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Edited Transcript of FDP earnings conference call or presentation 20-Feb-18 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Fresh Del Monte Produce Inc Earnings Call

Coral Gables Feb 20, 2018 (Thomson StreetEvents) -- Edited Transcript of Fresh Del Monte Produce Inc earnings conference call or presentation Tuesday, February 20, 2018 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 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 of Food & HPC and Managing Partner

* Mitchell Brad Pinheiro

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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's Fourth Quarter and Full Year 2017 Conference Call. Today's conference call is being broadcast live over the Internet and also being recorded for playback purposes. (Operator Instructions)

For opening remarks and introductions, I would like to turn today's call over to the Assistant Vice President of 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, Jody. Good morning, everyone, and thank you for joining our fourth quarter and full year 2017 conference call. As Jody mentioned, I am Christine Cannella, Assistant Vice President of Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad 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 distribution. This conference call is being webcast live on our website and will be available for replay approximately 2 hours after conclusion of this call.

Please note that our press release includes reconciliations of any non-GAAP financial measures we mention today to the 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 provision 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.

Now I would like to turn today's 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'm glad 2017 is behind us. Throughout the year, we faced particularly intense challenges in our operating environment that reduced our ability to deliver optimal earnings. We contended with 1 of the most depressed global months in the banana market I have experienced in my 45 years in the industry. There were a number of major weather events, including hurricanes, severe rainstorms and harsh winter -- weather in the United States that impacted our ability to conduct business and increase food procurement and transportation costs.

However, 2017 wasn't without accomplishments. The year was highlighted by 18% growth in our fresh-cut business and expanded demand in our avocado product line, which grew by 37%. We introduced Del Monte-branded [beverage], hydroponic vegetables as well as several integrated value-added fresh and ready-to-eat products. We invested in our distribution capabilities in North America and then our sourcing locations in Central America and the Middle East. We activated new sales channels and seized on opportunities by forging new customer relationships.

In late June, we announced a settlement agreement in a number of joint ventures with Del Monte Pacific. We look for these joint ventures to come on stream in 2018.

We have said from the beginning that the strength of our company is in our infrastructure and our ability to leverage debt platform to transfer -- transform our company. I'm pleased with the progress we made in 2017 to further leverage our infrastructure and advance our diversification strategy. Throughout the year, we focused on opportunities that would extend our marketing capabilities and global reach, while addressing the rapidly evolving consumer demand for healthier products.

Earlier this month, we entered into a definitive agreement to acquire Mann Packing, a leading grower, processor and supplier of fresh and value-added vegetable products in North America. This acquisition will be an excellent opportunity for us to enhance our leadership position in the fresh and value-added fruit and vegetable industry and drive future profitability over the long term. As always, we are focused on and determined to meet our goals.

I would now like to turn the call to Richard. Richard, please?

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

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Thank you, Mohammad, and good morning. For the year 2017, excluding adjustments on a comparable basis, we reported earnings per diluted share of $2.44 compared with earnings per diluted share of $4.74 in 2016. Net sales were $4.1 billion compared with $4 billion in the prior year. Gross profit was $332 million compared with $461 million in 2016. Operating income for the year was $155 million compared with $266 million in the prior year. And net income was $123 million compared with $246 million in 2016.

For the fourth quarter of 2017, excluding adjustments on a comparable basis, we reported a loss of $0.08 compared with earnings per diluted share of $0.26 in 2016. Net sales were $954 million compared with $955 million in the prior year, and gross profit was $51 million compared with gross profit of $57 million in the fourth quarter of last year. Operating income for the quarter was in line with the prior year, and net loss was $4 million compared with net income of $14 million in 2016.

Now I will turn to our business segments, and I will only give fourth quarter statistics as reported. In our banana business segment, net sales were $421 million compared with $431 million in the fourth quarter of last year. The decrease was a result of lower sales volume in the Middle East and Asia, partially offset by higher selling prices in all of our regions. Overall volume was 6% lower compared with the prior year. Worldwide pricing was 4% higher than the prior year at $13.51 per box. Total worldwide banana unit cost increased 2% due to higher distribution costs, and gross profit was $15 million compared with $5 million in the fourth quarter of 2016.

