Fresh Del Monte Produce Inc. (FDP) Q4 2018 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Fresh Del Monte Produce Inc.'s Fourth Quarter and Full Year 2018 Financial Results Call. Today's conference call is being broadcast live over the Internet, and is also being recorded for playback purposes. [Operator Instructions]. For opening remarks and introductions, I would like to turn today's call over to the Vice President, Global Corporate Communications and Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

Thank you, Marianna. Good morning, everyone, and thank you for joining our fourth quarter and full year 2018 conference call. As Marianna mentioned, I am Christine Cannella, Vice President, Global Corporate Communications and 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 after 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 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. With that, I am pleased to turn today's call over to Mohammad.

Thank you, Christine, and good morning, everyone. Thank you for joining us today. In reviewing the fourth quarter and 2018 as a whole, there were definite achievements and some frustrating setbacks. Let's begin with the positives. The acquisition of Mann Packing Company in March 2018 was part of our diversification strategy to drive growth. This acquisition made us a major player in the fresh vegetables space and gave us a foothold in the value-added product category. The acquisition led to a $409 million increase in sales over the last year's $4.1 billion. Our Mann Packing fresh and fresh-cut vegetable product lines complement our fresh-cut fruit product line, which continues to expand on a global basis, both are key to our future strategy and growth. What makes this year's net sales growth particularly meaningful is that the company was able to tap in this performance despite an extremely tough year in other segments. As I have stated on prior calls, during 2018, we experienced numerous challenges, including delays in the first half of the year at our port in Costa Rica and Guatemala, two of our key production sources. I'm happy to report that the new port in Costa Rica is now operating at full capacity, and port operations in Guatemala have improved. I also shared with you in earlier quarterly updates that we were negatively impacted by severe winter weather events across the U.S. throughout the year. We also experienced trucker shortages in the U.S., in part, the result of new driver regulations. Higher fuel costs compounded this across inland shipping and ocean transportation, posing considerable disruption to logistics activity in the U.S., higher operating costs also constrained our global performance during 2018. Industry-wide oversupply and global pricing pressure on bananas squeezed margins, with bananas reaching their lowest selling price in 10 years in Europe during the second quarter. Events such as this underscores the importance of continuing to diversify our business. We also reviewed our operating structure in 2018. Through aggressive action to become a more efficient producer, we restructured our operation in Chile and the Philippines, and we reduced expenses in tomato production by replacing our own U.S.-based production with new grower relationships in Mexico. Together, we estimate these strategic shifts will reduce operating expenses by approximately $20 million annually. Always, it is how you respond to difficulty that reveals your essential strength. Diversification, innovation, technology and strengthening consumer connections will drive us forward. We made significant strides in 2018 towards our goals, strengthening our position in the marketplace for 2019 and beyond. After this year's challenges, I am more confident than ever that we are on the right track. At this point, I would like to have Richard give you the financial details.

