Fresh Del Monte Produce Inc. (FDP) Q2 2018 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Fresh Del Monte Produce's Second 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 thank you for joining our second quarter 2018 conference call. As Stephanie 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 in our website and will be available for replay approximately 2 hours after conclusion of this call. Please note that our press release includes reconciliations of non-GAAP financial measures to their corresponding GAAP measures. I would 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 would like to turn today's call over to Mohammad.

Thank you very much, Christine. Good morning, everyone, and thank you for joining us. During the second quarter, we generated net sales that were 11% higher year over year, primarily driven by our recent acquisition of Mann Packing Company and steady rise in demand by consumers for our healthy on-the-go meal and snack options. We made solid progress during the quarter to expand our product offerings and distribution channels, further strengthening our company for long-term sustainability and growth. Examples of our progress include the launch of several new products such as cannelloni, cauliflower, fresh veggie noodles and rice blends, along with a variety of new Nourish Bowl flavors. However, while I'm pleased with our top-line growth and expansion activities during the quarter, our performance was negatively affected by congestion, delays and bad weather for 11 consecutive weeks at our loading ports in Central America, the worst we have ever experienced. Substantially lower banana selling prices in Europe, the lowest in 10 years, along with lower selling prices of pineapples in North America both a result of industry-wide oversupply. We also faced increased fertilizers and container-board costs, along with higher transportation and logistics costs, largely due to trucker shortages, new regulations on drivers, higher fuel-cost and port delays. In North America alone, inland transportation and logistics costs were $13.4 million higher year-over-year. Despite these challenges and the cyclical nature of the produce business, I remain optimistic about the future. Our vision is clear: to build a strong diversified business; reduce our dependence on a single region, product or distribution channel; and to lessen the impact of competitive market conditions, poor weather, seasonality and fluctuation in costs; and deliver long-term value to our shareholders. At this time, I would like to turn the call to Richard to discuss our financial results.

Thanks, Mohammad. For the second quarter of 2018, excluding asset impairment and other charges, on a comparable basis, we reported earnings per diluted share of $0.14 compared with the earnings per diluted share of $1.40 in 2017. Net sales increased $125 million or 11% compared to the prior-year period. Gross profit decreased to $79 million in the second quarter of 2018, compared with $124 million in 2017. Operating income for the quarter was $29 million compared with $82 million in the prior year and net income was $7 million compared with $71 million in the second quarter of 2017. In our other fresh produce business segment for the second quarter, net sales increased 27% to $721 million, compared with $568 million in the prior year. Gross profit decreased to $47 million compared with $55 million in the second quarter of 2017. In our gold pineapple category, net sales increased 3% to $193 million during the quarter, driven by higher sales volume in Europe, partially offset by lower selling prices in North America, along with lower sales volume and pricing in the Middle East. Overall, volume increased 12%, unit pricing was 8% lower, primarily in North America, and unit cost was 6% higher than the prior year period. In our fresh-cut category, net sales increased 61% to $272 million compared with $169 million in the prior year. The increase was driven by our Mann Packing business. Overall, volume was 96% higher, unit pricing was 18% lower, and unit cost was 19% lower than the prior year. In our avocado category, net sales increased to $95 million compared with $85 million in the prior year due to increased customer demand and market share. Volume increased 43%, pricing was 22% lower, and unit cost was 24% lower. In our non-tropical category, net sales increased to $86 million compared with $78 million in the second quarter of 2017, principally due to higher sales volume of apples in the Middle East, higher sales volume of grapes in North America, along with increased sales volume of other deciduous products in South America. Volume increased 5%, unit pricing increased 5%, and unit cost was 12% higher than the prior year. In our banana business segment, net sales decreased to $458 million compared with $500 million in the second quarter of 2017 with lower sales in Europe, the Middle East and Asia, a result of competitive market conditions in Europe and lower sales volume from the Philippines. Overall, volume was 6% lower than last year's second quarter. Worldwide pricing decreased 40% - $0.40 or 3% to $14.52 per box compared with $14.92 per box in the second quarter of 2017. Total worldwide banana unit cost increased 4% from the prior year period, mainly due to increased transportation and container board costs. And gross profit decreased to $24 million compared with $58 million in the second quarter of 2017. In our prepared food segment, net sales were $94 million compared with $80 million in the prior year period. The increase was a result of higher sales in our prepared vegetable product line in North America, a result of our acquisition of Mann Packing this past February, and gross profit was $8 million compared with $10 million in the prior year. Now moving to costs for the second quarter. Banana fruit cost, which includes our own production and procurement from growers, increased 1% worldwide and represented 24% of our total cost for sales. Carton cost increased 16% and represented 3% of our total cost of sales. Bunker fuel cost per ton increased 30% 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, increased 3% and represented 7% of our total cost of sales. And to foreign currency, the impact of the sales level for the second quarter was favorable by $16 million. And at the gross profit level, the impact was favorable by $11 million. Selling, general and administrative expenses for the second quarter increased to $50 million compared with $42 million in the prior year, principally due to the acquisition of Mann Packing. Other expense net for the quarter was an expense of $7 million compared with an expense of $500,000 in the prior year. That change was principally attributable to higher foreign exchange losses during the second quarter of 2018. As far as our stock repurchase plan during the second quarter, we repurchased approximately 36,200 shares for approximately $1,628,000. At the end of the quarter, total debt was $690 million. Net interest expense for the second quarter was $6 million compared with $1 million in the second quarter of 2017. The increase was due to higher average loan balances as a result of our acquisition of Mann Packing along with higher interest rates. Income tax expense was $6 million during the quarter compared with income tax expense of $8 million in the prior year. This concludes our financial review. And operator, we can now turn the call over for Q&A.

