Fresh Del Monte Produce Inc. (FDP) Q3 2019 Earnings Report, Transcript and Summary

Good day, everyone and welcome to Fresh Del Monte Produce Third Quarter 2019 Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to the Vice President, Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

Thank you, Christine. Good morning, everyone, and thank you for joining our third quarter 2019 conference call. As Christine mentioned, I'm Christine Cannella, Vice President, Investor Relations with Fresh Del Monte Produce Inc. 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 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 reconciliations of any non-GAAP financial measures we mentioned today to their 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. Good morning, everyone, and thank you for joining us. I'm pleased with our overall performance in the third quarter. Net sales totaled $1.1 billion, gross profit increased 42% from last year's third quarter, and we generated EPS on an adjusted basis of $0.35 per share, up from a loss per share of $0.14 a year ago.During the quarter, we continued to make progress on our strategic objectives, as we transform our company to a value-added higher margin business. Disrupting the legacy of being a volume based banana business. Much of the improvement came from our fresh and value-added business segment. Most notably, our fresh-cut fruit product line in North America. We continue to see strong demand from existing and new customers. Our new fresh-cut unit in Yokohama, Japan is on track to open in the first quarter of 2020, and we have begun expansion of our existing fresh-cut facilities in the UK. This will allow us to keep pace with global demand trends and expand our foodservice and retail customer base.Our vegetable business through Mann Packing also performed well during the third quarter. As part of our meals and snacks product line, we were excited to see the launch of our Better Break line of vegetable rich convenience snacks. We are moving ahead, as well with some of our newest and biggest opportunities. For example, we continue to grow our foodservice partnerships across the Middle East, Asia and Europe, which is increasingly a focus of new business for us. We are also on schedule to open our fresh food and beverage store in the United States during the first quarter of 2020 in Coral Gables. This concept has proven itself in the Middle East and we are looking forward to the possibilities in the United States.We are about to bring our new state-of-the-art avocado packing facilities online in Mexico, which will give us even more control over our supply. This should improve our margin and secure new additional sourcing opportunities to serve the rapidly expanding consumer market for avocados. We recently released on our website, the latest corporate social responsibility report highlighting Fresh Del Monte's commitment to making a better world tomorrow. Sustainability has always been a part of who we are and what we do every day. We recognize setting and meeting our sustainability goals is an opportunity for us to positively impact people and the environment. We look forward to building on our momentum as we advance our efforts to meet all our corporate responsibility goals and make a better way tomorrow.In summary, we remain committed to transforming the company growing our product lines, increasing shareholder value and inspiring healthier lifestyles for generations to come.Let me now turn the call over to Eduardo for more financial details. Eduardo, please.

