Fresh Del Monte Produce Inc. (FDP) Q1 2018 Earnings Report, Transcript and Summary

Good day everyone and welcome to Fresh Del Monte Produce's First Quarter 2018 Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. 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, Stephanie. Good morning everyone and welcome to First Del Monte's first quarter 2018 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 distribution 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 in 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 that may cause actual company results to differ materially. This call is a property of Fresh Del Monte Produce. Redistribution, retransmission or rebroadcast of this call in any form without a written consent is strictly prohibited. Let me turn this call over to Mohammad.

Thank you, Christine. Good morning everyone and thank you for joining us. Our performance during the first quarter of 2018 saw net sales 7% higher year-over-year at $1.1 billion with gross profit 7% higher and comparable operating income up 13% over the prior year. These increases highlights the continuing progress we have made in diversifying our business. I'll share a few highlights. Our value-added products stood out during the quarter with the acquisition of Mann Packing at the end of February. The newly acquired company contributed $51 million in one month to our increase in net sales, driving strong growth in our Fresh Cut product line as well as increased sales volume and selling prices of our Vegetable product line. The integration is going extremely well and we look forward to further positioning ourselves as the innovative leader in the Vegetable category in North America. Sales in our Avocado product line were also higher during the quarter. Consequently, we continue to increase our market share and further strengthen our competitive position. Other highlights included higher Banana selling prices in all of our regions due to tight banana supply in our traditional growing areas and favorable exchange rates in Europe and Asia. During the quarter, we also expanded our global value-added Fresh Cut network with the opening of our new facility in Houston. However, although, I was pleased with our progress during the first quarter and the execution of our diversification strategy, several headwinds held up our progress and adversely affected our performance throughout the quarter, including extreme winter weather events in North America and Central America that resulted import closures, obstructed shipping, and inland transportation, and disrupted market activity. We also encountered higher U.S. transportation cost, a reflection of the reduced capacity in the trucking industry along with higher fuel costs. It is important to note that performance in our Gold Pineapple business in North America was also affected by significant increase in industry volume during the quarter. We remain the number one marketer of fresh pineapple worldwide with a clear competitive advantage by bringing the highest quality fruit to market, far superior to our competitors. We are and we will aggressively take the necessary measures to ensure we hold our leadership position. In spite of these headwinds, we remain fully committed to our strategy of leveraging our vertically integrated business model and [Indiscernible] our operations, products, and markets. Accordingly, we have ordered six new fuel-efficient reefer container vessels to be delivered starting in 2020. We will also be introducing new value-added vegetable and prepared food products in the coming months. And we continue to look at potential acquisitions and joint venture opportunities that offer synergies in the areas of e-commerce, meal kits, and grab-and-go outlets that offer around the clock healthy, full convenience fresh foods. We believe there remains a tremendous opportunity to increase our scale and generate attractive returns over the long term. At this point, I will turn the call to Richard. Please, Richard?

