Fresh Del Monte Produce Inc. (FDP) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce Company’s Second Quarter 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 Ms. Christine Cannella, Assistant Vice President, Investor Relations. Ma’am, you may begin.

Thank you, Andrew. Good morning, everyone, and thank you for joining us second quarter 2017 conference call. As Andrew mentioned, I’m 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 we’ll be available for replay approximately two hours after the completion of 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’d 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 then the Company's most recent filing with the SEC. Now, I’d like to turn today’s call over to Mohammad. Mohammad?

Thank you, Christine. Good morning, everyone and thank you for joining us. I’m pleased to report that Fresh Del Monte achieved a 5% increase in net sales over last year’s second quarter, with our other fresh produce business segment the key drivers. We benefitted from increased demand for our value added fresh-cut business across all delivery channels and in all of our sales regions. Second quarter sales were also enhanced by higher volume in our fresh pineapple business in North America and Europe as a result of higher production and continuous strong consumer demand from our premium Del Monte Gold pineapple, which remains the worldwide leader in market share. Higher pricing in our avocado business also contributed to our increased in net sales. During the quarter, we took steps to further solidify Del Monte's momentum and leadership position in the fresh, prepared and packaged, food and beverage industry when we signed four joint venture agreements with the market specific. These partnerships would enable us to expand refrigerated offerings sold across all distribution and sales channels and brought out our Del Monet food and beverage stores in the United States. We also reach an agreement with Del Monte Pacific and Del Monte Foods to resolve longstanding licensing and distribution litigation and to allow us to place the Del Monte mark on value-added fresh products we currently sell under other brand names in the United States such as fresh sandwiches, protein salad and snacks along with new value-added product and visions. Looking forward, this partnership provides tremendous opportunities for continued brand expansion and creating products and consumer experiences for healthy premium quality food options. At this time, I’d like to turn the call over to Richard to discuss our financial results in more details. Richard?

Thank you, Mohammad. For the second quarter of 2017 excluding asset impairment and other charges on a comparable basis, we reported earnings per diluted share of $1.40 compared with earnings per diluted share of a $1.75 in 2016. Net sales increased $59 million compared to the prior year period. Gross profit decreased to $124 million in the second quarter of 2017, compared with the $145 million in 2016. Operating income for the quarter was $82 million compared to the $101 million in the prior year and net income was $71 million compared with $90 million in 2016. In our banana business segment, net sales increased to $500 million compared with $497 million in the second quarter of 2016 with higher sales volume and pricing in North America and Europe, partially offset by lower net sales in Asia and the Middle East due to higher industry supply. Overall volume was 3% higher than last year’s second quarter. Worldwide pricing decreased $0.37 a box or 2% to $14.92 per box compared with $15.30 in the second quarter of 2016. Total worldwide banana unit cost was in line with the prior year and gross profit decreased to $58 million compared with $67 million in the second quarter of 2016. In our other fresh produce business segment for the second quarter, net sales increased 14% to $568 million compared with $497 million in the prior year. Gross profit decreased to $55 million compared with $60 million in the second quarter of 2016. In our Gold pineapple category, net sales increased 9% to a $135 million during the quarter due to higher volume. Overall, volume increased 23%. Unit pricing was 11% lower and unit cost was 4% lower than the prior year. In our fresh cut category, net sales increased 25% to a $169 million compared with $135 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 23% higher, unit pricing was 1% higher and unit cost was 6% higher than the prior year. In our avocado category net sales increased 48% to $85 million compared with $58 million in the prior year due to increase customer demand and tight industry supply. Volume decreased 6%, pricing was 58% and unit cost was 63% higher. In our non tropical category, net sales decreased 10% to $78 million compared with $87 million in the second quarter of 2016, principally due to lower sales volume and pricing in the Middle East as result of plan reductions. Volume decreased 15%, unit pricing increased 6% and unit cost was 4% higher than the prior year. In our prepared food segment, net sales were $80 million compared with $94 million in the prior year. The decrease was the result of lower sales in our processed pineapple product lines and gross profit was $10 million compared with $19 million in the prior year. Now to discuss cost in the second quarter, banana fruit cost which includes our own production and procurement from growers increased 1% worldwide and represented 20% of our total cost to sales. Carton cost increased 1% and represented 3% of our total cost to sales. Bunker fuel cost per ton increased 41% and represented 2% of our total cost to sales, but total ocean freight cost during the quarter, which includes bunker fuel, third-party charters and fleet operating costs decreased 2%. For the quarter, ocean freight represented 8% of our total cost to sales. The foreign currency impact at the sales level for the second quarter was unfavorable by $8 million and at the gross profit level the impact was unfavorable by $2 million. Other expense net for the quarter was an expense of $500,000 compared with other income net of $700,000 in the prior year period. The change principally attributable to foreign exchange gains during the second quarter of 2016. As far as our stock repurchase program during the second quarter, we repurchased approximately 107,000 million shares for approximately $54 million. At the end of the quarter, our total debt was $227 million. Income tax expense was $8 million during the quarter, compared with income tax expense of $9 million in the prior year. As relates to capital spending, we spent $72 million on capital expenditures in the first six months of 2017. We expect to spend approximately $160 million in 2017. This concludes the financial review. Operator, we can now turn the call over for Q&A.