In our other fresh produce business segment for the fourth quarter, net sales were $455 million compared with $441 million in the prior year, and gross profit was $31 million compared with $38 million in the fourth quarter of 2016.

In our gold pineapple category, net sales increased 3% to $128 million compared to $124 million in the prior year. The increase was primarily due to higher sales volume in the Middle East and Asia. Overall volume increased 7% driven by higher production. Unit pricing was 4% lower, and unit cost was 2% higher.

In our fresh-cut category, net sales increased $8 million or 6% to $139 million during the quarter. The increase was driven by higher sales volume and higher selling prices in North America, Europe and Asia. Volume was 3% higher. Unit pricing was -- increased 3%, and unit cost was 9% higher due to unfavorable weather conditions that drove food costs higher.

In our avocado category, net sales increased $8 million or 13% to $68 million compared to the prior year. The increase was driven by higher sales volume, the result of increased consumer demand. Volume increased 20%. Pricing was 6% lower, and unit cost was 3% lower.

In our nontropical category, net sales decreased $4 million to $41 million compared with $45 million in the fourth quarter of 2016. Volume decreased 13%. Pricing was 6% higher, and unit costs were 5% higher.

In our prepared food segment, net sales were $78 million compared with $82 million in the prior year, and gross profit was $5 million compared with $14 million in the prior year. The decrease in gross profit was primarily due to lower selling prices in our industrial pineapple product line.

As for costs for the fourth quarter, banana fruit cost, which includes our own production and procurement from growers, increased 1% worldwide and represented 30% of our total cost to sales. Carton cost increased 11% and represented 4% of our total cost of sales. Bunker fuel cost per ton increased 25% and represented 2% of our total costs, and total ocean freight cost during the quarter, which includes bunker fuel, third-party charters and fleet operating cost, was 7% lower. For the quarter, ocean freight represented 9% of our total cost of sales.

For foreign currency, the foreign currency impact at the sales level for the fourth quarter was favorable by $6 million. And at the gross profit level, the impact was also favorable by $6 million.

Other expense net for the quarter was an expense of $1 million compared with other expense net of $5 million in the fourth quarter of 2016; the decrease attributable to fewer foreign exchange losses this year.

As far as our stock repurchase plan, during the fourth quarter, we repurchased approximately 987,000 shares for approximately $45,750,000.

At the end of the quarter, our total debt was $358 million.

For income taxes, income tax was a $6 million expense during the quarter compared with a $14 million benefit in the prior year. The increase was primarily due to discrete tax benefits in 2016. We also recorded a onetime noncash increase in income tax expense of $2 million this quarter as a result of the new U.S. tax reform legislation.

As it relates to capital spending, we spent $139 million in 2017. We expect to spend approximately $230 million in 2018.

Before I close, I would like to give some financial information on Mann Packing. As Mohammad mentioned, we recently announced we have signed a definitive agreement to acquire Mann Packing. We expect the transaction to close in a few weeks. Mann Packing had net sales of approximately $535 million in 2017, and we will pay approximately $360.9 million for the company.

This concludes our financial review. 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 the line of Jonathan Feeney of Consumer Edge.

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

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Mohammad, you led up your remarks saying what a tough year 2017 was, and it certainly seemed that way. I know you don't give guidance, but from a -- just thinking of the banana business, which is the most volatile piece of your business, do you think, for your planning purposes, whether you're planting, you're buying assets, whatever it is, you have to have some idea in your head what the range is of profitability of that business going forward. Would you say that 2017, given all the investments and logistics efficiency you've made, it's something like a bottom or like you have -- what were -- something like a bottom for the banana business and average profits, you'd be a lot higher? Or where do that sit?

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

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Yes. I think you're right. I think that, one, 2017 was a bottom, in my opinion and as we go forward, God willing, if everything doesn't have any catastrophe somewhere. But given that everything is as usual, I think that we should be heading towards better times.