Thank you, Mohammad, and good morning. For the full year 2018, on an adjusted basis, we reported earnings per diluted share of $0.44 compared with earnings per diluted share of $2.43 in 2017. Net sales were $4.5 billion compared with $4.1 billion in the prior year, and gross profit was $280 million compared with $332 million in 2017. Operating income for the year was $82 million compared with $155 million in the prior year, and net income was $22 million compared with $123 million in 2017. For the fourth quarter, on an adjusted basis, we reported a loss per share of $0.43 compared with a loss per share of $0.08 in 2017. Net sales were $1 billion compared with $954 million in the prior year, and gross profit was $42 million compared with gross profit of $51 million in the fourth quarter of last year. Operating loss for the quarter was $8 million compared with operating income of $5 million in the prior year, and net loss was $21 million compared with a net loss of $4 million in 2017. Now I'll turn to our business segments, and we'll only give fourth quarter statistics, as reported. In our other fresh produce business segment for the fourth quarter, net sales were $563 million compared with $455 million in the prior year. Gross profit was $49 million compared with $31 million in the fourth quarter of 2017. In our gold pineapple category, net sales decreased to 9% to $116 million during the quarter compared to $128 million in the prior year, the decrease was due to lower sales volume. Overall, volume decreased 15% due to lower yields from our sourcing areas in Costa Rica. Unit pricing was 7% higher, and unit cost was 5% higher. In our fresh-cut fruit category, net sales increased $5 million or 4%, to $114 million during the quarter. Volume was 6% higher, unit pricing decreased 1%, and unit cost was 4% lower. In our fresh-cut vegetable category, net sales increased $93 million to $123 million during the quarter. The increase was driven by higher sales volume in North America as a result of our acquisition of Mann Packing Company. Unit pricing decreased 21%, and unit cost was 21% lower. In our avocado category, net sales decreased $3 million or 4%, to $65 million. Volume increased 16%, pricing was 18% lower, and cost was 28% lower. In our nontropical category, net sales decreased $13 million or 31%, to $28 million compared with last year. The decrease in sales was primarily attributable to lower sales volume and lower selling prices of stone fruit. Volume decreased 8%, pricing was 25% lower, and unit cost were 20% lower. In our vegetable category, net sales increased $40 million to $46 million during the quarter. Overall, volume was 5x higher, unit pricing increased 19%, and unit cost was 8% higher. In our banana business segment, net sales were $395 million compared with $421 million in the fourth quarter of last year. The decrease was primarily the result of lower sales volume in the Middle East and lower selling prices in Europe, partially offset by higher selling prices in the Middle East and North America. Volume was 9% lower. Worldwide pricing was 3% higher at $13.87 per box. Total worldwide banana unit cost increased 7% due to higher fruit and distribution costs. And gross profit was a loss of $2 million compared with gross profit of $15 million in the fourth quarter of 2017. In our prepared food segment, net sales were $88 million compared with $78 million in the prior year, and gross profit was a loss of $4 million compared with gross profit of $5 million in the prior year. The decrease in gross profit was primarily due to lower selling prices in our industrial and canned pineapple product lines. As for cost for the fourth quarter, banana fruit cost, which includes our own production and procurement from growers, increased 4% worldwide and represented 25% of our total cost to sales; carton cost increased 7% and represented 3% of our total cost to sales; bunker fuel cost per ton increased 29% and represented 2% of our total cost to sales; and total ocean freight cost during the quarter, which includes bunker fuel third-party charters and fleet operating cost, was 1% higher, and represented 8% of our total cost of sales. Selling, general and administrative expenses increased $5 million to $47 million compared to last year, as a result of the acquisition of Mann Packing. The foreign currency impact at the sales level for the first quarter was favorable by $300,000, and at the gross profit level, the impact was favorable by $7 million. Interest expense net for the quarter was $7 million compared with $2 million in the fourth quarter of last year due to a higher-average loan balance as a result of the acquisition of Mann, along with higher interest rates. At the end of the quarter, our total debt was $662 million, also the result of our acquisition of Mann Packing during the first quarter of 2018. Income tax expense was $3 million during the quarter compared with income tax expense of $6 million in the prior year, primarily due to the lower earnings. As it relates to capital spending, we spent $151 million in 2018. We expect to spend approximately $175 million in 2019. This concludes our financial review. Operator, we can now turn the call over for Q&A.

[Operator Instructions]. Your first question comes from Jonathan Feeney with Consumer Edge Research.

Mohammed, I wanted to -- I wanted to see if I have something right here. It seems like this quarter versus last quarter, it seems to me like maybe you took up pricing or maybe priced a little bit ahead of the market, and hence, the volume losses. Is that a good explanation? Or are the volume losses in pineapples and bananas purely a function of fruit quality and fruit sourcing?

Actually, it's more fruit quality and fruit sourcing as well as rationalizing our supplies. You know that -- if you see statistics, the growth in pineapple has increased tremendously in supply from Costa Rica. We have been expecting this -- I have been expecting this for several years, that this will come at one point, which had actually started hitting the markets by the end, the last quarter of 2017, and it continues in 2018. As we speak today, we noticed that a lot of small farmers and producers, medium-sized producers, are already abandoning their orchards, and I expect that supplies will start -- supply and demand will be more in line by the end of this year. Because it's not like bananas; it's a very intensive, let's say, capital expenditure into the pineapple unlike bananas. And my expectation that pricing should improve as we go forward. And don't forget that we have a very dominant position in the market, and we will not compromise that dominance at any cost.

