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Edited Transcript of FDP earnings conference call or presentation 19-Feb-19 4:00pm GMT

Q4 2018 Fresh Del Monte Produce Inc Earnings Call

Coral Gables Feb 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Fresh Del Monte Produce Inc earnings conference call or presentation Tuesday, February 19, 2019 at 4:00:00pm 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 & CEO

* Richard Contreras

Fresh Del Monte Produce Inc. - Senior VP & CFO

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Conference Call Participants

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* Jonathan Patrick Feeney

Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner

* Kane Ossorio

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Fresh Del Monte Produce Inc.'s Fourth Quarter and Full Year 2018 Financial Results Call. Today's conference call is being broadcast live over the Internet, and is also being recorded for playback purposes. (Operator Instructions)

For opening remarks and introductions, I would like to turn today's call over to the Vice President, Global Corporate Communications and Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

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

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Thank you, Marianna. Good morning, everyone, and thank you for joining our fourth quarter and full year 2018 conference call. As Marianna mentioned, I am Christine Cannella, Vice President, Global Corporate Communications and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammed Abu-Ghazaleh, Chairman and Chief Executive Officer; and Richard Contreras, Senior Vice President and Chief Financial Officer.

I hope that you had a chance to review the press release that was issued earlier this morning via Business Wire. You may also visit the company's website at freshdelmonte.com for a copy of today's release, as well as to register for future distributions. This conference call is being webcast live on our website and will be available for replay after this call.

Please note that our press release includes reconciliations of any non-GAAP financial measures we mention today to their corresponding GAAP measures. I would like to remind you that much of the information we will be speaking to today, including the answers we give in response to your questions, may include forward-looking statements within the provisions of the federal securities safe harbor laws. We ask that you review the forward-looking statements information included in the press release we issued this morning and in the company's most recent filings with the SEC.

With that, I am pleased to turn today's call over to Mohammed.

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

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Thank you, Christine, and good morning, everyone. Thank you for joining us today. In reviewing the fourth quarter and 2018 as a whole, there were definite achievements and some frustrating setbacks.

Let's begin with the positives. The acquisition of Mann Packing Company in March 2018 was part of our diversification strategy to drive growth. This acquisition made us a major player in the fresh vegetables space and gave us a foothold in the value-added product category. The acquisition led to a $409 million increase in sales over the last year's $4.1 billion.

Our Mann Packing fresh and fresh-cut vegetable product lines complement our fresh-cut fruit product line, which continues to expand on a global basis; both are key to our future strategy and growth. What makes this year's net sales growth particularly meaningful is that the company was able to turn in this performance despite an extremely tough year in other segments.

As I have stated on prior calls, during 2018, we experienced numerous challenges, including delays in the first half of the year at our ports in Costa Rica and Guatemala, 2 of our key production sources. I'm happy to report that the new port in Costa Rica is now operating at full capacity, and port operations in Guatemala have improved. I also shared with you in earlier quarterly updates that we were negatively impacted by severe winter weather events across the U.S. throughout the year. We also experienced trucker shortages in the U.S., in part the result of new driver regulations. Higher fuel costs compounded this across inland shipping and ocean transportation, causing considerable disruptions to logistics activity in the U.S. Higher operating costs also constrained our global performance during 2018.

Industry-wide oversupply and global pricing pressure on bananas squeezed margins, with bananas reaching their lowest selling price in 10 years in Europe during the second quarter. Events such as this underscores the importance of continuing to diversify our business. We also reviewed our operating structure in 2018. Through aggressive action to become a more efficient producer, we restructured our operations in Chile and the Philippines, and we reduced expenses in tomato production by replacing our own U.S.-based production with new grower relationships in Mexico. Together, we estimate these strategic shifts will reduce operating expenses by approximately $20 million annually.

Always, it is how you respond to difficulty that reveals your essential strengths. Diversification, innovation, technology and strengthening consumer connections will drive us forward. We made significant strides in 2018 towards our goals, strengthening our position in the marketplace for 2019 and beyond. After this year's challenges, I am more confident than ever that we are on the right track.

At this point, I would like to have Richard give you the financial details.

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Richard Contreras, Fresh Del Monte Produce Inc. - Senior VP & CFO [4]

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Thank you, Mohammed, and good morning. For the full year 2018, on an adjusted basis, we reported earnings per diluted share of $0.44, compared with earnings per diluted share of $2.43 in 2017. Net sales were $4.5 billion, compared with $4.1 billion in the prior year, and gross profit was $280 million, compared with $332 million in 2017. Operating income for the year was $82 million, compared with $155 million in the prior year, and net income was $22 million compared with $123 million in 2017.