Thank you, Mohammad. For the first quarter of 2018, excluding asset impairment and other charges on a comparable basis, we reported earnings per diluted share of $0.88 compared with earnings per diluted share of $0.84 in 2017. Net sales increased $74 million compared to the prior year period. Gross profit increased to $107 million in the first quarter of 2018 compared with $99 million in 2017. Operating income for the quarter was $58 million compared with $51 million in the prior year. And net income was $43 million compared with $44 million in the first quarter of 2017. In our Banana business segment, net sales increased to $453 million compared with $445 million in the first quarter of 2017 due to higher net sales in Europe and Asia. We benefited from higher selling prices in all of our regions due to tight industry supply and favorable exchange rates in Europe and Asia. Overall, volume was 8% lower than last year's first quarter. Worldwide pricing increased $1.51 to $15.68 per box compared with $14.18 per box in the first quarter of 2017, an 11% increase. Total worldwide Banana unit cost increased 6% due to higher fruit procurement and distribution costs, and gross profit increased $17 million to $52 million compared with $35 million in the first quarter of 2017. In our other Fresh Produce business segment for the first quarter, net sales increased $68 million to $574 million compared with $506 million in the prior year period. Gross profit decreased to $47 million compared to $48 million in the first quarter of 2017. In our Gold Pineapple product category, net sales increased 8% to $120 million during the quarter, primarily due to higher sales volume in North America. Overall, volume increased 16%, a result of increased industry supply. Unit pricing was 6% lower and unit cost was 4% higher than the prior year period. In our Fresh Cut category, net sales increased 28% to $180 million compared with $141 million in the prior year. The increase was primarily the result of increased sales from our Mann Packing acquisition. Overall volume was 36% higher, unit pricing was 6% lower, and unit cost was 5% lower than the prior year. In our Avocado category, net sales increased 19% to $84 million compared with $71 million in the prior year, supported by higher demand from both our existing customers as well as new accounts. Volume increased 35%, pricing was 12% lower, and unit cost was 12% lower. In our Non-Tropical category, net sales decreased 15% to $66 million compared with $78 million in the first quarter of 2017, principally due to lower sales volume in grapes, primarily due to unfavorable growing conditions in Chile. Volume decreased 27%, unit pricing increased 17%, and unit cost was 9% higher than the prior year. In Vegetable category, on February 27th, 2018, we completed our acquisition of Mann Packing Company, a leading grower, processor, and supplier of a variety of vegetable products in North America. As a result, we will begin to provide commentary regarding the Vegetable category. In the first quarter of 2018, net sales increased $12 million to $19 million, primarily [Indiscernible] Mann Packing for approximately one month. In our Prepared Food segment, net sales were $79 million compared with $81 million in the prior year, primarily due to lower sales volume and lower selling prices of industrial pineapple products. Gross profit was $8 million compared with $16 million in the prior year. Now, moving to costs, banana fruit cost per box, which includes our own production and procurement from growers, increased 4% worldwide--

Decreased.

No, per box, increased 4% worldwide, sorry, and represented 27% of our total cost of sales. Carton cost increased 16%, and represented 4% of our total cost of sales, bunker fuel cost per ton increased 19% and represented 2% of our total cost of sales, and total ocean freight cost during the first quarter, which includes bunker fuel, third-party charters and fleet operating cost, was 2% lower than the prior year period. For the quarter, ocean freight represented 8% of our total cost of sales. As to foreign currency, the foreign currency impact at the sales level for the first quarter was favorable by $28 million and at the gross profit level, the impact was favorable by $19 million. Other expense net for the quarter was an expense of $3 million compared with other expense net of $100,000 in the prior year. That change was principally attributable to higher foreign exchange losses during the first quarter of 2018. As far as our stock repurchase plan, during the first quarter, we repurchased approximately 182,000 shares for approximately $8.143 million. At the end of the quarter, our total debt was $795 million. Income tax expense was $6 million during the quarter compared with income tax expense of $7 million in the prior year. And as it relates to capital spending, we spent $43 million on capital expenditures in the first quarter. We expect to spend approximately $230 million in 2019. This concludes our financial review. We can now turn the call over for Q&A.

[Operator Instructions] Your first question comes from Jon Feeney with [Consumer End]. Please go ahead.

Good morning. Thank you very much.

Good morning Jon.

I first would love a comment -- well, I have three questions. First, I'd love a comment on supply outlook, particularly for banana, as you mentioned weather events, but that seems to me be more positive than a negative. As far as pricing, you're probably coming ahead from a profit standpoint. So, if you could confirm that and maybe talk about the supply outlook as we come into these critical three months here would be great. Secondly, what is the biggest single bottleneck -- not that you're behind schedule, but what is it -- what's the thing that needs to happen for -- to see more value-added planted products in North America hit shelf under these new JV agreements? And third, for Richard, do we still feel like we're getting a five-year payback on our CapEx above maintenance and update on that? And where we sort of are in the cycle of feeling the benefits of that? So, three big questions, but that's all I have. Thank you.

