Fresh Del Monte Produce - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, everyone, and welcome to Fresh Del Monte Produces First Quarter twenty nineteen Conference Call. Today's conference call is being broadcast live over the Internet and also being recorded for playback purposes. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. 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.

Speaker 1

Thank you, Lisa, and good morning, everyone, and thank you for joining our first quarter twenty nineteen conference call. As Lisa mentioned, I'm Christine Cannella, Vice President, Global Corporate Communications and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu Ghazali, Chairman and Chief Executive Officer and Eduardo Bezzara, 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.

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 Mohamed.

Speaker 2

Thank you, Christine. Good morning, everyone. 2019 is definitely a new year for Fresh Del Monte. We have a new outlook on expanding our business. We have new opportunities to generate strong returns and we have new team members including Eduardo Bezera, who officially became our Chief Financial Officer on March 25 and joins us today for this call.

Before I turn the call over to Eduardo to discuss the financial details for this quarter, I would like to briefly talk through what I see as our biggest wins during the first quarter of twenty nineteen. I'm very encouraged by the impact of the broad based operating decisions we made during 2018 to strategically realign our Chilean businesses, our tomato and melon programs in The U. S. And changes in our operations in The Philippines, all of that brought immediate improvements. Additionally, the Mann Packing acquisition along with fresh cut and avocado sales increases helped us then in year over year positive sales results for the first quarter.

With total net sales at approximately $1,200,000,000 while at the same time expanded several of our value added product lines. Consumer trends towards healthy eating and wellness remain strong. Sales of products designed to provide convenience to customers whether through direct to consumer, online grocery and restaurant delivery categories continue to grow even more rapidly. These market forces present tremendous opportunities for 2019 and beyond. Strong sales in our fresh cut vegetables and fresh cut fruit lines during the 2019 reflect these trends as do the higher sales in our fresh vegetables and avocado product lines.

Showing we are beginning to capitalize on our efforts to accelerate growth through value added categories. I believe several of the challenging market conditions of 2018 are behind us. But nevertheless, the global economy is at a tipping point and we are watching it closely to act fast and leverage our global scale infrastructure in case headwinds face our path. We remain committed to our vision and business objectives of controlling costs, increasing operating efficiencies, consolidating operations and optimizing our cost structure with a focus on long term growth for our shareholders. At this time, I would like to introduce Eduardo Pizzera and I have spent several weeks with Eduardo and can assure you that he brings proven skills and high level insight to the role of Chief Financial Officer.

He will be an asset to all of us seeing that he has a thorough knowledge and understanding of the agriculture industry. Eduardo, would you like please to start your financials?

Speaker 3

Yes. Thank you, Mohamed, and good morning, everybody. For the first quarter of twenty nineteen, excluding asset impairment and other charges on an adjusted basis, we reported earnings per diluted share of $0.48 compared with earnings per diluted share of $0.89 in 2018. Net sales increased $48,000,000 year over year. Our gross profit decreased to $93,000,000 in the 2019 compared with $107,000,000 in 2018.

Operating income for the quarter was $41,000,000 compared with $58,000,000 in the previous year. And net income was $23,000,000 compared with $43,000,000 in the first quarter of twenty eighteen. Before I turn to our segment performance, I want to highlight the changes we announced in our press release regarding segment reporting. The decision was made to realign our operating segments to reflect the internal reporting used by our management team, particularly in light of the recently realignment of member of our senior management team. We have realigned other fresh products and prepared food business segments into one segment titled fresh and value added products.

Fresh and value added products include pineapples, melons, non tropical fruits, including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis. Other fruits and vegetables, avocados, fresh cut fruit and vegetables, prepared fruits and vegetables, juices, other beverages, prepared meals and snacks. Our banana business will remain in the banana segment and our other businesses will now be comprised in a segment titled Other Products and Services. Other Products and Services includes our poultry and meat products, our plastic products business and third party freight services. Prior periods have been adjusted to reflect periodic reports that are filed to conform to the new reportable segment composition.