Well, now what it relates to my second question, too, Mohammed. You've made some very significant investments, and not just in pineapple supply and things, but all kinds of things, pineapple plantings, port infrastructure. But others have made, it seems, those kinds of investments as well. I'm just trying to understand, if we look at all the, say, the higher-than-trend capital expenditure that's taken place over the last 5 years, what gives you confidence that you're going to get a return on that? Or is it just that -- is it possible that others have just spent a lot of money, too, and this industry just continues to throw -- if everybody's spending, then it doesn't really drive an incremental return?

What really -- nobody is perfect. We have made mistakes in the last few years, especially in the Philippines with the banana production being an area which is very much in turmoil. And that turmoil, I mean, civil unrest and certain groups that try to influence laborers, and that has -- that's one of the reasons why we took a writeoff, as you can see from -- in the Philippines, in the last quarter. But if you look at most of our actual investments over the years have been very sound and paying back as, more or less, as expectation. If you look at last year, most of our capital expenditures were really heavy in certain projects. Like for instance, when we acquired a Mann Packing last year, they were already into building a brand new fresh-cut facility and distribution center in Gonzales, Salinas. And this project, by itself, is a very costly project. So -- and as we took over the company, we found out that there were some incorrect layouts and specifications done to the plant, and we had to expand as well the facility by constructing more. This is one of the big investments that we have done in 2018, and we have a carryover into 2019 as well. One of the other big project in the Panama, actually, banana plantations that we have started since last year, and the first production actually came on last week with the first few containers that were shipped. Now, you tell me why do we have Panama plantation bananas? Because when you look at our cost in terms of production compared to third-party costs that we are already sourcing now, there is significant variation here which will translate as we go forward in the years 2020 and forward. The same time, I have -- one of my -- our big investment as well, we have already 6 ships under constructions in China, 6 new container ships, which we are financing since last year and going forward. And these are major investments, as well as our one -- state-of-the-art packing shed in Mexico for our avocado business. As we speak, we pack almost in 13 different packinghouses in Mexico to different third parties. And hopefully, by middle of this year, sometime in August, we will have our plant ready and operating. So these are very big investments in reality, plus all other regular investments that we do in our fresh-cut like new machineries, new automation, that's what we are going forward with. It's actually automating more and more our fresh-cut operations in order to reduce our labor cost, which is increasing drastically over the years. So if you look at all these, and as we go forward in the year, we'll keep updating you about these. But once all these projects come into -- in line, I think that then, we will see a lot of added value -- value added going forward.

And last question, I'll give someone else a chance. Do you expect -- over the course of the quarter, did the price -- you mentioned that you see some people abandoning production in Costa Rica. Would you expect improved pricing as a result of that limited supply of pineapples? And what would you say -- would something similar be true with bananas?

Bananas, I'm not so sure, to be honest with you. What we are trying to do is reduce our cost on bananas. I don't believe that production by itself would be reduced. But what we would like to do is reduce our cost ourselves in order to be able to improve our margins. That's our target. As far as pineapple is concerned, I believe pineapple will rationalize by itself as we go forward because during last year, many people that have gone into the pineapple marketing and distribution have sustained large losses, very huge losses, which I expect will deter that from going forward into continuing in this business. And if they continue, they will sustain more losses as they go forward. As far as ourselves, I mean, we have a certain OI that we would like to maintain on goal, and I think that we are slowly coming back to this level, which I believe we can sustain. And don't forget, we have our rosy pineapple that will come online, hopefully, towards the end of the year, which will give us a different perspective in this field. I mean, that's a completely different new game.

[Operator Instructions]. Your next question comes from Kane Ossorio with Yost Capital Management.

