Fresh Del Monte Produce Inc. (FDP) Q2 2019 Earnings Report, Transcript and Summary

Good day everyone and welcome to Fresh Del Monte Produce’s Second Quarter 2019 Conference 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 of Global Corporate Communications and Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead Ms. Cannella.

Thank you, Sharon, good morning everyone, and thank you for joining our second quarter 2019 conference call. As Sharon 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 Eduardo Bezerra, 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 distributions. As we have previously advised, our press release includes reconciliation of any non-GAAP financial measures we mentioned today to the corresponding GAAP measures. I would like to remind you that much of the information we will be providing 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, and thank you for joining us. I want to begin by saying we made solid progress in the second quarter of 2019. The quarter’s started with a conscious strategic decision to shift our focus towards becoming a value added and more diversified company. During the second quarter, we delivered positive year-over-year numbers in gross profit, operating income and net income. Certainly, we wish our sales could have been stronger and we believe they will.Adjusted gross profit for the second quarter was up 23% from last year, a total increase of $80 million. We also saw adjusted operating income and net income increased by $24 million and $27 million, respectively year-over-year. This signals that we do not have to be completely reliant on volume as long as we are actively calculating our value-added focus and diversification strategy.I sincerely believe this year will be a turning point for our company. I want to share some of what you should expect on the road ahead for Fresh Del Monte. Based on the second quarter of 2019, we believe that it is probable that pineapple market will contract further. The industry forecast is for fewer boxes to be exported from Central America with the exit of several smaller groups.We continue to maintain our leadership position in the gold pineapple category with premium pricing over our competition. With respect to Mann Packing, we are continuing to execute our integration plan. We are pursuing exciting new retail opportunities with the United States first fresh fruit and beverage stores, featuring our fresh and wholesome fruit and vegetable offerings.Our plan is to open our first store in Coral Gables by year end followed by Dallas in 2020. There are currently 17 of these food and beverage stores operating throughout the Middle East in airports and hospitals. We see these stores as powerful connection points between our product and consumers as we further promote our company as an essential component, healthy living and provide of wholesome convenient fresh fruit.We are also on track with the completion of our state-of-the-art packing facility in Mexico that we expect to open during the fourth quarter, which is mainly for avocado and other products. As many of you may have read, the Colombian government recently confirmed infestation of Panama disease on certain farms in Colombia.These farms are under quarantine. We have been following this closely and are actively working on preventative measures to protect our interest in this region and beyond. As I have shared in the past, Panama disease is an issue that may potentially affect the entire industrial on both the commercial and a socioeconomic level for the communities that depend on banana industry.In summary, 2019 is a year of transition, a year in which we will move to incorporate more diversification into our business approach, further reducing our dependence on bananas while strengthening our leadership position in key value added product lines and further expanding our brand leadership in world markets.At this time, I will turn the call over to Eduardo. Please Eduardo.