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

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Now how about the -- you've made an initiative pretty clearly to diversify this business. Could you characterize the amount in volatility of profitability in Mann Packing? And it strikes me that, I guess, on a pro forma basis, fresh-cut will now be about 1/4 of your global business. Is that profitability? Any comments you can make about how profitable that business is and how volatile that business is relative to your banana business and other tropical fruits would be appreciated.

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

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That's a completely different business. First of all, we are getting into vegetable business that we haven't been before, I mean, in a big way. We do have some vegetable -- fresh-cut vegetables in our DCs. However, we never had a full-fledged kind of operation in vegetables. Now Mann operation is value-added, about 50% value-added, 50% a kind of commodity, which is the whole, let's say, kind of vegetables, like whole fruit and fresh-cut fruits, more or less, it's the same. However, their ratios is much better than our ratios. About 50% of their business is into value-added, and that's where they're growing further. They are growing in a very aggressive way, the value-added products that they are putting, which is really fantastic products that they are introducing into the market. So I'm very -- we are very, very kind of excited and pleased about the acquisition because I believe it's going to give us completely new frontiers and leveraging our infrastructure. Take into consideration that Mann is mainly in the West Coast, partly in the Northeast, but however, they don't have too much, almost none activity in the Southeast and the Southwest of the U.S. So that's where we give us a lot of new opportunities, a lot of new businesses that wasn't existing as well as leveraging our total infrastructure across the U.S. to improve marketing and distribution of Mann products. Well, I'm very pleased about this, really, going forward.

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

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And just one last question. This is for Richard, I think. I was a little surprised by the tax movements this year. Can you give -- how does it -- for years going forward, how does tax reform affect Fresh Del Monte's tax rate? What should we model for out-years?

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Richard Contreras, Fresh Del Monte Produce Inc. - CFO and SVP [7]

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So Jonathan, as you know, even though our -- obviously, our rate moves, but we've always modeled 15% effective tax rate. With the new tax law, we were modeling 12%. However, now that we acquire Mann, which is 100% U.S., we think it creeps back up to about 14%. At least, that's how we're modeling it.

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Operator [8]

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Your next question comes from the line of Mitch Pinheiro of Costello Asset Management.

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Mitchell Brad Pinheiro, [9]

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2 things. On the Mann acquisition, where -- did I hear you say you said the ratios were better? I mean, is that -- was that in sales? Or did you mean was that also profitability? How's the profit margins compare to your existing business?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [10]

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No. When I said ratios, I meant sales between value-added products and the whole product. When I say whole product, it means like cabbage, like cauliflower, like all kinds of vegetables but in a bulk form. Now value-added is everything else that they are doing, so it's 50-50 between these 2 businesses. However, their profitability margins on the value-added is better than our margins on our value-added products.

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Mitchell Brad Pinheiro, [11]

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And how about as a whole, so including the more commodity piece of the business, are your -- are the margins similar to your current margins?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [12]

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Commodity is usually depending on the availability. I mean -- and it's mainly California products. So 1 year, they have a shortage and then the prices spiked, and the other year, they have a good weather, which can create abundance. But all in all, I think it's not as volatile as bananas, for instance, or other products. So I think the vegetable segment is more like I wouldn't say controllable but more kind of steady business.

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Mitchell Brad Pinheiro, [13]

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Yes. I mean, I definitely see the advantages of diversification, but I -- having followed sort of the vegetable business in California for some time, the one thing I know is that there is nothing normal. There's never -- hasn't been a normal year in all my years of following that industry. It's either sourcing issues, rains, droughts, El Niño, La Niña, and it's sort of the same thing you face globally.