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

Three questions I had. First, on the gross margin compression, this quarter. Is this consistent in your mind with the usual ups and downs of supply particularly in the -- as referenced the Asia in the banana business, but even in pineapple consistent with the typical ups and down? Or do you think there is any structural going on here? It would be my first question.

Jonathan, to be honest with you, we haven’t seen worse markets than what we have seen in many, many years as far as banana supplies and banana pricing specially in Asian market and in the Middle East. Europe wasn’t bad during the last few months. It just started getting bad since I would say early July. North America is contract pricing, so it’s more or less stable. But as we speak for the first time that I have in many, many years that I haven’t seen that Ecuador is selling fruit today at almost $4.50 a box, FOB, which is unheard of, never in the last 10, 15 years. We have seen these prices today in Russian, selling prices in the market today is around $4.50, $5 a box which cost them over $12 to $15 at least in cost to deliver to Russia. So, you can see the situation is extremely bad for we don’t understand the reasons. But it seems that there is an oversupply situation worldwide that has affected the banana market, which we haven’t seen for many, many years to be honest with you. So, I expect this situation to continue for at least a month more and then hopefully this whole kind of oversupply situation works itself. But the gross margin traction was very, very clear to us, I mean last year was a short year. And everything like I said last, we had tailwind, we never had any headwinds. Everything was perfect even in the industrial side which is the prepared food. Pineapple juice concentrate was selling at almost $3,000 to $2,800. Today, it's half that price. So, you can see, I mean, this is the commodity that we could not control. But if you look at all other, other businesses that we have and they are all expanding and they are all doing very well. So, I’m not very worried about the future, even in the near future, I believe we know where we're going. And our motivation and our target is to reduce our banana, let say part of the pie by an over 10% or so from the total activities. I’m not saying that the reduced banana volume, but really to increase all other items in order to mitigate any influence by the banana pricing or supplies like we’re experiencing today. So all-in-all, this is the situation.

I think I understand. We talked about maybe I think a couple of years ago about how there was a little bit better behavior out of Ecuador structurally enforcing the minimum reference prices, I guess that's not -- that was some possibility. I guess that discipline kind of broken down little bit?

Well, it’s not the discipline it’s because of the market situation and because of supply. Central America hasn’t been hit with any hurricanes or any bad weather for the last several years. So, there we’re producing a full production and without any interruptions. The same thing happened in the Philippines. Last year, there was a shortage and that’s why the markets were very strong in Asia and the Middle East. This year, there is full production. So taken into consideration as well, some of the big players that in the Asian markets have started importing as well fruits from Ecuador, which really backfired on them because they are putting more fruit to the market where they should it have. I mean it’s a -- the situation is that, in Ecuador, they always depend that there is a shortage from Central American or some interruption there. And to continue making good prices, this year it hasn’t happen and I don’t see as we speak that there is a kind of disruption to the supply from Central America. So, that’s why they have so much over supply and let’s buyers which moved the price even below their reference price that they put as minimum for their exports.

Understood. And just a couple other things, Mohammad. Is there anything, can you give us any update, I know, it's only few weeks since what I thought was a pretty exciting announcement your joint venture. Is there any -- can you give us any update on like new pieces of business you’ve targeted? Or the things that could have an impact product line wise for 2018 beyond just a resolved litigation or resolving the dispute I should say between the two companies?

