Fresh Del Monte Produce Inc. (FDP) Q3 2017 Earnings Report, Transcript and Summary

Good day everyone and welcome to Fresh Del Monte Produce's Third Quarter 2017 Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. For opening remarks and introductions, I would like to turn today's call over to the Assistant Vice Assistant of Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

Thank you, Christina. Good morning everyone, and thank you for joining our third quarter 2017 conference call. As Christina 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 will be available for replay approximately two hours after 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 in the Company's most recent filings with the SEC. Now, I’d like to turn today's call over to Mohammad.

Thank you, Christine and good morning everyone. Our results show that we continue to face the number of challenges during the quarter. However there were a number of positive developments that kept our diversification strategy on track. We saw higher sales in our other Fresh Produce business segment continuing our near double-digit growth over the past three years in this important segment. The increase was driven by our value added fresh cut and avocado product lines, with sales supported by higher demand from both our existing customers as well as new regional and national accounts. Our third quarter was also augmented by increased sales in the rapidly growing planted product line and our recently introduced Fresh Dairy program, along with ongoing expansion in our grab-and-go and prepared meal channels where our quality products continue to be well received by customers and consumers. I'm excited about how these new ventures are trending as they are integral parts of our vision but I'm strong in Fresh Del Monte to a leading diversified global food company. Although I was pleased with the ongoing progress, a number of headwinds impacted the quarter that resulted in our missing several financial targets. The banana industry experienced one of the worst oversupply market conditions in several years, certainly, one of the worst in my 45-plus-years in the produce business. The oversupply of pineapple concentrate from Thailand and Indonesia was so great during the quarter that selling prices were significantly off. We were also impacted by multiple hurricanes that challenged logistics and disrupted sales. In spite of the headwinds, we have been facing in the second half of 2017 we're optimistic about the future end demand firmly focused and committed to growing our business, strengthening our business model and creating long-term shareholder value. At this time, I would like to turn the call over to Richard to discuss our financial results in more detail. Richard?

Thank you, Mohammad. For the third quarter of 2017, excluding adjustments on a comparable basis, we reported earnings per diluted share of $0.24 compared with earnings per diluted share of $1.17 in 2016. Net sales increased to $953 million compared with $950 million in the prior year period. Gross profit decreased to $59 million compared with $119 million in 2016. Operating income decreased to $17 million compared to $70 million in the prior year and we reported net income of $12 million compared with net income of $61 million in the third quarter of last year. Now turning to our business segments, in our banana business segment, net sales in the third quarter of 2017 decreased $15 million to $409 million compared with the prior year. The decrease in banana net sales was primarily due to higher industry supply resulting in lower selling prices in the Middle East and Asia. This was partially offset by higher sales in North America. Overall volume was 6% higher than last year; worldwide pricing decreased a $1.40 per box to $13.53. Total worldwide banana unit cost decreased 1% due to lower transportation costs and gross profit was $6 million compared to $40 million in the third quarter of last year. In our other fresh produce business segment for the third quarter, net sales were $468 million compared to $434 million in the prior year. Gross profit was $44 million compared with $62 million in the third quarter of last year. In our gold pineapple category, net sales decreased $3 million to $119 million during the quarter primarily due to lower selling prices in North America, Europe, and the Middle East, partially offset by higher sales volume. Volume increased 7%, unit pricing was 9% lower and unit cost was in line with the prior year period. In our fresh cut category net sales increased $24 million or 18% to $159 million. The increase was primarily the result of increased sales volume and selling prices in North America and Europe, along with higher sales volume in Asia due to increased demand. Overall volume was 15% higher, unit pricing increased 3%, and unit cost was 11% higher. In our Avocado category net sales increased $23 million or 35% to $90 million compared to the prior year, the result of growing consumer demand. Volume increased 8%, pricing was 25% higher and unit cost was 20% higher. In our non-tropical category, net sales decreased $7 million to $38 million compared with $45 million in the third quarter of 2016. The decrease in sales was primarily attributable to lower sales volume and selling prices in our citrus and Apple product lines in the Middle East, partially offset by higher sales volume and selling prices in our recently introduced berry product line. Volume decreased 21%, pricing was 7% higher, and unit cost was 16% higher. In our prepared foods segment, net sales were $76 million compared with $92 million in the prior year, and gross profit was $8 million compared with $17 million in the prior year, primarily the result of lower selling prices in our industrial pineapple product line. Now as for cost in the third quarter, banana fruit cost which includes our own production and procurement from growers was in line with the prior year period and represented 31% of our total cost of sales. Carton cost increased 3% and represented 3% of our total cost of sales. Bunker fuel cost per ton increased 23% and represented 2% of our total cost of sales and 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 8% of our total cost of sales. The foreign currency impact at the sales level for the third quarter was unfavorable by $4 million and at the gross profit level, the impact was unfavorable by $300,000. Other expense net for the quarter was an expense of $1 million principally attributable to foreign exchange losses. As far as our stock repurchase plan, during the quarter we repurchased approximately 523,800 shares for approximately $24.7 million. At the end of the quarter, our total debt was $280 million. Income tax expense was $4 million for the quarter compared with income tax expense of $6 million in the prior year. And as it relates to capital spending, we have spent $103 million on capital expenditures in the first nine months of 2017, we expect to spend approximately $140 million in the full-year 2017. This concludes our financial review. We can now turn the call over for Q&A.