Thank you, Jonathan. As far as banana supply, in the beginning of the year, there was a shortage. Ecuador was a little bit tight. Central America was normal supply, actually between Guatemala, Costa Rica. But as we speak now, prices at Ecuador has dropped significantly and banana supply is more abundant. What we are doing right now, actually, at the year, the situation is that we have less volume in the first -- in the first half of the year and more volume in the second half where it really has our average selling price across the year. What we are trying now is to reduce that risk, I can't go in details, but definitely trying to smooth out the whole 12 months period where prices doesn't suffer as much in the second half as like previous years. So, we, as a company, we want to go -- as far as North America is concerned, most of our volumes are going into contracts, so we don't have that issue of price, let's say, fluctuations. It's Europe and Asia and MENA, which really are exposed to this. So, what we are trying to do is really kind of try to get out of that vicious circle where it happens in the second half of the year and be more consistent in our supplies and avoid that very, let's say low prices during the summer months. So, we are watching the situation very carefully. As we speak now, we have things under control and we hope this would continue to the end of the year. As far as the new products, as we're growing through the next few couple of months or -- you will see a lot of new, hopefully, announcements about our new products, about our new joint ventures, which will take us into a different level, a different sphere of our core business, which is the value-added products, which is reaching to consumers more directly than before and having a different kind of business model than what we have been doing for that last 20-something years. And I can't illustrate on this today, but I am sure that within the next few weeks, you will hear some news about this and I think it will be very exciting to the -- to you and to us as well. So, I think we just have to wait for that. As far as the investment returns, Richard, do you have any--?

Yes, Jon. I mean, we still insist when we receive projects that there are no more than five years. Obviously, there's some projects, for example, if it includes a lot of land investment or something like that, it would exceed that, but that is still the goal, are we getting that on all products -- projects? No, but that's what we strive for, and we get it on most.

Thank you very much.

Thank you.

Your next question comes from Mitch Pinheiro with Castello Asset Management. Please go ahead.

Hey, good morning.

Good morning Mitch.

Hey, so maybe working backwards off of Jon's question on CapEx. Reefer vessels, you're going to invest in, I forget what you said, six more new ones by 2020? What's the -- how do you think about that versus like leasing for or -- and not putting the capital there? Or what's your ROI as a -- on that spend?

A return on capital on these vessels are seven years, and I wish we can lease vessels like these in the market. There are not too many of these vessels around in the market. And the container ships of that size is really going significantly high today and going higher forward. Another thing that we have to take into consideration that in a couple of years, there will be newer regulations and rules about fuel efficiency and fuel consumption that the present ships that we have, or the market has, doesn't meet these standards and to convert them to these standards will take several million dollars for each ship, all ships, I mean, to convert into the -- to comply with the new regulations. So, I think it's -- and these vessels are going to replace existing leased vessels that are already in the route and are costing us quite substantial amounts of money. So, there will be a very good return on the investment as well as -- I mean, seven years, but these vessels can go on for usually, if you maintain them well, 30 years or so. So...

So, these vessels -- so you have a what, 15 of your own reefer vessels, is that correct?

11, I guess. Today, it's 11.

11?

Yes, our own is 11, yes.

Okay. And then--

These vessels will be just for the East Coast service.

Okay. So, it'll be 11 plus -- plus?

Yes. Yes.

Okay. Okay. And you also have CapEx, maintenance CapEx to convert to the new various environmental standards?

No. No.

No, you won't have to do that?

No, no, we don't have to do that.

Okay.

Because its regulations will be for North America.

Okay. Understood, understood. On the Banana cost side of things, how does -- if you look out for the rest of this year, how does your total ocean freight costs look?