For the fourth quarter, on an adjusted basis, we reported a loss per share of $0.43, compared with a loss per share of $0.08 in 2017. Net sales were $1 billion, compared with $954 million in the prior year, and gross profit was $42 million compared with gross profit of $51 million in the fourth quarter of last year. Operating loss for the quarter was $8 million, compared with operating income of $5 million in the prior year, and net loss was $21 million compared with a net loss of $4 million in 2017.

Now I'll turn to our business segments, and will only give fourth quarter statistics as reported.

In our other fresh produce business segment for the fourth quarter, net sales were $563 million, compared with $455 million in the prior year. Gross profit was $49 million, compared with $31 million in the fourth quarter of 2017.

In our gold pineapple category, net sales decreased 9%, to $116 million during the quarter, compared to $128 million in the prior year; the decrease was due to lower sales volume.

Overall volume decreased 15% due to lower yields from our sourcing areas in Costa Rica. Unit pricing was 7% higher, and unit cost was 5% higher.

In our fresh-cut fruit category, net sales increased $5 million, or 4%, to $114 million during the quarter. Volume was 6% higher, unit pricing decreased 1%, and unit cost was 4% lower.

In our fresh-cut vegetable category, net sales increased $93 million, to $123 million during the quarter. The increase was driven by higher sales volume in North America as a result of our acquisition of Mann Packing Company. Unit pricing decreased 21%, and unit cost was 21% lower.

In our avocado category, net sales decreased $3 million, or 4%, to $65 million. Volume increased 16%, pricing was 18% lower, and cost was 28% lower.

In our nontropical category, net sales decreased $13 million, or 31%, to $28 million compared with last year. The decrease in sales was primarily attributable to lower sales volume and lower selling prices of stone fruit. Volume decreased 8%, pricing was 25% lower, and unit costs were 20% lower.

In our vegetable category, net sales increased $40 million, to $46 million during the quarter. Overall, volume was 5x higher, unit pricing increased 19%, and unit cost was 8% higher.

In our banana business segment, net sales were $395 million, compared with $421 million in the fourth quarter of last year. The decrease was primarily the result of lower sales volume in the Middle East and lower selling prices in Europe, partially offset by higher selling prices in the Middle East and North America. Volume was 9% lower. Worldwide pricing was 3% higher, at $13.87 per box. Total worldwide banana unit cost increased 7% due to higher fruit and distribution costs. And gross profit was a loss of $2 million, compared with gross profit of $15 million in the fourth quarter of 2017.

In our prepared food segment, net sales were $88 million, compared with $78 million in the prior year, and gross profit was a loss of $4 million, compared with gross profit of $5 million in the prior year. The decrease in gross profit was primarily due to lower selling prices in our industrial and canned pineapple product lines.

As for costs for the fourth quarter, banana fruit cost, which includes our own production and procurement from growers, increased 4% worldwide and represented 25% of our total cost to sales; carton cost increased 7% and represented 3% of our total cost to sales; bunker fuel cost per ton increased 29% and represented 2% of our total cost to sales; and total ocean freight cost during the quarter, which includes bunker fuel, third-party charters and fleet operating cost, was 1% higher and represented 8% of our total cost of sales.

Selling, general and administrative expenses increased $5 million, to $47 million, compared to last year as a result of the acquisition of Mann Packing. The foreign currency impact at the sales level for the fourth quarter was favorable by $300,000, and at the gross profit level the impact was favorable by $7 million.

Interest expense net for the quarter was $7 million, compared with $2 million in the fourth quarter of last year, due to a higher average loan balance as a result of the acquisition of Mann, along with higher interest rates. At the end of the quarter, our total debt was $662 million, also the result of our acquisition of Mann Packing during the first quarter of 2018.

Income tax expense was $3 million during the quarter, compared with income tax expense of $6 million in the prior year, primarily due to the lower earnings. As it relates to capital spending, we spent $151 million in 2018. We expect to spend approximately $175 million in 2019.

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

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Questions and Answers

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Operator [1]

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

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [2]

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Mohammed, I wanted to -- I wanted to see if I have something right here. It seems like this quarter versus last quarter, it seems to me like maybe you took up pricing or maybe priced a little bit ahead of the market, and hence, the volume losses. Is that a good explanation? Or are the volume losses in pineapples and bananas purely a function of fruit quality and fruit sourcing?