Yes, like we said, we are getting into -- we have several joint ventures, four joint ventures which are going to kick-in hopefully by the end of this year. We are going to market the chilled juice business. We are going to the F&B which is, maybe people are not yet acquainted with. We have a very successful concept that is going right now in the Middle East specially in Saudi Arabia and in Dubai area where we have like the Del Monte F&B shops where it’s becoming very popular there and quite successful as a matter of fact. We have about, as you speak, we probably have about 16 shops already operating and we have probably five, six already in the pipeline in the next few months that would open. And they've been doing very well, extremely well as a matter of fact. So, that’s the kind of concept that we are bringing into the U.S. of course with some tweaking to fit the U.S. market. But this will be in my opinion very important milestone for us. Of course, we are using the brand all our stuff that we could not use it before. Part of our agreement with Del Monte Pacific, Del Monte Foods was to put our brand, to put the Del Monte brand on many items that we could not sell under Del Monte, which was a big handicap like all the added value, products like prepared meals, like hummus, like protein, salad and sandwiches, anything you can think of dairy products, things like that. That is now in the process. It’s in the pipeline of how to start the biggest into the market. Of course, we are creating now the, the recipes, we are creating the packaging, we are creating the, which hopefully we go into the market also by the end of the early next year. That is going to be our big in my opinion, our big push in the future as far as our fresh-cut and added-value products. We are going to be within a month from now or six weeks from now we will be operating our new fresh-cut in DC, in Huston which will brand new. We are already in the process of putting up our mega distribution fresh-cut and preferred meals location in Delaware, that’s a very big, that should be ready hopefully by the end of this next year and operations. So, we have many things. We’re putting up our new packing house, a very packing house in Mexico for our avocado. So, we will be packing our own avocados rather than through third parties. Many things are in actually in the process now and in the pipeline. And that’s why when I said, I’m not worried about what. When we make $1.40 for a quarter is that really something that we should be saying or sad about. I think it’s a very good result. I believe that we have to withstand the market conditions what we are going through. And hopefully that we will go, we will overcome.

Thanks. And which relates directly to my last question, which is you bought about $180 million worth of stock over the past 18 months. And yet the Company still is by historical standards relatively conservatively leveraged. Is this the priority, maybe this for Richard, but certainly Mohammad your views? Is this the priority use of cash right now? And how big of share repurchase program could you envision given what inexpensive debt is right now?

We’re expecting with the opportunistic buy and this has been every quarter. We’re looking at a position as well as if there is the right acquisition with the right value and with the right mix for you, we will look at this seriously. So, we’re always prudent and using our cash and our capital.

Thank you. And our next question comes from Mitch Pinheiro with Loss Asset Management. Your line is now open.

I don’t know who I’m working for now, but we’ll take whoever that was I’m working. So, hey, I just had a -- I just didn’t understand the banana business here. You had flat revenue in the quarter and your unit costs were flat and then we had a decline in gross profit. What was driving that?

Price is the only other variable, Mitch.

We had volumes up, right. So, I kind of -- I just kind of thought we would see, you’d see flattish banana margins year-over-year?

No, but what really helped us was the Asian and the Middle East banana market. These were the ones that really have the big difference year-over-year in pricing, Mitch, which really affected the whole average.

And so, and you were saying Mohammad you think some of the oversupply situation can sort of balance out in a couple of months. Is that what you kind of see right now?

I believe so, yes. Yes.

Okay.

Because otherwise I don’t believe that this can continue. Something has gone so let’s go.

And then any -- how would you compare year-over-year the percentage of your units that were self produced versus bought by from third parties?

As far as bananas concerned?

Yes, yes

Pretty steady Mitch over the last couple of years.

Okay.

Our production in the Philippine is on the rise. Our on production on the rise and that might mitigate that we will reduce third-party and increase our own -- replaces it by our own production. So, it’s more or less stable, but it's -- what’s happening is that we are replacing some of our own production with third-party production as we move forward, 38% in the quarter Mitch of own production.

Okay, your own production. And where -- would you like, is there not a target, but you just like to see that continue to increase?

Increase for our own, you mean or the other?

Yes for your own. You’d like to see that 38%?

We are replacing third party with our own production as we move forward.

Okay. And then another question on the other fresh produce, really strong revenue quarter and gross profit was down a bit. And some of your profitable items like pineapples were strong, other fresh produce looks strong. I was surprised to see the margin declined despite the really strong revenue growth. Is there any color you can add there?

I mean the pineapple was down because we had normal ups and downs, so some months ago we were short, in this quarter we had a surge of production. So we volume was up so cause the price become down, that was a piece of it. And then margins were down slightly, even though sales were way up, but margins were down in both the fresh cut and the avocado, just because of the cost of buying from the outside.

Okay.

I just want to add to this, we always constantly we have to face with the fresh-cut, the labor, because the labor rates going up all over the country. And to catch up with this, we are increasing our pricing, but that’s not -- doesn’t happen overnight.