In our fresh and value added business segment for the first quarter of twenty nineteen, net sales increased 12% to $690,000,000 compared with $617,000,000 in the prior year period, primarily driven by increased sales in our fresh cut vegetables, vegetables, prepared food and avocado product lines. Gross profit increased 20% to $62,000,000 compared with $51,000,000 in the first quarter of twenty eighteen, primarily as a result of the realignment in Chile and The U. S, along with the Mann Packing acquisition and growth in our avocado product line. In our Gold Pineapple category, net sales decreased 7% to $111,000,000 compared to $120,000,000 in the prior year period, primarily due to lower sales volume in North America, Europe and The Middle East, partially offset by higher volume and selling prices in Asia. Overall volume was 9% lower as a result of lower production coming from our Costa Rica operations.

Unit price was 2% higher and unit cost was 3% higher than the prior year period. In our fresh cut fruit category, net sales increased 1% to $119,000,000 compared to $118,000,000 in the prior year period. The increase was primarily the result of higher selling prices in North America along with increased sales volume in Asia and The Middle East. Overall volume was 1% higher, unit price also was 1% sorry, unit price was 1% lower and unit cost was 1% higher than the first quarter of twenty eighteen, primarily due to higher fruit costs. In our fresh cut vegetable category, net sales increased 95% to $123,000,000 in the first quarter of twenty nineteen.

The increase was primarily the result of having a full three months of sales from our packing acquisition in the first quarter of twenty nineteen. Overall volume doubled, unit pricing was 5% lower and unit cost was 3% lower than the prior year period. In our avocado category, net sales increased 5% to $89,000,000 compared with $84,000,000 in the first quarter of twenty eighteen, supported by higher demand from both our existing customers as well as new accounts. Volume increased 25%, pricing was 16% lower and unit cost was 18% lower than the prior year period. In our fresh vegetable category, net sales more than doubled to $42,000,000 in the first quarter of twenty nineteen, principally due to the acquisition of Mann Packing.

Volume also more than doubled. Unit pricing was in line with the prior year period and unit cost was 5% higher. In our non tropical category, net sales decreased 7% to $61,000,000 compared with $66,000,000 in the first quarter of twenty eighteen, principally due to lower sales volume of stone fruit in Asia and lower sales volume and selling prices of apples in The Middle East. Volume overall decreased 7%, unit pricing was in line with the prior year period and unit cost was 9% lower. In our prepared food category, which includes our traditional can products and meals and snacks product lines, net sales increased 20% to $66,000,000 compared with the prior year period, primarily due to higher sales of prepared food products in North America as a result of our Mann Packing acquisition.

Volume increased 3%, unit pricing increased 16% and unit cost was 24% higher than the prior year period. In our banana business segment, net sales were $432,000,000 or 5% lower compared with $453,000,000 in the first quarter of twenty eighteen, primarily due to lower selling prices in Europe, The Middle East and Asia. Overall volume was 1% higher than last year's first quarter. Worldwide pricing decreased $0.84 to $14.84 per box compared with $15.68 in the 2018 or a 5% decrease in pricing. The total worldwide banana cost decreased 1% and gross profit decreased $19,000,000 to $33,000,000 compared with $52,000,000 in the first quarter of twenty eighteen.

Now moving to costs for the first quarter. Banana fruit costs, which includes our own production and procurement from growers, decreased 2% worldwide and represented 25 of our total cost of sales. Carton costs increased 6% and represented 4% of our total cost of sales. Bunker fuel costs per ton increased 6% and represented 2% of our total cost of sales. And total ocean freight costs during the first quarter, which includes bunker fuel, third party charters and fleet operating costs was 3% higher than the prior year period.