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

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Actually, it's more fruit quality and fruit sourcing as well as rationalizing our supplies. You know that -- if you see statistics, the gold pineapple has increased tremendously in supply from Costa Rica. We have been expecting this -- I have been expecting this for several years, that this will come at one point, which hit -- actually started hitting the markets by the end, the last quarter, of 2017, and it continues in 2018. As we speak today, we notice that a lot of small farmers and producers, medium-sized producers, are already abandoning their orchards, and I expect that supplies will start -- supply and demand will be more in line by the end of this year. Because it's not like bananas; it's a very intensive, let's say, capital expenditure into the pineapple, unlike bananas. And my expectation is that pricing should improve as we go forward. And don't forget that we have a very dominant position in the market, and we will not compromise that dominance at any cost.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [4]

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Well, you know, it relates to my second question, too, Mohammed. You've made some very significant investments, and not just in pineapple plantings, but all kinds of things -- pineapple plantings, port infrastructure. But others have made, it seems, those kinds of investments as well. I'm just trying to understand, if we look at all the, say, higher-than-trend capital expenditure that's taken place over the last 5 years, what gives you confidence that you're going to get a return on that? Or is it just that -- is it possible that others have just spent a lot of money, too, and this industry just continues to throw -- if everybody's spending, then it doesn't really drive that incremental return?

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

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What really -- nobody is perfect. We have made mistakes in the last few years, especially in the Philippines, with the banana production being an area which is very much in turmoil. And that turmoil, I mean, civil unrest and certain groups that try to influence laborers, and that has -- that's one of the reasons why we took a writeoff, as you can see from -- in the Philippines, in the last quarter. But if you look at -- most of our actual investments over the years have been very sound and paying back as, more or less, as expectation. If you look at last year, most of our capital expenditures were really heavy in certain projects. Like for instance, when we acquired a Mann Packing last year, they were already into building a brand new fresh-cut facility and distribution center in Gonzales, Salinas. And this project, by itself, is a very costly project. So -- and as we took over the company, we found out that there were some incorrect layouts and specifications done to the plant, and we had to expand as well the facility by constructing more. This is one of the big investments that we have done in 2018, and we have a carryover into 2019 as well. One of the other big projects is the Panama, actually, banana plantations that we have started since last year, and the first production actually came on last week with the first few containers that were shipped. Now you tell me why do we have Panama plantation bananas? Because, when you look at our cost in terms of production compared to third-party costs that we are already sourcing now, there is significant variation here which will translate as we go forward in the years 2020 and forward. The same time, I have -- one of my -- our big investments as well, we have already 6 ships under constructions in China, 6 new container ships, which we are financing since last year and going forward. And these are major investments, as well as our -- one -- state-of-the-art packing shed in Mexico for our avocado business. As we speak, we pack almost in 13 different packing houses in Mexico to different third parties. And hopefully, by middle of this year, sometime in August, we will have our plant ready and operating. So these are very big investments, in reality, plus all other regular investments that we do in our fresh-cut: the new machineries, new automation. That's what we are going forward with, is actually automating more and more our fresh-cut operations in order to reduce on labor cost, which is increasing drastically over the years. So if you look at all these, and as we go forward in the year, we'll keep updating you about these. But once all these projects come into -- in line, I think that then we will see a lot of added value -- value added going forward.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [6]

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And, last question, I'll give someone else a chance. Do you expect -- over the course of the quarter, did the price -- you mentioned that you see some people abandoning production in Costa Rica. Would you expect improved pricing as a result of that limited supply of pineapples? And what would you say -- would something similar be true of bananas?

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

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Bananas, I'm not so sure, to be honest with you. What we are trying to do is reduce our costs on bananas. I don't believe that production by itself would be reduced, but what we would like to do is reduce our cost ourselves, in order to be able to improve our margins. That's our target. As far as pineapple is concerned, I believe pineapple will rationalize by itself as we go forward because, during last year, many people that have gone into the pineapple marketing and distribution have sustained large losses, very -- huge losses, which I expect will deter them from going forward into continuing in this business. And if they continue, they will sustain more losses as they go forward. As far as ourselves, I mean, we have a certain OI that we would like to maintain on gold, and I think that we are slowly coming back to this level, which I believe we can sustain. And don't forget, we have our rosy pineapple that will come online, hopefully towards the end of the year, which will give us a different perspective in this field. I mean, that's a completely different new game.

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Operator [8]

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(Operator Instructions) Your next question comes from Kane Ossorio with Yost Capital Management.

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Kane Ossorio, [9]

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I'm wondering about the avocado segment in particular, if you could explain the dynamics there. I see in the press release pricing decreased 18%, but unit costs increased by 28%, which would be a pretty significant margin impact, I imagine. Is there anything notable to explain about what's happened in that segment, or your plans there?