Thank you, Mohammad. Good morning, everyone. Our financial performance in the third quarter demonstrates that our strategy to evolve Fresh Del Monte to our value-added, efficient, profitable and more focused business is underway.For the third quarter of 2019, adjusted net income per diluted share was $0.35, compared with an adjusted loss per diluted share of $0.14 in 2018. Net sales were in line with the prior year period. Adjusted gross profit increased 42% to $75 million in the third quarter of 2019, compared with $53 million in 2018. Adjusted operating income for the quarter increased to $25 million, compared with $3 million in the prior year. And adjusted net income was $17 million, compared with an adjusted net loss of $7 million in the third quarter of 2018.Turning to our business segments and key product lines. In our fresh and value-added business segment for the third quarter of 2018, net sales were $653 million, compared with $640 million in the prior year period. Primarily as a result of higher net sales in our fresh-cut fruit, avocado and vegetable product line, partially offset by lower net sales in our pineapple and non-tropical product lines. Gross profit increased 27% to $54 million, compared with $42 million in the third quarter of 2018, primarily due to higher gross profit in our fresh-cut, pineapple and vegetable product lines. Our gross profit margin for the segment improved by 1.6 percentage point, maintaining the growth trend of the first half of 2019.In our pineapple category, net sales decreased to $102 million, compared to $112 million in the prior year period. The result of lower production volumes, due to adverse growing conditions in our production areas. The decrease was offset by higher selling prices in North America and Europe. Overall volume was 20% lower, unit pricing was 14% higher and unit cost was 7% higher than the prior year period.In our fresh-cut fruit category, net sales were $145 million, compared with $132 million in the prior year period, primarily due to higher sales volume and higher selling prices in North America. Overall volume was 10% higher, unit pricing was 1% higher and unit cost was 2% lower than the third quarter of 2018. In our fresh-cut vegetable category, net sales increased to $124 million, compared with $123 million in the third quarter of 2018. The increase was primarily the result of higher selling prices. Volume was 9% lower, unit pricing was 11% higher and unit cost was 9% higher than the prior year period.In our avocado category, net sales increased to $98 million, compared with $85 million in the third quarter of 2018, supported by higher selling prices as a result of tight industry supply. Volume decreased 8%, pricing was 26% higher and unit cost was 28% higher than the prior year period. In our fresh vegetable category, net sales increased to $46 million, compared with $40 million in the third quarter of 2018, due to higher sales volume and increased selling prices. Volume increased 9%, unit price increased 6% and unit cost was 1% lower.In our non-tropical category, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry and kiwi product lines. Net sales decreased to $32 million, compared with $42 million in the third quarter of 2018, primarily due to planned rationalization of low-margin products in this category beginning in 2018. Volume decreased 22%, unit pricing was in line with the prior year period and unit cost was 2% lower.In our prepared food category, which includes our traditional canned products and meals and snacks product lines. Net sales increased, due to higher sales volume, gross profit was impacted by lower selling prices in the traditional prepared product lines.In our banana business segment, net sales were $386 million, compared with $397 million in the third quarter of 2018, primarily due to lower net sales in North America and Asia, partially offset by higher sales in the Middle East and Europe. Overall volume was 7% lower than last year's third quarter, worldwide price increased 4% over the prior year period and total worldwide banana unit cost was 3% higher than the prior year period and gross profit increased to $17 million, compared with $10 million in the third quarter of 2018, reflecting a 1.7 percentage point increase in gross profit margin.Now moving to selected financial data. On selling, general and administrative expenses, we were in line with the prior year period. Regarding foreign currency, our foreign currency was impacted at the sales level for the third quarter with an unfavorable impact of $7 million, and at the gross profit level the impact was unfavorable by $2 million. Interest expense, net for the third quarter was $6 million compared with $7 million in the third quarter of 2018, due to lower debt and volume. Income tax expense was $3 million during the quarter, compared with income tax expense of $1 million in the prior year, mainly due to higher taxable earnings in North America.At the end of the quarter, our cash flow -- cash from operating activities was $130 million, compared with net cash provided by operating activities of $271 million in the same period of 2018, primarily due to lower accounts payable and accrued expenses, partially offset by higher net income. At the end of the quarter, we were able to reduce our debt by an additional $50 million to $590 million from $640 million at the end of the second quarter of 2018.In October 2019, we amended and restated our $1.1 billion unsecured credit agreement and extended the credit facility until October 2024, with a more favorable rate. We also included an accordion feature that could increase the availability by, up to $300 million. And we are pleased to have the continued support of our lenders and appreciate the confidence they maintain in Fresh Del Monte's future. As it relates to capital spending, we invested $94 million on capital expenditures in the first nine months of 2019, compared with $119 million in the same period in 2018. Also as announced this morning in our financial results press release, our Board of Directors declared an interim cash dividend of $0.08 per share, payable on December 6, 2019 to shareholders of record on November 13, 2019. This is a 33% or $0.02 increase over the dividend paid in September 2019.This concludes our financial review. So we can now turn the call over for Q&A, Christine.

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

Good morning. Thank you very much. I wanted to maybe start with a bigger picture question. What -- I think about your fresh and value-added product segment, which is essentially the combination of at least most of your old prepared foods and other fresh produce segment. I'm trying to understand how the addition of Mann Packing, as well as a bunch of all the other products you've added to that affects the mid-cycle say average gross profit, right? Because that was pretty consistent for last five years, it's volatile, like every other line, but it was average $200 million, it averaged something like $190 million the five years before that. I'm trying to understand like where would the expectation should be of additional, kind of, profitability or anything you can do to help me think about that as we model going forward. Because you've added a lot and it doesn't seem appropriate to me to just assume it's going to stay flat, which is kind of, where I have it this year? And I have a couple of others. Thanks.