I'm wondering about the avocado segment, in particular. If you could explain the dynamics there. I see in the press release pricing decreased 18%, but unit cost increased by 28%, which would be a pretty significant margin impact, I imagine. Is there anything notable to explain about what's happened in that segment, or your plans there?

We continue to gain on the top line and continue to take market share and increase the consumer pool as well, but it's a market you have to keep on top off, and pricing is constantly going up and down. We try and keep the margin the same, but it's constantly having to -- it's an everyday battle to pass the cost along to the customer. We do not grow avocados, so we buy them all from growers.

Got it. So that -- you were able to potentially take share in end market retail, but it just -- you had to pay growers a little bit more to get that volume?

It goes up and down. It's cyclical. It goes up and down.

It's about actually doing the right buying at the right moment, and selling. We have increased our market share in avocado business, and we're continuing to do that. We see, as I said, a few minutes ago, that we would be starting our packing operations in Mexico towards the, hopefully, by August this year. And by then, I think that will have improved our costing and our quality and our -- more consistency to our buyers. So we are a very big believer and confident in our avocado segment, and we believe this will keep growing as we go forward.

[Operator Instructions]. You have a question from Jonathan Feeney with Consumer Edge Research.

Sorry. If you guys have some time, I've got a couple more questions.

Sure, go ahead.

Richard, could you -- I apologize if you've said this in the remarks, I got on about four minutes late, but could you give us a sense of what the contribution was to the other fresh produce in terms of gross profit for Mann Packing?

For Mann Packing?

Yes. So what's the -- I'm trying to understand what the organic rate of gross profit pressure was year-over-year. Clearly, Mann Packing contributed something.

As a matter -- since we just -- we only acquired the company in March last year, and since we've been trying to integrate and kind of streamline the business together, I think as we go forward during this year, we will be able to give more notes or figures on the business with Mann. But actually, with -- the Mann business has been doing very well during the 2018, and I believe that it will do even better during 2019.

Okay. And how about on the foreign currency effect on gross profit. Is that just the -- is that mainly the euro strength versus your production cost? And how much of that was hedging versus spot, because that's a little bit more than I would have expected?

Yes, that's mostly spot, Jonathan. So on the sales impact, it was mostly the euro, and on the cost as well. Costa Rica also had a cost impact.

So it was favorable?

It was favorable.

Right. Understood. The -- I guess, following up on the avocado question, I mean, this has been a fantastic business for a lot of people, and I think the challenge has always been getting hands on the right fruit at the right time. I mean, are there any -- it seems like kind of a tough quarter. I mean does this highlight to you the need to get bigger in the business or have a steadier supply? Or does it -- I guess, I'm going to keep it open ended. Does this kind of -- does the performance you've seen in that business change at all your aspirations one way or the other to get bigger or get smaller in the business?

Definitely, our objective is to get bigger into this business and have a bigger market share, which we are gaining as we speak, Jonathan. I -- we believe very much into the business. We have done -- our people, our team has done a great job in the penetration of the market, especially during last year. There was a strike, and for almost 3 weeks, there was not a single avocado coming out of Mexico. And through our planning and vision, I believe that we were one of the very few, if not the only, maybe player in the avocado business that we were able to keep supplying our buyers with the avocados because we were -- we had the foresight to have volumes in place before the strike took over, and we were able to keep supplying our customers even if it's not at 100% fulfillment, but we were able to keep their shelves still stuffed with avocados, which was a very big -- and that's why we noticed that a lot of these customers that were not our customers, as a matter of fact, now starting to be more aligned with Fresh Del Monte and wanted to continue building that relationship and the programs with avocado. So with avocados, we are very confident that we will grow this business, especially once we finish our packing station. And it's a very big packing, I mean, station. It's about 180,000 square-foot facility, which is very sizable. And I think it will give us a different edge in terms of quality and consistency.

There are no further questions at this time. I will now turn the call back over to Mohammad Abu-Ghazaleh for closing remarks.

I would like to thank everybody for attending this call, and I hope that we can speak on the next call with better news. Thank you very much, and have a nice day.

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