For the quarter, ocean freight represented 8% of our total cost of sales. And labor costs continue to be a challenge to our cost structure and we remain focused on increasing automation in our operations to minimize such impact. On selling, general and administrative expenses, we saw an increase of $4,000,000 to $53,000,000 compared with the 2018 as a result of three months of Mann Packing results being included in the 2019 versus only one month in the first quarter of twenty eighteen. The foreign currency impact at the sales level for the first quarter was unfavorable by $19,000,000 and at the gross profit level, the impact was unfavorable by $3,000,000 Interest expense net for the first quarter was $7,000,000 compared with $4,000,000 in the 2018 due to a higher average loan balance as a result of the acquisition of Mann Packing along with higher interest rates. At the end of the first quarter, our total debt was $7.00 $1,000,000 as compared to $662,000,000 at the end of first quarter of twenty eighteen.

Income tax expenses was $7,000,000 during the quarter compared with income tax expenses of $4,000,000 in the prior year, mainly due to a gain in settlement of litigation in our North American business. As it relates to capital spending, we spent $34,000,000 on capital in the 2019 and we are taking a deeper look at the capital allocations for the remaining of the year and we will update you when we have better visibility on those capital expenditures. This concludes our financial review. We can now turn the call over for Q and A.

Speaker 0

Thank you. And our first question comes from the line of Jonathan Feeney from Consumer Edge. Your line is open.

Speaker 4

Good morning, guys. Thanks very much. I think you just told me, but I think I missed it. Did you give us the exact dollar impact for the two months of extra man packing on the quarter? Because I want to see what the organic sales growth is.

Speaker 2

Yeah. We you have it Eduardo here.

Speaker 3

Yeah. So we mentioned on the SG and A piece, but not specifically we disclose Mann Packing information.

Speaker 4

Can you give me a sense what the I guess roughly speaking like what the let me ask you this. Could you tell me whether it's up or down on a like for like basis Mann Packing itself? I mean I can look up what the historical sales So

Speaker 3

Mann Packing as a whole, as you can see in the different components of categories is spread between fresh cut vegetables as well as in the prepared meals and snacks, we saw a significant increase year over year on Mann Packing sales, mainly because in the first quarter of twenty eighteen, we had only one month and now we have three months of that impact.

Speaker 4

I got it. I got that part. But I'm trying to understand, can you tell me can you comment? And if the answer is no, don't want to comment, that's fine. But I'm asking, would the organic sales same for same, like for like of Mann Packing, have you grown that business since you bought it?

Or have you rationalized that business, it hasn't declined since you bought it?

Speaker 3

No, no, it has increased. Yes, it has increased.

Speaker 4

That's an

Speaker 3

important message there.

Speaker 4

You. I just wanted to clarify that. Thank you very much. Can I could you get Mohamed, could you give me an update on I know we talk about this at least twice a year, but on the JVs, like I guess maybe I'm wrong, but I expected those to the brand JVs you own in North America to be more impactful more quickly? Can you talk about where we are in process with some of those products?

And when we can expect to have a bigger JV contribution from the Del Monte branded value added products?

Speaker 2

Yes. We are actually it's an ongoing process. As we speak, we are I think that we have a meeting with our colleagues from the Monte Food next month in June, I think. And we are in the process. We had several JVs vehicles.

One of them was for the F and B project, one for juice, one for avocado guacamole. And I think this one the first one F and B, the first flag, let's say store will be opened during this year in The U. S. I believe that probably it will be more than one from that to the end of the year. So this is already in place.

As far as the juice itself, it's in process. We are not going to take any kind of commitment either on either side unless we make sure that this business is viable 100% to the advantage of both companies. So we are working on this. But all in all, I think the arrangements between ourselves Del Monte Food has been very beneficial to both companies in the sense that have really freed up the scope of operations. In our case, we are making a lot of new SKUs that we were not able to do before.

And at the same time, the multi food, I believe, have more, you know, kind of freedom to be able to move their products in more beneficial way. So I think the gain and benefit that came from the agreement is more on the making our flow and ability to create new products is a lot more beneficial than what used to be in the past.

Speaker 4

Thanks, Mohammad. And just one more before I get back in the queue. We talked a little bit about last quarter about you mentioned capital allocation clearly suspended the dividend. I mean, given we've seen the corporate bond market and credit markets broadly, not only interest rates drop, conditions get even tighter, friendlier borrowing conditions. Can you update us on any progress you might be making in renegotiating some of those covenants that prevented you from I mean, here, a very unusual situation to have a positive cash flow business apparently pointed in the right direction that had to suspend its dividend.