[Operator Instructions] And your first question comes from Jonathan Feeney with Consumer Ed. Please go ahead.

Good morning. Thank you very much for the questions.

Good morning, Jonathan.

I've got a few - nice to hear from you. Let me start with little bit of a special occasion today. I think it was a little bit - just today was a little bit surprising, sounds like to you as well as a lot of us in the investment community. What single area line, segment in your financial statements or in the review that Richard just went through was most behind your plan? I'd say that's hard to say. You don't guide, but I'm trying to understand, what's most behind expectations? And what's your outlook for that going forward? It'll be my first question.

You go ahead, Richard.

I would say transportation in general and logistics. As Mohammad…

But where is that felt, Richard, because I'm a little surprised that like, I mean, everybody feels transportation, everybody feels logistics? Why can't - where is it that your - it seems like there's big shortfall in pineapples. That's one piece, and if you do the math, that seems like about a big chunk of it. But where are the other places that was most acutely felt?

Well, I mean, transportation goes across all our product lines.

Let me, Jonathan. Let me tell you. This wasn't like a - a perfect storm really that was not expected at all. To be honest with you, we started second quarter with a different anticipation and expectation. Unfortunately, everything turned around beyond our control. That, like the weather in Central America, which I mentioned earlier, we had such a bad weather with a very poor port management in Costa Rica and Guatemala. Both of these countries never had such a congestion and bad weather like we experienced in the last quarter, in the sense that ships used to wait for two, three days, four days sometimes to be able to load. That meant for us, once we lose that slot, the ripple effect is tremendous, because we lose our kind of schedules coming into the discharge ports, which means - I can give you 10 different kinds of consequences of this. We missed delivery to our customers. We have to ship fruit from other ports to be able to sustain our customer needs, which means off-port charges, which would translate in millions of dollars, as well as the quality was also affected by delays at the port. There are so many reasons that have also - are not as bad as in the tropics or Central America. But even here, during the April, May, March, I mean, period, we have also very bad weather in the East Coast, where also our ships were delayed and not being able to get into the port, because of snow, because of rain, because of God knows what. And it was really a very bad situation.

Okay. Thank you. Moving on to - I see Mann Packing, is there any way you can tell us how much that contributed? Maybe I missed it someplace in terms of the gross or operating profit. And whether Mann Packing is meeting your expectations from that profit contribution standpoint?

So, yeah, Jonathan, Mann Packing contributed about $12.8 million to the gross profit in the quarter. It is meeting our expectations. It's doing quite well in fresh-cut and in the prepared business, such as in nourish bowls and those products. It's a little bit behind on the commodity type vegetables. But overall, it's pretty much on track, it's been a big contribution.

And I guess, I'd just say finally, so weather - the nice part of a weather, it's specific to a day, a week, a month. Looking at the second half of the year, I realize knowing the pre-existing seasonality of the business, would you expect this situation to get much better in the second half? I mean, keeping in mind not - keeping in mind that we all know the way of the seasonality of this business.

We are doing everything in our power to make that second half of the year better than the first half of the year. That's what we are trying to - striving to achieve, hopefully that conditions will start to kind of stabilizing. And don't forget that we also have to pass costs to our customers that we cannot absorb on our own, like transportation, logistics and fuel increases, things like that will have to be passed along to the buyers. So we are doing everything in our power. Things - and of course, the port has improved a lot since about three weeks, and operations is more smooth, and we are taking precautions for next year or next season. Because usually one day, volume start ramping up by November, December, that's when we start - the congestion starts at the ports. We are taking actions hopefully to mitigate all this coming in the next season or next year. So I hope that this situation that we saw this year never happens again. Now as far as market is concerned, nobody ever expected Europe to show a performance of that sort in the second quarter. We looked at our figures, historical figures, and we looked at the graphs in the last 10 years, and we haven't seen worst pricing for bananas in the second quarter as we see this second quarter. We have never seen that kind of pricing even the last 10 years. So it is really something that we cannot comprehend, it's probably because of Ecuador. Ecuador shipped a lot more fruits during the second quarter into Europe all over the place that had really affected prices drastically all of a sudden. I mean, it's just like overnight, prices just dropped and never kind of recovered. When it comes to pineapples, for instance, we saw a 25% more volume coming into the market than normal years, of course, we are taking actions and we are taking kind of steps to mitigate this. And being the leader into this category and in a worldwide basis, we are going to maintain our position and mitigate whatever causes that has created this oversupply for us and maintaining our pricing as we go forward.

Okay. That's all I had. Thank you very much.

Thank you.

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

Thank you very much, everyone for joining us. And I hope that we can give you better news, good news on the next call. Thank you, and have a good day. Bye.

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