Fresh Del Monte Produce Inc. (FDP) Q4 2017 Earnings Report, Transcript and Summary

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. 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 President of Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

Thank you, Jody. Good morning, everyone and thank you for joining our fourth quarter and full year 2017 conference call. As Jody 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. Good morning, everyone. I'm glad 2017 is behind us. Throughout the year we faced particularly intense challenges in our operating environment whereas that reduced our ability to deliver optimal earnings. We contented with one of the most depressed global banana markets, I have experienced in my 45 years in 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 increased fruit [decrement] 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 based 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 and the number of joint ventures with the 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 that platform to transform our company. I'm pleased with the progress we've 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're focused and determinant to meet our goals. I'd now like to turn the call to Richard. Richard please.

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'll only give fourth quarter statistics as recorded. 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 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 non-tropical 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 cost were 5% higher. In our prepared foods 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 one-time non-cash 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'd like to give some financial information on Mann Packing. As Mohammad mentioned, we recently announced we've sign 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.

[Operator instructions] Your first question comes from the line of Jonathan Feeney with Consumer Edge. Your line is open.

Good morning. Thanks very much.

Good morning, Jonathan.

Mohammad, one of your remarks saying what a tough year 2017 was and it certainly seemed that way. I know you don't give guidance, but from 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 ranges of profitability of that business going forward? Would you say that 2017 given all the investments in logistics efficiency you've made, it's something like a bottom -- some of your bottom for the banana business and average profits to be a lot higher or where do that sit?

Yeah, I think you're right. I think that 2017 was the 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.

Now how about the -- you've made an initiative pretty clearly to diversify this business. Could you characterize the amount and volatility of profitability in Mann Packing and it strikes me that I guess on a pro forma basis of -- fresh cut will now be about a quarter 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?

It's a completely different business. First of all, we're getting into vegetable business that we haven't been before in a big way. We do have 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 in the same. However, their ratios is much better than our ratios that 50% of their business is into value-added and that's where they’re growing further. They’re 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 and partly in the Northeast, but however, they don't have too much -- almost none activity in the Southeast and Southwest of the U.S. So that's where we give us a lot of new opportunities and 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. I'm very pleased about this really going forward.

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

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

Thank you very much. Talk to you soon.

Your next question comes from the line of Mitch Pinheiro of Castello Asset Management. Your line is open.

Hi everybody.

Hi Mitch.

Thanks for taking the questions. Two things, one, on the Mann acquisition, did I hear you say, you said the ratios were better. Is that -- was that in sales or did you mean was that also profitability? How did the profit margins compare to your existing business?

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

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

Commodity is usually depending on the availability and it's mainly California products. So, one year they have shortage and the prices spike and the other year they have 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.

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

But I think vegetable is more predictable in the sense that they have part of the business into contract. And the other part is like spot markets. 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 pie will be bigger, but the commodity or the whole vegetable segment will be smaller as we move forward.

Okay. And then one more thing, I know the deal hasn't closed, but as you -- what will be the next two or three sort of tangible steps that you're going to take, once the acquisition closes? I understand your focus on the value-add, but what should I expect to see, what kind of actions are we going to immediately integrate distribution? How do you see that planning out over the next 12 to 18 months?

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 would 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 operations, but through a third-party that will change in the future. We have a Delaware facility that is under development right now. We will have also -- we have facilities in the Southeast in our own areas that we are going to also include their products, 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.

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

As we speak today, demand is exceeding supply because variable supply shortage since late last year into the new year and then we have the weather events. We have in both at outsourcing and at destination. So that has created a lot of pressure on the supply side where prices has improved and markets improved. But as I see the future, in the near future, I can’t tell the long term, but the near future doesn't look too bad as we speak. And our case what we're trying to do within our own capabilities is to streamline the business in a better way than that 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.

Okay. Thank you, Mohammad. Thank you, everybody.

Thank you.

[Operator Instruction] Your next question comes from the line of Jonathan Feeney of Consumer Edge. Your line is open.

Thanks very much for taking the follow-up. just one question I had is, your friend at Conagra today divested a Del Monte canned vegetables, packed vegetables business. I think that's one that would've been within the scope of maybe your 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 transaction -- there are other Del Monte properties globally, come to market are those things that, you've proven interested in the past it now in growing that business. Does that continue to be the case, thank you?

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

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

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

We bought that business in 2004 Jonathan.

No. I know, but what's the timeline?

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 tremendous leverage. And now our joint venture with -- our agreement with our competitor Del Monte Pacific, has given us also some leverage and some way do use our fresh with certain non-fresh, even in North America. So I don't think that looking at the other units in the fruit parts of the world, Del Monte canned or prepared, is not really our kind of first option or wishes? Thank you very much.

Thank you very much.

Thank you.

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

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

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