And I think that's a big issue in terms of marketing of the stock because a certain number of folks are just not going to buy something that doesn't pay a dividend. So I guess I'm wondering, as you stand right now, what are the prospects for rearranging your credit facilities in such a way that you could restore that? Thank you.

Speaker 2

It's not a credit facility actually, Jonathan. It's more or less I always believe that we don't like to operate in a very high level debt level. That was my main concern. It's not about the covenants or the banking arrangements. We have an excellent banking arrangements and we have very convenient covenants.

In my situation, the decision was taken because I want to deleverage the company in terms of debt. I want to reduce that debt to a more comfortable level. And this has been the way I've been operating for the last the company has been operating for the last twenty plus years. And this would be the way going forward. I know that we are going to deleverage quickly hopefully within this year.

And we are going to revisit the dividend issue towards the end of the year. I mean, that's not off the table. But we are very prudent in terms of conducting our businesses without taking additional leverage that and especially that we have been going into a very expensive capital expenditure program during last year and continuing into this year. Hopefully by the end of this year, we have several projects Jonathan that are under completion right now. We have a very big plant packing plant for avocados in Mexico that should be finished within the next in the third quarter.

We have our Gonzales facility, which is the new packing facility in Salinas for the Mann Packing, which is also a tremendous investment. We have in Oklahoma a new fresh cut facility that is being under construction. So we have several projects. We have the Panaman ore, we have the new ships. All these actually have put that influenced the decision when I said we will stop dividend.

Am the first one to be harmed by that, but think business comes first. But definitely dividend is not off the table.

Speaker 4

Understood. Thanks very much. I'll get back in the queue.

Speaker 0

We have another question from the line of Jonathan Feeney from Consumer Edge. Your line is open.

Speaker 4

Hi, guys. Me again. Thanks. I always wanted to give other people a chance. I love this new investor presentation you have up on your site.

I don't if it's Christine who put it up there or Eduardo, but like it's a terrific presentation. And I noticed that 45% of your business you now say is growing on company owned farms in that presentation as of February. Is that still does the vast majority of that still tropical like bananas and pineapples? Or are there other vertical integration, if you will, other crops that you're growing now at a greater rate than before?

Speaker 2

Well, I mean, man packing, we grow a lot of commodities and a lot of our own products. I mean, it's grown on by us and not through third parties. That's number one. We are growing more into lettuce production for instance. We have bigger businesses expanding our business with McDonald's in The Middle East and other parts of the world, which is new businesses for us, I mean, than The Middle East.

So we have new a lot of new ventures and a lot of new opportunities that is really undergoing as we speak, which will transform our business. I think the most important thing that you have to look at and if you have been following, which you have been Jonathan for the last many years is that I said that we will reduce our dependence on bananas year over year. And if you can look now at our portion of bananas compared to our total volume for revenue is almost 37%. My main objective our main objective is to go to 30% of our total pie, expanding our pie, but at the same time into the value added businesses, which is this is our direction. This is where we are going from now on.

Speaker 4

Makes sense. And you certainly come a long way in that presentation. Well, even in the time I've covered it since February. The let me see, of this avocado business, can you explain to me how that when you do a tremendous growth in volume in that business, now first of all, I assume there's vertical integration or you own very few avocados, if any, first of all. And second of all, if like when you grow a business like that, what's the how much more money do you make?

I mean, do you leverage infrastructure pretty drastically? I used to cover an avocado company, and they had some pretty attractive margins on their distribution only business. And I'm wondering if that's pretty high margin business for you.

Speaker 2

It's a good margin business. However, we have since we started avocado business, it has been done through third party packers. So we have never had our own packing facilities. Now in the next few months, we will start having we'll start packing our own fruit in our own packing facility. And I think that is going to make a huge difference by almost I wouldn't say 100%, but almost all our production will go through our own packing, which will give us an advantage in terms of cost as well as in terms of quality and assurance of the safety assurance.