It's up here because of the fuel. The bunker is going up and you see the oil where -- I mean, if you watch the oil prices, I hope that it would not go further north, but that made our main really -- the charter rate what makes it -- makes difference is the fuel cost.

Are you hedged at all?

No, we are not hedged for fuel.

Okay. And how about on the non -- on the -- your leasing events, leasing of reefer container and all the other transportation, is that -- that's going higher as well, correct?

We just actually renewed one ship -- container ship and we have to pay a higher rate for the renewal.

Okay. So, total ocean freight cost in this past quarter was down 2%, but you think it's going to rise throughout the year, correct?

It could. It all depends on the fuel. Hopefully, that's not change so we'll be in the same situation.

Okay. And then in terms of banana pricing in the U.S. So, these are contracted at the end of the year -- the prior year. Does that put you -- how does that put you relative to like tight supply? So there's tight supplies, how has that affect your overall margins in the U.S.? I mean, being locked in on pricing that was probably lower than it is now?

Well, I mean, it's a catch-22. You can't have the cake and eat it all. So, I mean -- okay, contracts will protect you during the second half of the year, but of course, the first half of the year, you enjoy very high pricing in the market, I mean the spot market. So, you lose this opportunity, but you have to think -- I mean, North America is not like a small market. I mean, we are talking about above $1.4 million a week for us, so you can't just play with this kind of volume on a spot market so it has to be contracted. However, what we are trying to do is to improve our pricing with our customers, hopefully to mitigate these all additional cost, be it bunker, be it where we are trying to now include clauses to address the fuel cost, ocean fuel costs, and even inland fuel cost now, and additional trucking cost that we are facing in the U.S. now because of all the new regulations, the electronic logging and all this. So, that's really what's really we are working on is try to improve our pricing with our customers to improve our margins or to maintain our margins, let's put it that way. And I hope that this can be achievable, and the spending of our customers.

It always seems that at the end of the year, pricing tanks just as you're trying to negotiate forward rate for the coming 12 months, and it's based on a fairly low rate, it almost seems like clockwork regardless of what's--

No, no. No, the pricing in North America is not influenced by the market, actually, so the customers understand the cost of bananas and they understand the highs and lows. So, the market, the spot market tanks, it's true because of the summer and other fruits, but as far as bananas is concerned, pricing is more or less kind of stable in terms of -- with supermarkets.

That was helpful. Then last question. As I'm around Avocados, you said that -- are you taking share in Avocados? Is the market -- your volume increased 35%, but I was curious what you saw the category do?

We are -- we don't like to compare ourselves to others, but we are doing our own business and that is increasing our -- as you can see, this year-over-year that we have been increasing our volumes and market share, and I think our infrastructure and our ability to deliver to our customers in a more timely basis and being very close to our customers and giving them like a boutique service, I think that is a testament for our ability to be different from the rest of the industry. And as we speak, we just started building a state-of-the-art packing facilities in Mexico that will even give us an additional advantage in terms of supplies and quality. We started as well -- we put up a packing facility in our Los Angeles distribution center there and it's catering for the California avocado season, which is also putting us on a very good footing in the California and Avocado industry, and building up relationships with the avocado growers there. And we even put some avocado trees in Florida now to fill a gap. We are planting our avocados as well in Florida today, on a small scale, of course, as a trial period. So, on all fronts, we are very confident about our avocado business and going forward, building our leading position there.

Okay. And just on the Avocado, is most of that -- is that a U.S. and North America business or is there any outside of North America?

It's mainly North America, but we are also opening markets, some volumes into Europe and Asia, but the majority -- most of the -- the vast majority of this is going to North America.

Okay. Mohammad thanks for your time.

Thank you.

[Operator Instructions] There are no further questions at this time. I turn the call back over to Mohammad Abu Ghazaleh.

I would like to thank everybody for joining us on this call today and we hope to talk to you soon with some good news as well like today. Thank you very much and have a good day.

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