Thank you, Mohammad. Good morning everyone. For the second quarter of 2019 excluding asset impairment and other charges on an adjusted basis, we reported earnings per diluted share of $0.69 compared with earnings for diluted share of $0.14 in 2018. Net sales decreased $33 million year over year.Our gross profit increased to $97 million in the second quarter of 2019 compared with $79 million in 2018. Operating income for the quarter increased to $53 million compared with $29 million in the prior year, and net income was $34 million compared with $7 million in the second quarter of 2018.Now, we will review our business segment and key product lines. In our fresh and value-added business segment, for the second quarter of 2019, net sales were $764 million compared with $781 million in the prior year period, primarily as a result of lower lower net sales in our non-tropical pineapple and fresh cut vegetable product lines, partially offset by higher net sales in our avocado and vegetable product lines.Gross profit increased to $58 million compared with $51 million in the second quarter of 2018, primarily due to higher gross profit in our pineapple, non-tropical and fresh cut fruits product lines, partially offset by the lower gross profit in our fresh cut vegetable and avocado product lines. Our gross profit margins for the segment improved by 1 percentage point, maintaining the trend that we saw in the first quarter of 2019.In our gold pineapple category, net sales decreased to $126 million compared to a $139 million in the prior year period, primarily due to lower sales volume in North America and Europe, mainly due to lower production from our operations in Costa Rica. The decrease was partially offset by higher selling prices in North America and Europe.Overall, volume was 16% lower as a result of lower industry volume. Unit pricing was 8% higher and unit cost was 1% higher than the prior year period. In our fresh cut fruit category, net sales were $147 million in line with the prior year period. Overall, volume was 1% higher. Unit pricing was 1% lower and unit cost was 3% lower than the second quarter of 2018.In our fresh cut vegetable category, net sales decreased to a $121 million compared with the $125 million in the second quarter of 2018. The decrease was primarily the result of weather-related issues that impacted our production and sales volume. Overall, volume was 6% lower, unit pricing was 3% higher and unit cost was 10% higher than the prior year period.In our avocado category, net sales increased to a $125 million compared with $95 million in the second quarter of 2018, supported by higher selling prices and strong demand. Volume decreased 4% due to tight industry supply, pricing was 37% higher and unit cost was 40% higher than the prior year period.In our fresh vegetable category, net sales increased to $41 million compared with $39 million in the second quarter of 2018 primarily due to the acquisition of Mann Packing. Volume increased 10%, unit price decrease 5% and unit cost was 7% lower due to mix.In our non-tropical category, net sales decreased to $69 million compared with $86 million in the second quarter of 2018, primarily due to rationalization of our Chilean volume in 2018. Volume decreased 24%, unit pricing was 6% higher than the prior year period and unit cost was 3% higher.In our prepared food category which includes our traditional canned products and meals and snacks product lines, net sales and gross profit were impacted by a reduction in the traditional prepared product lines.In our banana business segment, net sales were $440 million compared with $458 million in the second quarter of 2018, primarily due to the lower production from the Philippines and Central America. Overall, volume was 7% lower than last year of second quarter.Worldwide price increased $0.42 to $14.94 per box compared with $14.52 in the second quarter of 2018 or a 3% increase. Total worldwide banana unit cost was in line with the prior year period and gross profit increased $11 million to $35 million compared with $24 million in the second quarter of 2018.Now moving to cost for the second quarter, banana fruit cost which includes our own production and procurement from growers increased 2% worldwide and represented 23% of our total cost of sales. Carton cost increased to 6% and represented 3% of our total cost of sales. Bunker fuel costs per ton increased 5% and represented 2% of our total cost of sales.And total ocean freight cost during the second quarter which includes bunker fuel, third party charters and fleet operating cost was 3% lower than the prior year period. For the quarter, ocean freight represented 7% of our total cost of sales.On SG&A, our selling, general and administrative expenses decreased $6 million to $44 million, compared to the second quarter of 2018, as a result of lower selling marketing and other interest expenses in the Middle East and North America.The foreign currency impact at the sales level for the second quarter was unfavorable by $13 million. And at the gross profit level, the impact was unfavorable by $4 million. Interest expense, net for the second quarter was $7 million compared with $6 million in the second quarter of 2018.At the end of the quarter, our total debt was $640 million as compared to $662 million at the end of 2018. The debt is now reported at current due to its April 2020 maturity date. Our income tax expense was $9 million during the quarter compared with income tax expenses of $6 million in the prior year mainly due to a higher taxable earns.As it relates to capital spending, we spent $70 million on capital expenditures in the second quarter of 2019 almost $12 million lower than the same quarter of 2018. During the quarter, we realized the sales of one of our tomato farms in Florida as part of the reorganization of some product categories in 2018. As part of our stock repurchase plan, during the second quarter, we repurchased approximately 365,000 shares to approximately $9.2 million.This concludes our financial review. We can now turn the call over for Q&A.

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

Mohammad, both on your comments and the numbers I see, there is a decided -- in all of your major product category that decided emphasis on value or volume, and you're purely pricing head of your unit cost as you disclosed them by product. And I’m wondering, how much of that that is -- when I look at your fresh products, how much of that is that you’re sourcing internally more and your third -- you’re buying less from third party growers? And how much is it there is just a lot of fruit around and you've decided to only do the most profitable business? That'd be my first question.