Yes, good morning, Jonathan. Everything that you have seen, I mean, or saw in the last quarter and this quarter is actually is a result of what we have been planning and building up in the last two or three years. 2018 was, in my opinion a very disruptive year in the sense that we were transforming the company at the same time, we were hit by very unfortunate, you know, events, climatic and others market exchange and so many other reasons.Now when I mentioned, you know, that for instance, we are expanding into the foodservice sector, you know, historically for the last several years, I would say, seven, eight years or more, we have been supplying McDonald's in the Middle East almost an exclusive basis for lettuce and other vegetable items, as well as some fruits. As we have proved ourselves to be a very dependable, kind of, supplier that is a multinational supplier and not just a local or regional supplier. McDonald and ourselves have come to realize that our collaboration is getting more and more beneficial, mutually beneficial. So we have -- in the last, actually a few months, we have expanded into Japan, into Korea and now we are expanding in Italy and other places as well. I don't want to mention every country or every region. But as we speak this business is growing for us together with McDonald in terms of becoming a global supplier of certain items, especially in lettuce and vegetables.So, in my opinion, this is a business that will grow further and further and will open also new opportunities for us to introduce and to come with ideas and products that might also serve McDonald. And of course, we do have also so many other QSRs that are also our clients in the Middle East, and I'm sure as we go into these new countries we'll have also the interest of these same QSRs in the new regions that we are started operating. So this is one of the things we are doing. We have got into the protein salads during the last six month, when I say protein salads, it means that not only fresh ingredients, but also adding up protein items, as well as sandwiches and other items. This has grown quite in my opinion, it has moved nicely, and we have proven that we can deliver better product than competition. And we have gained businesses, and I think that would open the door for us to gain more business as we go forward. So these are some of the things that have been evolving here.And what I would like just to highlight is that, this is a trend that Fresh Del Monte will be, kind of, moving towards. I mean, it will all be about value-added products, value-added services and so on. And as we go forward, quarter-to-quarter, I am sure that you will be hearing more news about many other initiatives that will add to our very, kind of, well disciplined plan to change the company from a banana-based company into a more diversified value-added products company.

That's very clear on the numbers. I guess what I'm trying to figure out is maybe to ask this more specifically. The other fresh produce line historically was dominated, but largely influenced by the gold pineapple business and carried something like, you know, 11% in a bad year be about 11% and a good year be about 13% gross margin. Now you've made a nice recovery this quarter, but it's at 8%, we're modeling at 8.5%, it got down to 6.5% last year? How much of that is a structural change in the margin structure of that segment? And how much of that is just like, kind of, craziness that went on in 2018, like any flavor for what kind of margin all this business is? Is that McDonald's business is that lower than 10% margin typically. I'm just trying to get a handle on how this has changed structurally?

Any value-added business should not be hopefully less than 10%, I mean, that should be clear. As far the gold pineapple last year was a very determinantal year in terms of the markets. I knew from the beginning that there will be -- I knew three years -- three, four years ago that there will be a time when oversupply will take over the market, and that happened in 2018 late '17 and 2018 that production went like crazy in Costa Rica and there was an oversupply all over the world. So we have to endure that kind of tidal wave, which of course we survive better than any other in the market. But I can tell you for the fact that production in Costa Rica has gone down by almost over 20% and prices today by growers to sell FOB for argument sake it was like $5 a couple of years ago to do a box of pineapple today is about $7. And that's, of course, reflects on the market and I -- we as leaders in this -- we are the only company in the world that produces in three different continents. We produce in Costa Rica, we produce in Kenya. Kenya, you know, it used to be only a can -- pineapple operation for the last eight, nine months, we have transformed part of that into fresh as well.So we are producing now Del Monte Gold and Kenya for supply to Europe, to the Middle East and even to Asia and trying to reduce our dependence on the prepared or the canned, which will help us in improving our margins tremendously in that part of the country. At the same time, we are producing in the Philippines, mainly for the Asian market. So we are the only company in the world really that we have three production areas to supply our markets. And that's something that gives testament to where our strength and leverage as far as pineapple is concerned. To add to this, we have the pink can pineapple, which we will start marketing very soon. And this is a patented pineapple that no one else will have, and I believe it's going to make a very big impact for our business going forward. So as far as pineapple, I'm very confident, I'm very sure that we will return to the -- all the levels that we had before, and hopefully better. So I hope that I answered your question.