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

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Yes, but I think vegetables -- the vegetables is more predictable in the sense that they have part of the business into context. And the other part is like spot markets, so -- and plus, they are sourcing vegetables from Mexico as well. So they are hedging between California and Mexico. Now in the future going forward, also, we will leverage our presence in Guatemala, which is a very important vegetable producer as well into the U.S., and that would add also some value to us. So really, our focus going forward, Mitch, is the value-added products. This is our focus. The bulk will stay, but I think it will become smaller portion of the total business as the value-added products increase and our business increase. So the total, let's say, buy, will be bigger, but the commodity of the whole vegetable segment will be smaller as we move forward.

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Mitchell Brad Pinheiro, [15]

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Okay. And then there's one -- and one more thing, I know the deal hasn't closed, but as you -- what will be the next 2 or 3 sort of tangible steps that you're going to take once the acquisition closes? I mean, I understand you're focused on the value add, but what should I expect to see, like what kind of actions? Are we going to immediately integrate distribution? I mean, how do you see that planning out over the next 12 to 18 months?

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

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Well, the most important thing is that they have a very excellent model themselves. We don't want to disrupt that model, number one. Number two, we want to add on that by introducing Del Monte label on certain items or most items that they are not -- to customers that are not handling Mann at this time. So that will be an additional, let's say, business. The second thing, we are going to put that into areas that they haven't been operating, like the Northeast. Of course, they have operation but through a third-party. That will change in the future where we have a Delaware facility that is under development right now. We will have also -- we'll have facilities in the Southeast in our own areas that we are going to also include their products, I mean, processing the products that Mann is processing right now. So we are going to leverage our infrastructure in several parts of the country and expand the distribution and sales.

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Mitchell Brad Pinheiro, [17]

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Okay. And then the last -- this last question on bananas. How do you see the banana market here in the near term over the next 6 months or so from a supply and demand and pricing point of view?

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

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As we speak today, demand is exceeding supply because there is a supply shortage since late last year into the new year, and then we have the weather events, we have the -- in both -- at sourcing and at destination. So that has created a lot of pressure on the supply side where prices have improved and markets improved. But as I see the future, I mean, the near future, I can't tell the long term, but the near future doesn't look too bad as we speak. In our case, what we are trying to do within our own capabilities is to streamline the business in a better way than it used to be in the past. So hopefully, we can achieve that, which will give us more kind of steadiness in the banana segment.

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Operator [19]

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(Operator Instructions) Your next question comes from the line of Jonathan Feeney of Consumer Edge.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC and Managing Partner [20]

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Just one question I had is your friends at Conagra today divested a Del Monte canned vegetables, packed vegetables business. I think that one that's with -- would have been within the scope of maybe your trade, JV trademarks in North America. Can you comment on your observations about that business? Why it did or didn't fit with Fresh Del Monte? And if transactions -- there are other Del Monte properties globally come to market, are those things that -- I mean, you've proven an interest in the past in growing that business. Does that continue to be the case?

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Mohammad Abu-Ghazaleh, Fresh Del Monte Produce Inc. - Chairman and CEO [21]

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I don't think I would be interested in growing anything with packaged food. And in our opinion, that -- it's not -- we're looking into more fresh, more healthy items. So unless, do you have any comment, Richard on that?

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Richard Contreras, Fresh Del Monte Produce Inc. - CFO and SVP [22]

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No. I would agree. That was primarily a canned business, and that's not our target.

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

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But you do have some canned businesses in Europe and Middle East and Africa...

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

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We bought that business in 2004, Jonathan.

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

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Oh, I know. But listen time flies if you are having fun...

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

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But you see, we bought it for one reason because that gave us the leverage to use the food with the fresh, which has given us a tremendous leverage by -- we could -- and now our joint venture with -- and our agreement with our -- Del Monte Pacific has given us also some leverage and some way to use our fresh with certain nonfresh even in North America. So I don't think that looking at the other units in different parts of the world, Del Monte canned or prepared is not really our kind of first option or wish list.

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Operator [27]

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There are no further questions in queue at this time. I turn the call back over to Mr. Mohammad Abu-Ghazaleh.

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

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Thank you very much, everybody. And hopefully, we will give you better news on our next call. Have a good day. Thank you. Bye.

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Operator [29]

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