I think what we are focusing right now Jonathan is on the bottom line and this is a message that has been spread across the Company that we are not here just to sell volume and without take into the consideration the bottom line, bottom line comes first and then volume. Of course taking into consideration that we have, in terms of fix cost that we have to consider as part of our ongoing willingness, but as you could see every effort has been put on every call center and that’s why we got to these results a matter of fact. It’s a joint effort by everyone across the Company, really from the production and the producing areas to shipping, to DCs, fresh cut sales. Every one of them has done a very good job in improving his operation, which resulted in better result and better pricing.And the most important thing is the rationalization of the business. I believe that focus and rationalization is really our target as we speak and going forward. We are very confident that we can execute and deliver as a company, as a team. I’m so proud to be honest I would like to say, it’s on the conference call, I’m so proud of our team across the world, and not only across North America that they have been really striving to achieve the objectives and the target that we have put for them. And I think we are at the beginning of the role, I believe that there is still a lot of mileage to cover and lot of improvements to achieve.

Well, you might -- thank you Mohammad, and you've made some significant investments in capital over the past few years that presumably, I guess, I'm just trying to figure out, is that what’s paying off right now that allows you to how cost pricing that's way ahead of cost?

It’s part of it. I don’t believe that the major thing, these investments, we have put a lot of money and the ships that are under construction now. The packing plan that would hopefully be operational Mexico in the next couple of months and Panama that is started producing and delivering the fruit, but I think overall, it’s the efficiencies and the rationalization of the business. I think we have a team in place now that is really focused on the business that is really like razor sharp on every course segment or every course center, specially deals and the costs. I think all this has resulted in better pricing and better course structure. And I'd say that it's just the beginning. I am confident of what I'm saying. It's just the beginning because I see where the future is.

Thank you. There was a comment in the release about you doing also sounds like a skew rationalization, pulling certain products off shelves that were less profitable. Can you give us more detail about what drives that? Because it is -- but my understanding that between the Mann Packing acquisition, a lot more products have been going on shelf and you're certainly talking about more products and product forms in the coming year.

Yes, definitely, I mean don't forget that we just started. It's almost a year since we acquired Mann, and we are still in the kind of synchronization and rationalization of all the products. Definitely, Mann has given us tremendous leverage in making a better offering. We are coming now with new products to the market, which will be introduced very soon, which I think will be a novelty in the market.And we are going to be adding fruit and vegetables together in some innovative ways that will come to the market you know as something new and that's what we would like to do. We would like always to come with something new to the market. We don't want to be just business as usual and try to copy you know other products in the market, but we would like always to be pioneers and come with new products that really will command you know a premium and good revenue.

Thank you and last question for the moment. The 640 million that's coming due in April, I mean, that's substantially all of your debt. When we see this in the context of the dividend suspension, can you update us on what your strategy is relative to that? Is the idea that you're going to term it out? Or and I know you have significant assets, but what are you going to do about that debt?

No, no, no, this debt, what Eduardo just mentioned just for the sake of record that. It is maturing, but as we speak we are negotiating now renewal of the credit facilities. So, this is going to be you know renewing. It's not that it’s going to end in April. As far as and I would like maybe Eduardo to maybe explain further on that.

Yes. So, Jonathan, so we start the negotiations with several banks in the sense, so our expectation is to have by early Q4 that renegotiation concluded, and so we expect a similar terms than what we have today. And our approach is that by year end, that's going to be back to the long term debt.

[Operator Instructions] We have a question from Mitch Pinheiro with Sturdivant. Mitch, your line is open.

So, Mohammad, could you just give us a -- I think the near-term outlook for the bananas looking at each market. I mean I know what the U.S. is kind of stable, but how does Europe and Asia Pacific look in terms of supply and demand?

Europe, as we speak is actually far better than 2018 in terms of pricing, volume and stability in the market. So, it’s not that strong, but it’s far better than what it was in 2018. There is no question about that. As far as the Far East, we are seeing a stable market even as we are at the end of July. We’re still seeing a reasonably good market in Japan and Korea and China and Hong Kong. So, we see this as a normally, mentioned in the sense of 2018 was really an abnormal year in terms of supply and market conditions.I see this year as being a more normal year. In our case, I think, Europe, we have for the first time we have enter into a more blend of Europe use to be a total spot market. And in the last few months since the beginning of this year and end of last year, we actually started blending long-term kind of, longer term contract pricing with the retailers as well as spots. So we have kind of average and mitigated the rest of the spot markets, especially during the second half of the year.

Is there reason European retailers are changing to less spot and more contracted pricing?

As matter of fact, in Europe, we see this getting more in favour. I think supermarket realized that they cannot, especially big supermarkets, big retailers that have really substantial volumes cannot just depend 100% on -- and I think what they are doing is exactly what our trend, I mean our kind of future objective is to have a blend of spot and fix prices.