That was a very helpful answer, Mohammad, I appreciate it. The one maybe for Eduardo or you Mohammad on the capital program, a little lower this year. Can you characterize what you're -- what the emphasis has been on capital expenditure this year? What kind of hurdle rates you're looking at? And what -- if possible, what you would expect for 2020 as far as capital expenditure? I appreciate it.

I will have Eduardo answer this and If I need to, I will add to it.

Yes. So thank you, Jonathan. So, this year, first of all the emphasis has been investments tied to our value-added products. So in Q4, we're going to have our avocado unit up and running. So that was a big investment that we had this year also in some of our key fresh-cut units, there are in Yokohama in Japan, and also in other expansions that we're doing. There are some investments that we did related to the new vessels that will come in and it's important to mention that not only we expect efficiencies there, but we also foreseeing the future that adding to the bottom line with our commercial cargo operations as well.So I think that was -- we put more rigor in our capital investment review process. And for 2020, we have a significant investment related to four ships that would come up and running. And beyond that we would consider probably a regular year investment that we have been doing with the same emphasis that we have been doing before. A couple of those are related to your previous question on Mann. How to make sure we can consolidate further our operations to become more efficient on our cost side. Also we have some further expansions in our fresh-cut in Europe that we have planned for next year, including the expansion of our UK operation. And also we continue focusing on lowering the cost base of our core business, mainly on bananas. We continue to invest in Panama, that will bring a competitive advantage versus our cost position that we have today.

That's very helpful. I'll leave it at that. Thank you for your time. Good quarter.

Thank you.

[Operator Instructions] Your next question comes from the line of Mitch Pinheiro from Sturdivant. Your line is open.

I wanted to follow-up on a couple of Jon's questions. In pineapples did you say you expect to see like a full recovery to where you were several years ago? I mean, when I look back at 2014, you were doing $576 million in pineapple revenue, roughly now I'm looking at, you know, maybe $450, so that's down 30%. Are you going to recover all of that plus the profitability?

I think, we are -- what we are focusing on is really profitability more than volume that would be our focus really is the bottom line. And this has been, kind of, the message that we have been conveying to all our people, be it at production or sales. So I am not too much concerned about volume, actually more on to the bottom line. The volume, we can ramp up whenever we need to, either through increasing our own production or buying from third-party to -- but what we need to make sure that our margins has to improve and hopefully reach the same level that we used to have a few years back.

Okay. And that's sort of your -- the profit over volume has been your newer strategy, so that's just a part of this too?

Yes, actually we've -- why we are shifting our efforts and focus on where can we make more money, which products can drive, I mean, put us in a better position. And that's why I mentioned about value-added products and new categories that we are working on which is proving to be very successful and very beneficial to us as a company. I think this is where our future is moving towards the value-added products and services, as well as we go along. But at the same time we're not under cutting our core products, what I'm saying is rationalizing our volume into these areas and making sure that our margins are maintained and grown. So we are working on both levels and I don't want to go into the, kind of, becoming a commodity producer, we are a specialty producer. And our geographical coverage gives us that kind of leverage, where I'd like -- I mentioned a minute ago about our presence in three different continents as producers that I think makes it a huge -- makes a huge difference between us and everyone else that when our shortages in one area, we have the ability to cover that from another region, which over the years. I'm not saying the long-term future, but even in the near future will make a big difference for us and that in my opinion, is a huge plus that we will enjoy going forward.

Okay. And staying in the fresh-cut or the fresh and value-added segment. The fresh-cut vegetables in the quarter were down slightly. What was the driver of that? Is that getting rid of lower margin business? Or how would you accomplish that?

No. The vegetable business, you know, that they are sometime because of the climatic conditions you get short on certain items and sometimes you have to cut on other items that doesn't make sense to us. So it's nothing really significant. And as Eduardo just mentioned a while ago that when we acquired the Mann Packing at the beginning of last year. We acquired a company that is very successful in terms of presence in the market and the creativity and innovation and the product lines that they serve. However, the company was lacking the governance, the systems, the procedures, policies and this is something that we have been working on for the last several months from all aspects in terms of financial, legal, HR. And I think the company is becoming now streamlined in our, kind of, Del Monte way. So I believe that we will see more value as we go forward, because I believe that the business would be streamlined and leveraged in a way that will add more value to us. When I say more add -- add value, it means that we will use these products across our distribution centers, across the United States and be able to increase volume distribution, as well as value.