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

I wanted to ask, how much of the -- obviously I think a lot of us were surprised by the -- it's not surprising that you have ups and downs in this business, was a little surprised by the magnitude of the impact on profits. What’s your position just in the banana business as far as sourcing fruit over the next three to six months, it seems like you were caught a little bit on the long side here by rapidly falling costs and excess supply. To what extent even if conditions don't get better, should sourcing cost get better on that portion of the bananas over the next three to six months that you don't -- that you don’t produce internally, it’s my first question.

Jonathan, the situation with the bananas is as follows. During the last 12 months there has not been a single occurrence of any climatic let's say conditions that would have reduced banana supply somewhere in the world. If you recall in 2015 we had two occurrences that had really created a situation where we saw very high prices in 2016 and the result of that was very clear. We had remember if I don't know if you remember but we had a very big hurricane, typhoon in the Philippines that affected the eastern part of the Philippines which wiped out a quite large volume of bananas at that time. Simultaneously, a month or two later or before, also a typhoon that hit the Chinese banana plantations at that time and took off -- took out so much of the production as well. That, that in particular was very important event made a big shortage in the market especially for the East Asian market and that created a huge opportunity. At the same time, there wasn't so much fruit in Ecuador at that time, and that's what also created another good market for Europe in that period. This year we didn't have any of that. And number two every country are producing at optimum volume, and that's what happened. Now we are taking measures going forward to mitigate this to a separate extent. However the banana industry which everybody knows that during the first half of the year we enjoyed very good markets, we enjoyed very good situation because of the shortage usually there is more demand than supply during that period where the markets are usually functioning and behaving better. It's the second half of the year where usually supply was going up and demand and consumption was going down. And then that's the dilemma of the banana industry to be honest with you, is the second half of the year if you can have a normal second half which is not so much oversupply and the consumption doesn’t go down so much we would be in a much better situation but unfortunately the facts are the facts now we know what we need to do to mitigate to reduce that exposure and that's -- these are the measures that we are taking going forward in the future partly to regulate our supplies more tightly to the second half of the year. Secondly how can we reduce our force, which we are working on, even further? Unfortunately we cannot influence the prices because the market is the market and what we can influence our cost and that's where we're working now. So I'm not too, I'm very much upset of what happened during the last few months but I have been in this business for a long time, I understand the dynamics of this business and I know how we should react and how we should overcome all these kind of hurdle that we have faced during the last few months. So I'm not down I look more positively to the future and I believe that we will overcome.

How would you say -- may be can I ask it this way, versus this time last year would you say that you had more part you have more three, six months contracted out, purchasing agreements for bananas and so you were caught like maybe you had a little bit more supply contracted versus last year or would you say less and what impact can sourcing you were buying more in spot market, sourcing more cheaply, not extending that help you profits in the next couple of quarters things you can't control.

As a matter of fact, Jonathan, the same contracts, the same that were last year, the same that are this year, same volumes, nothing has changed. Because the only thing that changed was that there was nothing that took out some production somewhere and so it was like full steam production everywhere in the world, and the markets could not take all this volume. I mean so much of this volume, in the U.S. we have contract in places where we have volumes in place even in the U.S during the summer period the customers reduce their volumes unfortunately even if they are contracted and they are obliged to take this, they still cannot take older volume and that means that the U.S. is instead of taking X number of boxes every week reduces that number by a significant amount which the market cannot take. So we have to take this route and put it somewhere else in the market which is usually in the Mediterranean market which is like a bumping market. So the fruit is sold there are a loss and it depends on the market could be slight loss, could be big loss. So nothing has changed from us in terms of volumes, in terms of contracts as far as we are concerned what's changed is the market dynamics itself I mean the supply on one side and the consumption on the other hand.

