition, and they come to us because they are short of 1 or 2 loads or 3 loads and they request us. And then once they do that, they realize how consistent and how reliable we are and then they shift to us. And that's what is going on.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [21]

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What kind of -- what percentage of your avocado business goes to food service customers?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [22]

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Not much.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [23]

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Not much?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [24]

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Not much. We have, but the majority is going to retailers.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [25]

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Got you. And then one more question on pineapples. I mean, obviously, a high-margin business for you, and it was a -- it was just -- it was an awful quarter in pineapples. I guess weather in Central America hurt your volume. How do you see that playing out here over the next quarter and year here?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [26]

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It will be back to normal, be back to normal.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [27]

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Okay. Does that also -- how does that dovetail with your -- with the pineapple juices and things you have in -- you called that out actually in the quarter. How does that dovetail with that in any way? Does it -- do costs come down for that business? Is there some other -- what are the metrics around that?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [28]

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No. You're talking about the concentrate maybe?

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [29]

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The concentrate. I don't know if you have any that -- if you supply concentrate to that business?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [30]

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We do sell concentrate. That's part of our prepared business. Richard mentioned a while ago about the prepared business. Concentrate comes under that.

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Mitchell Brad Pinheiro, Wunderlich Securities Inc., Research Division - SVP and Senior Consumer Research Analyst [31]

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Right. So I guess 2 things. One, so pineapples, you think the business in general, the fresh will be back to normal. Does -- did you see any benefit from lower pricing in the concentrate business or is that really not a factor at all?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [32]

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The pricing on the concentrate has gone dramatically down compared to the last previous 2 years, and that's -- and the reason for that is because Thailand is back into production and they have so much oversupply and they reduced their prices tremendously. But definitely when we produce gold pineapple, it's a different type of juice which commands a higher premium and priority over the traditional kind of pineapple juices.

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Operator [33]

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I am showing no further questions. I would now like to turn the call back to Mohammad Abu-Ghazaleh for any further remarks.

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [34]

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I would like to thank everybody for having the time to attend our call today, and I hope to speak to you in the next quarter with good news as well. Thank you.

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Operator [35]

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