Fresh Del Monte Produce - Earnings Call - Q2 2019
July 30, 2019
Transcript
Speaker 0
Good day, everyone, and welcome to Fresh Del Monte Produces Second Quarter twenty nineteen Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. 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 Canela. Please go ahead, Ms. Canela.
Speaker 1
Thank you, Sharon. Good morning, everyone, and thank you for joining our second quarter twenty nineteen conference call. As Sharon mentioned, I'm Christine Canela, Vice President, Global Corporate Communications and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohamed Abu Ghazali, Chairman and Chief Executive Officer and Eduardo Bezara, 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 fresh.monte.com for a copy of today's release as well as to register for future distributions. As we've 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 get 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, 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 twenty nineteen. The quarter 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 $80,000,000 We also saw adjusted operating income and net income increase by 24,000,000 and $27,000,000 respectively year over year. This signals that we do not have to be completely reliant on volume as long as we are actively cultivating 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 twenty nineteen, we believe that it is probable that the pineapple market will contract further.
The industry forecast is for fewer boxes to be exported from Central America with the exit of several smaller rolls. 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 food 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 products and consumers as we further promote our company as an essential component of healthy living and provider wholesome convenient fresh food. 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 preventive 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 industry on both the commercial and a socioeconomic level for the communities that depend on the 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.
Speaker 3
Thank you, Mohamed. Good morning, everyone. For the second quarter of twenty nineteen, excluding asset impairment and other charges, on an adjusted basis, we reported earnings per diluted share of $0.69 compared with earnings per diluted share of $0.14 in 2018. Net sales decreased $33,000,000 year over year. Our gross profit increased to $97,000,000 in the 2019 compared with $79,000,000 in 2018.
Operating income for the quarter increased to $53,000,000 compared with $29,000,000 in the prior year. And net income was $34,000,000 compared with $7,000,000 in the second quarter of twenty eighteen. Now we'll review our business segments and key product lines. In our fresher value added business segment for the second quarter of twenty nineteen, net sales were $764,000,000 compared with $781,000,000 in the prior year period, primarily as a result of 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 $58,000,000 compared with $51,000,000 in the second quarter of twenty eighteen, primarily due to higher gross profit in our pineapple, nontropical and fresh cut fruit product lines, partially offset by lower gross profit in our fresh cut vegetable and avocado product lines.
Our gross profit margin for the segment improved by one percentage point, maintaining the trend that we saw in the first quarter of twenty nineteen. In our Gold Pineapple category, net sales decreased to $126,000,000 compared to $139,000,000 in the prior year period, primarily due to lower sales volume in North America and Europe, mainly due
Speaker 2
to lower production from our operations in Costa Rica.
Speaker 3
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 $147,000,000 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 twenty eighteen.
In our fresh cut vegetable category, net sales decreased to $121,000,000 compared with $125,000,000 in the second quarter of twenty eighteen. 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 $125,000,000 compared with $95,000,000 in the second quarter of twenty eighteen, 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 $41,000,000 compared with $39,000,000 in the second quarter of twenty eighteen, primarily due to the acquisition of Mann Peking. Volume increased 10%, unit price decreased 5% and unit cost was 7% lower due to mix. In our non tropical category, net sales decreased to $69,000,000 compared with $86,000,000 in the second quarter of twenty eighteen, 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 Bananas business segment, net sales were $440,000,000 compared with $458,000,000 in the second quarter of twenty eighteen, primarily due to lower production from The Philippines and Central America. Overall volume was 7% lower than last year's second quarter. Worldwide price increased $0.42 to $14.94 per box compared with $14.52 in the 2018 or a 3% increase. Total worldwide banana unit cost was in line with the prior year period and gross profit increased $11,000,000 to $35,000,000 compared with $24,000,000 in the second quarter of twenty eighteen.
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 6% and represented 3% of our total cost of sales. Bunker fuel cost per ton increased 5% and represented 2% of our total cost of sales. And total ocean freight costs during the second quarter, which includes bunker fuel, third party charters and fleet operating costs, was 3% lower than the prior year period.
For the quarter, ocean freight represented 7% of our total cost of sales. On SG and A, our selling, general and administrative expenses decreased $6,000,000 to $44,000,000 compared to the second quarter of twenty eighteen, as a result of lower selling, marketing and administrative expenses in The Middle East and North America. For the foreign currency impact at the sales level for the second quarter was unfavorable by $13,000,000 and at the gross profit level, the impact was unfavorable by $4,000,000 Interest expense net for the second quarter was $7,000,000 compared with $6,000,000 in the second quarter of twenty eighteen. At the end of the quarter, our total debt was $614,000,000 as compared to $662,000,000 at the end of twenty eighteen. The debt is now reported as current due to its April 2020 maturity date.