When I went through the capital expenditure for the last five years it stepped up dramatically something Richard and you have talked about a lot, has -- could you -- I have two questions. Could you remind me of what sort of a maintenance maybe Richard level of capital expenditure is now for this business and how much is -- of your capital expenditure is investment in growth and have those investments in anyway increased your volatility like I see a lot of the spending and I spent the morning going through your comments for the past five years a lot of this investment has been in fixed infrastructure related to the banana and other fresh produce business. Has that increased your operating leverage in a way that could make this business more volatile going forward?

That the maintenance is about $35 million to $40 million Jonathan, that's been pretty steady.

Okay.

I mean as far of volatility you are right, a lot of the spending has been on bananas as Mohammad mentioned to try and decrease cost wherever we can and obviously serve the growing markets like the Middle East in the last few years and so on. But a lot of it has also been on fresh cut and what we call diversified or non-banana growth which is clearly the target for the future is. Still growing the banana business so we could lower our unit cost but growing all those other products at a much faster rate.

And you would still say that you have five-year pay back on that kind of growth capital expenditure that's what you target?

That's what we target. Operator [Operator Instructions]. Your next question comes from Mitch Pinheiro from Castello Asset Management. Your line is open.

Hey, so regarding bananas I apologize if you've talked about this but what does -- the visibility of the banana supply, how much visibility do you have? And can you comment around maybe any when we can anticipate a more normal supply and then -- and demand balance?

Well, you can never in banana business, to be honest with you, we can never say that we can balance I mean or we have a plan in place and we know exactly how much we are producing each month of the year and we know what our volume need to be in the markets. We know all these site -- these kind of variables are available. However, what we cannot decide is whether there will be any disruption in the supply. And there is a disruption in supply that's usually good for bananas, both for banana market. And what we are trying to do actually is to regulate our supplies more, let's say, more kind of in a logical way where we can have more supplies during the first half when supplies are short and less supply during second half when there is too much abundance of the fruit that's our target and that's our mission. And that's what we look for, I mean, expanding. The problem with that is that the markets are the markets we cannot change the market that’s the problem we have. We tried to increase prices but unfortunately in the U.S. competition is fierce and the clients dictate more or less their price because of the illogical kind of competition that is in the market. As far as Europe is concerned more of the fruit is sold on spot basis. So the markets in the winter is good. We enjoyed very high return, the same thing in Asia. Unfortunately this doesn't happen, I mean if the situation today, like in Europe or Asia, that we have a spot pricing during let’s say between January and June that would have been a much better situation for us because the returns would be much higher that what we are enjoying today because we have a fixed price throughout the year. Unfortunately this has not been the case for the last let's say 30 years or so because the banana companies have gone into this practice of fixing contracts with the customers on annual basis which doesn't give you the upside during the high season. I mean during with the winter prices could up to $20, $22 above or $18, $19 while we are selling it much less than that on a fixed contract basis. So these are the dynamics I mentioned.

Okay, thank you. And then does in -- so did your percentage of self bananas from your own production is that continuing to increase or how does that look for the next couple months and into next year.

Our supplies in Central America and more or less is stable as we speak. We had better years, we anticipate. Definitely, our price is close compared to third-party supplies it's very -- I mean it’s in a better situation it's advantageous to us. And that's when we are moving towards more production of own but not necessarily in Panama -- I mean in Costa Rica, Guatemala. We are -- and as -- now it's been public that we are looking up new farms into Panama and within a year, a year-and-a-half from here from now that reduction will start ticking in which will eliminate some of the third-party supplies which will be favorable to us in the long-term. That's the kind of strategy and moves that we're making.

Okay. And then can you talk a little bit about your JV with Del Monte Pacific? Update us from where you are and what you're doing and if there's any effect in the quarter?

All the areas where we have agreed on is actually in the pipeline, it’s hopefully by end of next year, this will be materializing in several fronts. We already started cooperating on supply side, from our side to their side and vice versa. So our relationship has been quite satisfactory and excellent, as a matter of fact and I think this will pay back in the medium term and long-term future.

And then how your foray into new categories of strawberries and making inroads into blueberries et cetera, how does that stand today?

I think we're in very good position on that. We are not going to plunge ourselves into kind of big -- kind of play but we are taking we’re doing it step by step. We have already bought farms in Chile, we bought a packing plant, we have established ourselves with the grower and in the U.S. we already have relationship with Peruvian producers. So we are building up this business just like we've been the avocado business, step-by-step and I’m very positive that we will become an important player in the market in the years to come.

And there are no further questions at this time. I turn the call back over to Mr. Abu-Ghazaleh.

Thank you very much, Christine. I would like to thank everyone for having the time to join us today and look forward to speak with you on our next call. Have a good day.

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