Fresh Del Monte Produce reported mixed first-half results this week but the numbers merely provided the context for the US company to insist it is looking at building a business that focuses not just on produce and not just on the developed markets of the West, writes Dean Best.
“We are a food company, not just as a fresh produce company.”
That was the message of the chairman and CEO of US-based Fresh Del Monte Produce earlier this week as the banana, pineapple and melon supplier reported its half-year results.
The numbers were mixed. Fresh Del Monte booked higher first-half profits, helped by higher selling prices on its produce products (excluding bananas), “operational” improvements and lower ocean freight costs.
However, the company’s sales fell, with a drop in sales across each of Fresh Del Monte’s business segments.
The same trends were seen in the second quarter; higher profits and lower revenues. Fresh Del Monte chairman and CEO Mohammad Abu-Ghazaleh insisted the drop in sales was “pre-designed”.
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Speaking to analysts, Abu-Ghazaleh said: “It wasn’t for any other reason than our rationalisation of the business. It’s bottom line, rather than showing more revenues and losing more money.”
However, he faced questions about how Fresh Del Monte would look to grow its top line while pursuing profitable growth, especially in an industry where excess supply is putting pressure on prices of fresh produce.
The Fresh Del Monte chief, who has been in charge of the business since 1996, said the company was still sticking to the strategy it had since that time. “We haven’t changed from that course. We believe in vertical integration, adding value to the chain throughout the operation,” Abu-Ghazaleh said.
He said Fresh Del Monte had started its fresh cut division, which sells pre-packed fruit and vegetable convenience products, “almost from zero” and the business would continue to “grow internationally”, pointing to Europe, Japan and the Middle East.
The company’s moves to diversify its business and add value to its portfolio is vital in a fresh produce sector witnessing over-supply. Fresh-cut is a key category for Fresh Del Monte, it is building its presence in avocados, a sector where prices remain strong and plans to build juice plants in the Middle East and Africa.
However, Fresh Del Monte’s largest proportion of sales comes from bananas. In 2011, 46% of the company’s sales were from bananas and much focus remains on that side of its business.
In recent years, Fresh Del Monte has rationalised its banana production and the company is still concerned at the impact over-supply is having on prices, notably in Europe where it made a fifth of its banana sales last year and where, of course, trading conditions are tough for food companies of all kinds.
“The economic situation is not getting better, it is getting worse. Consumption is down and the economy is down,” Abu-Ghazaleh said. Tighter supplies would help prices and therefore margins but the Fresh Del Monte chief is unsure how long a reduction in supply would take.
“I think Europe will not improve in the near term. In three, five years from now, hopefully everybody is still standing there can enjoy a better market. The problem we are facing is not only the market in Europe but it’s the over-supply situation in the producing countries. Logistically anybody can bring bananas or any type of fruit into the market,” Abu-Ghazaleh said.
“People are encouraged to buy fruit at depressed prices like in Ecuador and bring that fruit into the market and try to make some money. Unfortunately all this is keeping the market under depressed conditions. I don’t see how this can change unless the supplies are rationalised, which I doubt can be done, and the shipping lines come to understand they cannot continue to doing what they are doing. In the next two to three years, I don’t see how this can change.”
Added value can help Fresh Del Monte’s business but so, too, can emerging markets.
The company has faced challenges in those kind of markets in recent months, which has also had an impact on neighbouring countries.
Abu-Ghazaleh said China has placed “quarantine conditions” on banana imports from the Philippines, which has meant more volumes have been shipped to markets like South Korea and Japan, hitting volumes.
Banana volumes from the Philippines have also been shipped to markets in the Middle East, where Fresh Del Monte has suffered from the sanctions placed on Iran.
“The Iran market was a very big market in terms of the consumption and import of bananas in general. Since the sanctions have taken place, it has affected their ability to import bananas and volumes are being diverted to other markets, which ultimately impact the pricing and economic situation in the other markets in the Gulf,” Abu-Ghazaleh said.
“We do have an advantage being physically in the Middle East. Del Monte offices and distribution centres in the area give us an advantage over other importers in being able to reach our customers and be able to help the food there with too much impact.”
Fresh Del Monte started business in Saudi Arabia two years ago and its products on sale in the country will include frozen french potatoes, another sign of the company’s diversification.
However, Janney Capital Markets analyst Jonathan Feeney put to Abu-Ghazaleh that Fresh Del Monte, despite “good results” in the region, had “barely scratched the surface of what could be possible”.
Abu-Ghazaleh said Fresh Del Monte had been “growing steadily” in the Middle East and “increasing our market share”.
He added: “We started in Saudi Arabia less than two years ago. As we speak, we are getting very strong into the fresh-cut business in these markets. We are producing juices that will be manufactured in the countries. We are starting a lot of added value products that will be meaningful as of the end of this year. This market has huge potential and we are capturing this but we are very careful, we like to be cautious and like to look at opportunities in a very sensible way. You will see growth, continuous expansion and continuous increase in revenues as well. We are very encouraged and optimistic.”
In the run of first-half results in the last fortnight, Fresh Del Monte has proved one of the more interesting to cover. It is a business facing challenges but one trying to, as Abu-Ghazeleh said, “transform” itself in the years to come.