And then, so how serious is the fungus, the Panama disease fungus in Central America? I mean, is it I know it can wipe out farms and there is a lot of talk about this. So just how serious of the thread is it to your business?

It's not to my business; it's to the industry. And it will be a kind of variable between one and the other. This is a disease that has already -- we have said before and if you remember on different previous conference calls, I said it's not if, it's when. And the when has happened and just been found in Columbia. And this -- for your information, this disease does show up in one -- in overnight. This disease usually takes sometimes two, three, four years to show up. So, we don’t know, maybe, it’s already in Ecuador, maybe it’s already more spread in Columbia.And hopefully you know we have taken and the government as well became very much aware and alert about this danger that is coming to them. So, they are taking very strict measures in order to protect their industries. However, this disease is something that, I believe that what is happening, seeing it from different companies around the world that have this disease that. You need to coexist with this, but especially small growers, medium-sized growers that don't have the means and tools and the R&D and the quality controls to be able to cope with such a disease.You know I always said that, you know, banana will be rationalized not by logical measures but by this disease that bananas will become in the years to come. I'm not saying tomorrow or after tomorrow or next year, but definitely as I see it. If I'm talking you know long term, 5 to 10 years from now, there might be a drastic reduction in banana supply from Central America, which will translate into much higher pricing. I predicted many years ago that a carton would be a $100 and I wouldn’t be surprised to see that, just like avocado.

That's very helpful. What about -- what percentage of your, you might have already answered this to Jon's question, but what percentage of your fruit come in this quarter, came from company-owned farms, company owned production?

What fruit do you mean, bananas or…

Do you have all fruit or just bananas? Either one.

Banana is mainly like we said always about 30% to 35% coming from our own farms. Pineapple about 90% is coming from our own production, worldwide. You know grapes from Chile probably around 80%, 75% our own farms. So you know majority is coming from our own farms. As far as vegetables percent of course, it is mainly our -- we do have, now with Mann we have our own agriculture arm where we produce our own vegetables as well as sourcing from third party all long term contracts.

Okay. And then just a couple other questions, on the fresh cut veggie side. What drove the unit costs higher? Is it just prices?

Some products were very high in price, very-very high. I mean like celery for instance, we have seen prices on celery that we have never seen in years and it continues for a long, I mean for a very long period of time.

Yes, so on the fresh cut, we saw an impact on our cost related to some weather-related issues that we saw in the second production that we've taken to south of Arizona that impacted the production volumes as well as our cost in that sense, but we expect that to stabilize now that we're getting more and more this selling season coming in, so that we should expect more stable cost in prices for the remaining of the year.

I mean you said costs were up 10, pricing in the fresh cut veggies was up3.

Yes.

Are you unable to get pricing quickly? Or is it just this is the type of cost hit that you just going to have to eat? Is there any help through a little more relations between your cost and pricing?

No, sometimes you have contracts and place where you have to deliver to the buyers with fixed cost, I mean, or fixed price. So, you have to eat it yourself. And in other instances, it’s a market fluctuation. For instance, iceberg lettuce, two months ago was $10, $11 a box. In the last six weeks, it’s been $30 a box.So, you can see the kind of technicality of pricing. I mean in $30, it’s great opportunity for us and others that are in this field. But all-in-all we have to -- in my opinion what we need to do and what that’s what we are doing is that, we are kind of diversifying our product line and the offering that we are doing are not the traditional offering that everybody is delivery, and that’s the most important thing.

Our last question was just -- did you have any update on your capital spending estimate for this year?

We’re mainly focusing on the ongoing capital expenditures which is the shift that we have. We have six ships of the construction. So, this is something that we need to keep spending and we are almost done with our Mexican plan. We have Panama project which is progressing, and we’re rationalizing this.

Yes, we have also fresh cut facility on Oklahoma and Japan that we expect to have that up and running, and also some additional expenses on the expansion of our EU operation in Mann Packing.

Is that so are you still looking for $100 million, $110 million range?

You mean....

So, yes, we expect that to be more in line with last year.

Okay. Thanks for taking the questions.

Thank you.

[Operator Instructions] And we do not have any questions at this time. I will turn the call over to Mr. Abu-Ghazaleh.

I would like to thank everyone for joining us today. And I’m happy to report the good results and this will be hopefully a continuing trend. Thank you very much. Have a good day.

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