So that is going to make a big difference in that category. I think our network in the across The U. S. Has given us also a tremendous advantage in terms of delivery reach to our customers, which is a very big advantage that we have. I think our ability to meet customers' needs and especially in tough times during the last few weeks prices of cargoes have went almost two folds.

And we were able one of the few probably we are the only ones in U. S. During that year that was able to deliver to our customers on a continuous basis without even any interruptions. And in some cases, shouldering some of the cost ourselves, but at the same time, subscribe. And that's why our customer base is expanding in a very fast manner.

And we are very satisfied the way our business is growing in the avocado category.

Speaker 4

Okay. I guess can I follow-up on something you said earlier about capital expenditure and the dividend conversation? Yes, I think I don't want to put words in your mouth now, but I think we would both agree that the asset value of fresh Devonte produce is substantially in excess of what the enterprise value the marketplace is putting on it today. I'm wondering how when you think about expanding capital expenditures, how that hurdle rate, what expected payback there is? I think you used to talk about there being a five year minimum payback on capital expenditures.

Is that still the case? And how does that come how do you think about that with respect to your stock that's out there kind of trading at what appears to be a significant discount to what the asset value at least appears to me to be?

Speaker 2

Well, I'll give the opportunity to Eduardo to answer this question. Maybe he can from a financial guy, maybe you can listen to the question.

Speaker 3

So Jonathan, that's a great question. So we are looking deeply about the process that we have today to make sure that the expected return on those investments are higher than the hurdle rates that we have imposed in the recent past. And of course, we are really making sure that those investments are 100% aligned with our long term strategy, which is mainly focused on value added products. So I also mentioned a little bit in my comment on costs, we're focusing a lot on automation to make sure on our fresh cut operations, we can streamline some of those processes as well. And as part of some of these JV and collaborations that we're doing to grow our footprint in the marketplace, we're going to be able to get a high return versus what we saw in the past.

So that's really our focus and our commitment. And that's why we're really looking to twenty nineteen capital plans and really take advantage of that to be in a better position for the growth that we expect in the upcoming years.

Speaker 4

But just to clarify, Eduardo, would you say I guess you want a better return than you've gotten in the past, but you wouldn't say there's a five year payback? You'd just be a little bit less specific about that?

Speaker 3

Well, we expect the payback to be lower in that sense at a shorter period of time. And so that's why the higher the threshold that we're going to put there, it will automatically translate into a faster payback as we expect.

Speaker 4

Okay. And just and final last question. Wanted to, Baham, you recently it looks like you recently had a legal success against a Costa Rican pineapple grower, an arbitration case, I just read that on one of the fruit news sources that I monitor. Does that have does any legal activity that you've been successful in, in the past few months, will that change the competitive landscape at all with far as people violating your trademarks or supply? Will that reduce supply at all?

Speaker 2

Well, definitely, I mean that we have established the fact that nobody can step or I overstep our field. But we succeeded in several legal cases in the last few months. And I think that puts Fresh Del Monte in a much stronger legal position, be it on the production side or even on the market side. And to be honest, I'm very pleased with results so far and that demonstrate this has been going for several years this case, which has gone from arbitration to the court, to the superior court and now to the appellate court. And now we are hoping and we are working very hard to make sure that this is implemented in Costa Rica as well.

I mean, our legal team is now enforcing this judgment in Costa Rica as well. So hopefully, we can in the next few months, we can have some news about that as well.

Speaker 4

Great. Well, thank you very much Eduardo formally for the first conference call welcome and I appreciate both of your time as always.

Speaker 2

Thank you, Jonathan.

Speaker 0

And we have no further questions at this time. Mr. Mohamed Abagazaleh, I turn the call back over to you.

Speaker 2

I would like to thank everybody for joining us today on this call. And I'm glad that we have had an encouraging first quarter. And in my opinion, that's a turnaround for Digital Mountain. I hope to talk to you next on our next call with better news as well. Thank you, and have a good day.

Speaker 0

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