Fresh Del Monte Produce Inc. (FDP) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [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.

Thank you, Anshri [ph]. 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 www.freshdelmonte.com or clicking on Investor Relations. This conference call is being webcast and will be available for replay approximately two hours after 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 our written consent is strictly prohibited. Let me turn the call over to Mohammad. Mohammad?

Thank you Christine. Good morning, everyone. I’d like to state that we made excellent progress on strategy to enhance our global diversified business model during the first quarter of 2017. We've broadened our higher margin product portfolio with new innovative snacks [ph] 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 increase our presence in non-conventional delivery channels bring our product closer to consumers adding new business daily. We see the growth trend for convenience health meals and snacks remaining strong as consumer demand continues strive and the fresh-cut category will be a major driver of our future growth. We also have the strong quarter of avocado business successfully gaining market share in this rapid growing category. To leverage these trends and build upon our leadership position in the fresh and prepared products industry, we’re in the process of expanding our distribution and fresh-cut capabilities with new operations in Houston, Texas and New York, Delaware. During the quarter, these operational achievements where encountered by a number of headwinds on many fronts. However, despite the challenges, we remain set fast and focus 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, very optimistic. We will continue to seek and capitalize our opportunities to increase our presence as a major fresh produce and prepare 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 financial in more details. Richard?

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 a $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 experience the 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 the result of lower net sales in all of our regions. In Europe, net sales were lower due to the 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% 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 dollars in the prior year period. And gross profit decrease $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 is 20% higher, unit pricing was 1% higher and unit cost was 2% higher than the prior year. In our avocado category, net sales increase 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 not-tropical 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 process pineapples, and gross profit was $16 million compared with $15 million in the prior year. Now moving to cost, banana fruit cost which includes our own production and procurement from growers decreased 2% worldwide and represented 30% of our total cost of sales. Cotton cost 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 cost 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 for 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.

Thank you. [Operator Instructions] Our first question comes from Jonathan Feeney from Consumer Edge Research. Your line is open.

Good morning, thanks very much. I wanted to thanks for the questions. A few questions, first I want to understand, am I right is thinking this the Chilean business the non-tropical fruit business, that’s over now, you move on to a new season and you kind of how does that happen that you want that with higher costs when prices market were prices were falling and what if anything does that tell us about that non-tropical business for the rest of the year, I don't think it helps us much, but if you could kind of walk us through what kind of happen in non-tropical be helpful?

Good morning, Jonathan.

Good morning.

The Chilean business this year compared to 2015, 2016 season is completely different. 2015, 2016 season was good and one and two different ways, first the quality of the fruit was excellent that is the 2015, 2016. Secondly the industry of California was on the low side, so it - and the fruit volume in Chile was shorter in general. So it was like a perfect scenario, excellent quality, short volume and lower inventory in California. In 2016, 2017 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 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 completely different scenario. However in our case we try to mitigate this by quality problem 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.

Understood, but doesn’t necessarily repeat in next year being the wholly set of variables.

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.

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

It is 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 recognize, 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 oils and increase of demand, we cannot dependent 100% on labels because it’s a very intensive and - in terms of labor needs. So we are mechanizing, we are automating you know the process and that should help us and reducing course and improving margins.

Last question, you weighted capital expenditure remains elevated, what are the primary areas where above the maintenance of your infrastructure that you're investing in right now.

Mainly, actually infrastructure and production, as I mentioned earlier that we are already in the built out our new Houston facility which should be operational end of August this year, and that about $25 million and capital expenditure that another one that we are just closing on the Delaware facility. We are investing in a production in Costa Rica, production in Philippines. You know that we have already concluded our agreement with Panamanian government regarding our new plantations there. So that before the end of the year we should start spending as well there on production at the very berry labs for plantation in 2018.

And just had a follow-up, the Richard and Mohammad, you’ve talked in the past about, I think with a five year target in payback. Would you say that’s still is the sum to think about it at your capital expenditures over and above the maintenance need something like it’s targeting a five year payback?

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

Thank you very much.

Thank you. Jonathan.

[Operator Instructions] Our next question comes from Mitch Pinheiro from Wunderlich Securities. Your line is now open.

Yes. Hi, good morning.

Good morning, Mitch.

So, Mohammad, question for you regarding sort of your statement about optimism. So I certainly understand optimism, your 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?

Let me just state one thing. The banana business is banana business. It will - we’re exposed to several factors, weather supply, demand and market. 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 oversupply in Asia during the first three months of this year. And we realize that the market is not bad. Now, according to our survey and our research and questioning customers what was going on. According to them, quote unquote is that because of our shortage last year, the prices went up and they had to fill their selves with other types of fruits. Now, according to them that they continue using these same prices that they use that last year to have more margin and rather than not to have more volumes on the shelves, that 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 have a lot of carryover from 2016. At the end of 2016, we had a lot of fruits, lot of supplies that’s spilled over in the first two 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, which is very important to look at. Few years ago, our total banana, I mean 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 two. 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 depend on bananas as a major source of income to other diversified products. And that’s why I say I’m optimistic, I know where we’re going, I know what we’re doing and I’m 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 $0.50 per 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.

Okay. I mean and then I mean how that in the very near term, so for the last year, banana margins were significantly higher than, it’s 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’s still been - banana margins kind of revert back the old days or is there a new paradigm perhaps?

No, we’ve seen improvement in the last six weeks which I hope will continue going forward in the year. But we have seen improvements.

Okay. When you look at avocado, you know 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 about 52% or 53% I forgot the number of percent. How are you outperforming on price while gaining share? How is that - how’s that happened?

That’s our secret, how can I tell you.

I mean…

But let’s say, we are now number three I mean leading retail largest exporter out of Mexico or retail largest let’s say distributor in the U.S. and that in a short time and hopefully that will be ahead of that in the future.

So I mean are you - I mean was pricing that good or was it just your channels, the way your mix I mean how - it was a very good?

We managed 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. And we a lot of customers that work with competition and they come to us because they have short of one or two loads or three loads and they request. And 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.

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

That much.

That much. Okay.

We have but the majority is going to retailers.

Got it. And then two more question on pineapples I mean obviously 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 in year here?

Will be back normal, be back to normal.

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

No. You’re talking about the concentrate maybe.

The concentrate, I don’t know if you have any, if that so put you supply concentrate to that business?

We do concentrate, that’s part of our prepared business. You know that Richard mentioned a while ago about the prepared business.

Right.

Concentrate under that.

So I so I guess two 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 that really not a factor at all?

The pricing on the concentrate has gone dramatically down compared to the last previous two years. And the reason for that is because Thailand is back into production and they have so much over supply and they reduced their prices tremendously. But definitely when we produce gold pipe apple you know it’s a different type of juice which come higher premium and priority over the traditional kind of pine apple juices.

Okay. Alright, well that’s all I had for you. Thank you very much.

Thank you.

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

I’d 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 the good news as well. Thank you.

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.