And does the fresh and value-added segment, I mean, is that a segment that should be able to reach double-digit gross margins?

So that's our target, Mitch. So I think we're trending in that direction, so you have seen that consistently, we have delivered an increase in our gross profit margin. And I think there are several components there, right? So one piece of that is re-establishing the profitability on the pineapple, increasing the profitability on our fresh-cut fruit by improving our operations. Also there were -- because of the rationalization that we did in tomatoes, in the cereals, as well as in melons last year. We're starting to see that recovery this year, as well. And also meals and snacks, it's very important contributor to our growth. So I think by having, you know, pineapples in very high teens margin and all the others balancing more towards the -- close to 10%, I think on the average on the segment, we should be in the teens range going forward.

I cannot precise exactly when, because we are still, you know, we are visiting some parts of the operation that require some adjustment. And that has been our priority, but I would say on the long run, we should expect to see, you know, bananas in the range that has always been between 4% and 6%, and that will depend on supply/demand and pricing, etc. But then the fresh and value-added products that should get to teens range. So that we should expect to see overall margin growing year-after-year.

Switching to bananas for a second. Just help us current supply and demand outlook look like for you through the year-end?

It's just the normal trend. The second half of the year usually the last three, four months of the year are usually the low end of the year. I mean, that demand is much lower than in the first half of the year. So we haven't seen really much difference from previous years. I would say it's more normal this year than the previous years. The only difference is that we see Europe doing better than normal. At this time of the year, which is a good sign. The US, North America is more or less the same. Asia is behaving and trending, the same as normal trends or normal year. So I don't see any really big surprises in the banana sector from now to the end of the year. In this business, we are always sensitive to natural disasters, so unless nothing happens, this would be a very normal year.

Yes. And I think I'll also -- need to -- just to complement Mr. Abu-Ghazaleh's -- we have been focusing a lot on recovery in the margins on this segment. So that's an important focus that we have been doing and also revisiting our portfolio of customers in that sense and making the right decisions to move the product, where we believe we can get the most out of that investment.

Yes, I'd like to add to this, Mitch, that this business -- the banana business has been, you know, in turmoil for the last -- I would say 10, 15 years. And I think, that this cannot hold forever. I mean, costs are going up in every respect, be it on the production level, on the shipping level, ports, you name it. Transportation everything. And I believe the retail, I mean, their systems on keeping the banana prices low is going to come to a point where they -- either you kill the goose or you -- I mean, can't go on forever like this. I mean even the producers or the -- ourselves as producer, marketer, shipper. We -- this cannot go on forever. I mean the retailers, the buyers has to understand that unless the prices are adjusted going forward there will be a time when there will be issues in this industry. And I believe it will adjust by itself as we go forward. Aside from the disease, I mean, I don't want even to mention the disease, but actual situation the structure of this business cannot be sustained forever. This cannot go on forever and you can see, I don't know if you can -- if you read or you follow-up on the produce news, you know, or produce industry, I keep looking in a global kind of overview.And you will see so many on the produce companies not only in bananas, but in other areas that they have been really going through very financial, severe financial difficulties. And it's just because of not coping with the cost increase and rationalizing their business. So I think as Fresh Del Monte, I think we are -- in my opinion, not just because we are Fresh Del Monte, but in my opinion we are pioneer into this area and we know how to take care of the future. I believe that we can see the future in a clear way.

I have just one more question, balance sheet question. I saw operating leases up $100 million from year-end. What -- are you using operating leases differently than before or in a new way? Can you explain that?

So Mitch, I guess you are aware that with the new lease accounting that took place this year you have to disclose that in the balance sheet. Both on the assets and the liabilities. So that's just a reflect of new accounting guidance.

Okay. But it wasn't required from last year?

No.

No, it started this year. So that's why December '18, we didn't have to disclose that there.

Okay. Then are you still looking for the comparison there?

Yes.

Okay, that's it. Thank you much.

Thank you.

Thank you, Mitch.

There are no further questions at this time. Mr. Mohammad Abu-Ghazaleh, I turn the call back over to you.

I would like to thank everyone for having the time to participate on our call today. And we look forward to speak to you on our next conference call. And, thank you and have a nice day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.