Right.

I mean you can’t just next day to the customer and say I’m raising my price equal to the rate and the labor cost. So it takes maybe a month or two kind of transitional. As we speak, we are raising our prices to compensate so that it will increase labor cost. As far as other items like avocados and others, we buy and sell and that’s usually, margins are more stable and constant except for certain cases. If you are long on some items where you have both let's say high and then the market went down, a little bit later then you're caught in the middle. But these are not really any significant events. As far as pineapple, like Richard said, sometimes we have a kind of surge in production and we know these periods. So we go into promotion kind of campaigns with our retailers and move these volumes to. But if you look at the whole year, I think this will -- would kind of normalize and then they will see more or less with margin.

Okay. And then, so you’re only half way down the year, but as you looking into 2018 and how to some of, like how do some of your sort of growth areas look for instance in the berry business, how is that looking now and any way you sort of plan as you enter next year. And saying I guess fresh-cut next year, we'll just fill up the new capacity. So that seems to be pretty visible. But I was curious about some of your growth areas your new lines how they look to contribute?

I think it will see very important in terms of berries. I think you will see a very important move into that category. I mean by next year we would be, I would say an important player in this field. As we are building up the business and it looks very, very promising. We are already selling berries into the market, and we are building out the sourcing and channel and the customer base. So, it looks very promising. As far as -- sorry.

I’m sorry. I’m sorry to interrupt.

No, no. And as far as all the other items like I was mentioning to Jonathan a few minutes ago, they are all in the pipeline. I mean definitely what we are doing is taking as you can see there is an increase in our revenues and our revenues mainly coming from other items other than bananas. So, that by sell is a testament for what we are -- what Fresh Del Monte is gearing towards. So, and I think this momentum is going to continue going forward and hopefully we will come to a time where bananas will become the minority of our business.

So, one more question just relating to initially your free cash flow even after spending $160 million in CapEx, it’s not a substantial free cash flow. You obviously brought back a lot of stock. I am curious. One, how the, your acquisition pipeline might be looking? And then, in absence to that, do you plan to continue to be aggressive repurchasing stock?

We will do all these things, I always said that a very well opportunity to find the right acquisition with the right value, with the right synergies, we will do that. As far as stock, buying back is on the table all the time and we do that opportunistically whenever we see that there is a good value for the company. So, I'll keep spending on our expansion.

Thank you. And our next question comes from Ajeya Patil with Evaluate Research. Your line is now open.

Yes. Hi, good morning everyone. And thank you for taking my call. So, my first question is regarding avocados. We have been seeing this situation of tight supply and high prices, but it seems the last three quarters or so. So what is your view like how -- what is the current situation in avocado? Is the supply still tight? And you know the volumes went down 6% this quarter. Was it just because of the supply being tight or was it something on the demand side too? Thank you.

No, the demand is always best, it is the supply actually and supply is over side from Mexico. You know because Mexico supply is very rejuvenated, let’s say it’s just like a and they can decide how much they want to explore and how much they don’t want to explore. So, it is likely and that’s why we see the very high prices and sometimes smaller supplies and sometimes more supplies. But we do get -- as you can see, we are expanding and our business is growing at avocado and this is going to continue. So this is the situation from Mexico.

Okay. And my second question is about the non tropical segment. So last time I think non tropical was the main segment because of which the margins and everything was done. And so, I think last time, it was because of grapes. And so, I just want to know what, what has happened this time in the segment, the volumes are 15% on which, in which specific category there, did you see the volumes going down and pricing increased. So what is going on there?

So, actually the margin on non-profit were higher this time. As you mentioned, the grape season starts tapering off at least the Chilean grape season towards the end of the second quarter. And as we mentioned in the -- earlier in the call, we purposely reduced some of the volume into the Middle East that was not looking to be as profitable. So, again, you saw a little bit less sales because grapes were down, if you’re comparing to last quarter that’s just normal seasonality and we make some changes ourselves to improve the margins and it could go up a bit.

Okay. And one last question on the new facilities and everything so, I think starting something in Costa Rica and Philippines as well. So, any update on that?

Costa Rica Philippines is mostly expansion, it’s not a facility per se. It’s just expanding production. Especially in the Philippians, we are expanding banana production.

[Operator Instructions] And I’m showing no questions at this time. I would now like to turn the call back to the Mohammad Abu-Ghazaleh for any further remarks.

I would like to thank everyone for attending this call today and I hope that we can get together at the next quarter and wish you a good day. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a wonderful day.