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Richard Contreras, Fresh Del Monte Produce Inc. - Senior VP & CFO [10]

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We continue to gain on the top line and continue to take market share and increase the consumer pool as well, but it's a market you have to keep on top of, and pricing is constantly going up and down. We try and keep the margin the same, but it's constantly having to -- it's an everyday battle to pass the costs along to the customers. We do not grow avocados, so we buy them all from growers. So you'll...

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Kane Ossorio, [11]

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Got it. So that -- you were able to essentially take share in the end market retail, but it just -- you had to pay growers a little bit more to get that volume?

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Richard Contreras, Fresh Del Monte Produce Inc. - Senior VP & CFO [12]

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It goes up and down. It's cyclical. It goes up and down.

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman & CEO [13]

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We -- it's about actually doing the right buying at the right moment, and selling. We have increased our market share in avocado business, and we're continuing to do that. We see, as I said a few minutes ago, that we will be starting our packing operations in Mexico towards the, hopefully, by August this year. And by then, I think that will have improved our costing and our quality and our -- more consistency to our buyers. So we are a very big believer and confident in our avocado segment, and we believe this will keep growing as we go forward.

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Operator [14]

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(Operator Instructions) You have a question from Jonathan Feeney with Consumer Edge Research.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [15]

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Sorry. If you guys have some time, I've got a couple more questions.

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

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Sure, go ahead.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [17]

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Richard, could you -- I apologize if you've said this in the remarks, I got on about 4 minutes late, but could you give us a sense of what the contribution was to the other fresh produce, in terms of gross profit, from Mann Packing?

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Richard Contreras, Fresh Del Monte Produce Inc. - Senior VP & CFO [18]

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For Mann Packing?

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [19]

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Yes. So what's the -- I'm trying to understand what the organic rate of gross profit pressure was year-over-year. Clearly, Mann Packing contributed something.

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

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As a matter -- since we just -- we only acquired the company in March last year, and since we've been trying to integrate and kind of streamline the business together, I think, as we go forward during this year, we will be able to give more notes or figures on the business with Mann. But actually, with -- the Mann business has been doing very well during the 2018, and I believe that it will do even better during 2019.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [21]

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Okay. And how about on the foreign currency effect on gross profit. Is that just the -- is that mainly the euro strength versus your production costs? And how much of that was hedging versus spot? Because that's a little bit more than I would have expected.

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Richard Contreras, Fresh Del Monte Produce Inc. - Senior VP & CFO [22]

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Yes, that's mostly spot, Jonathan. So on the sales impact, it was mostly the euro, and on the cost as well. Costa Rica also had a cost impact.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [23]

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That was favorable?

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Richard Contreras, Fresh Del Monte Produce Inc. - Senior VP & CFO [24]

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It was favorable.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [25]

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Right. Understood. The -- I guess, following up on the avocado question, I mean, this has been a fantastic business for a lot of people, and I think the challenge has always been getting hands on the right fruit at the right time. I mean, are there any -- it seems like kind of a tough quarter. I mean, does this highlight to you the need to get bigger in the business or have a steadier supply? Or does it -- I guess, I'm going to keep it open ended. Does this kind of -- does the performance you've seen in that business change at all your aspirations one way or the other, to get bigger or get smaller in the business?

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

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Definitely, our objective is to get bigger into this business and have a bigger market share, which we are gaining as we speak, Jonathan. I -- we believe very much into the business. We have done -- our people, our team have done a great job in the penetration of the market, especially during last year. There was a strike, and for almost 3 weeks, there was not a single avocado coming out of Mexico. And, through our planning and vision, I believe that we were one of the very few -- if not the only, maybe -- player in the avocado business that we were able to keep supplying our buyers with the avocados, because we were -- we had the foresight to have volumes in place before the strike took over, and we were able to keep supplying our customers, even if it's not at 100% fulfillment, but we were able to keep their shelves still stuffed with avocados, which was a very big -- and that's why we noticed that a lot of these customers, that were not our customers as a matter of fact, now starting to be more aligned with Fresh Del Monte and wanted to continue building that relationship and the programs with avocado. So with avocados, we are very confident that we will grow this business, especially once we finish our packing station. And it's a very big packing station. It's about 180,000 square-foot facility, which is very sizable. And I think it will give us a different edge in terms of quality and consistency.

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Operator [27]

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There are no further questions at this time. I will now turn the call back over to Mohammed Abu-Ghazaleh for closing remarks.

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

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I would like to thank everybody for attending this call, and I hope that we can speak on the next call with better news. Thank you very much, and have a nice day.

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Operator [29]

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This concludes today's conference call. You may now disconnect.