Our income tax was $9,000,000 during the quarter compared with income tax expense of $6,000,000 in the prior year, mainly due to higher taxable earnings. As it relates to capital spending, we spent $70,000,000 on capital expenditures in the second quarter of twenty nineteen, almost $12,000,000 lower than the same quarter of 2018. During the quarter, we realized the sale of one of our tomato farms in Florida as part of the reorganization of some product categories in 2018. As far as our stock repurchase plan, during the second quarter, we repurchased approximately 365,000 shares for approximately $9,200,000 This concludes our financial review. We can now turn the call over for
Speaker 0
Your first question comes from Jonathan Feeney with Consumer Edge.
Speaker 4
Morning and thank you.
Speaker 3
Morning.
Speaker 4
Mohamed, both in your comments and the numbers I see, there's a decided in all your major product categories, decided emphasis on value or volume. And you're prepared to be pricing ahead of your unit costs as you disclose them by product. And I'm wondering how much of that is when I look at your fresh products, how much of that is that you're sourcing internally more and you're buying less from third party growers? And how much is it that there's just a lot of fruit around and you're deciding to only do the most profitable business? That would be my first question.
Speaker 2
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 taking into consideration the bottom line. Bottom line comes first and then volume. Of course, take into consideration that we have, you know, set the fixed cost that we have to consider, you know, as part of our ongoing business. But as you could see, you know, every effort has been put on every call center, and that's why we got to these results as a matter of fact.
You know, it's
Speaker 3
a joint effort by everyone
Speaker 2
across the company, really, from the production and and and and the producing areas to shipping to DCs, fresh cut, sales. Every one of them have done a very good job in improving his operation, which resulted in better results and better pricing. And the most important thing is rationalization of the business. I believe that focus and rationalization is really our target as we speak and going forward. We we are very confident that we can execute and deliver, you know, as as a company, as a team.
I'm so I'm so proud, to be honest. I would like to say it on the 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 targets that we have put for them. And I think we are at the beginning of the road. I believe that there is still a lot of mileage to cover and a lot of improvements to achieve.
Speaker 4
Well, you've made thank you, Bob. And you've made some significant investments in capital over the past few years that presumably I guess I'm trying to figure out, is that what's paying off right now that allows you to have pricing that's way ahead of cost?
Speaker 2
It's part of it. I don't believe that's the major thing. These investments, we have put a lot of money in the ships that are being under construction now. The packing plant that will hopefully be operational Mexico in the next couple of months. And and and and and in Panama that is started producing, you know, and and and delivering the the food.
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 laser sharp on every cost segment or every cost center, specialty yields and the cost. And I think all this has resulted in better pricing and better cost structure. And I say that it's just the beginning. I am confident of what I say.
It's just the beginning because I see where the future is. There was a comment
Speaker 4
in the release about you doing also top like a SKU rationalization, pulling certain products off shelves that were less profitable. Can you give us some more detail about what drives that? Because it's 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.
Speaker 2
Yeah. Definitely. I mean, don't forget that we just started you know, it's it's almost a year since we, acquired NAM, and we are still in the kind of sync synchronization and rationalization of all the products. Definitely, NAN has given us tremendous leverage in in making a better offering. You know, we are coming now with new products to the market, which will be introduced very soon, which I mean, I think will be a novelty in the market.
You know? And we are going to be adding fruit and vegetables together in in some innovative ways that will come to the market, you know, as as something new, you know, and and that's what we would like to do. We would like always to come with something new to the market.
Speaker 3
You know, we don't want
Speaker 2
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 will command, you know, a premium and and and good value.
Speaker 4
Thanks. And last question for the moment. The $640,000,000 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. What are you going
Speaker 2
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, continuing. Some of that is going to end in April.
Speaker 3
As far
Speaker 2
as and I would like maybe Eduardo to maybe explain further on, know, on that.
Speaker 3
Yeah. So Jonathan, so we started negotiations with several banks in the sense of our expectation is to have by early Q4 that renegotiation concluded. And so we expect 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.
Speaker 4
Understood. Thank you very much.
Speaker 0
We have a question from Mitch Pinero with Stuart Evans. So,
Speaker 2
Mohammed, could you just give us
Speaker 4
a near term outlook for bananas looking at each market? I mean, I know The U. S. Is kind of stable, but how does Europe and Asia Pacific look in terms of supply and demand?
Speaker 3
Europe,
Speaker 2
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's no question about that. As far as the Far East, we are seeing a stable market. Even as we are at the July, we're still seeing reasonably good markets in Japan and Korea and China and Hong Kong.
So we see this as a normal year, Mitch, 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 entered into a more blend of Europe used to be a total spot market. And in the last few months, since the beginning of this year, end of last year, we actually started blending long term, you know, kind of longer term contract pricing with retailers as well as spot. So we have kind of averaged and mitigated the risk of the spot market, during the second half of the year.
Speaker 4
Is there a reason European retailers are changing to less spot and more contracted pricing?
Speaker 2
As a matter of fact, in Europe, we see this getting more in favor, you know. I think supermarkets realize 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, kind of future objective is to have a blend of spot and fixed prices.
Speaker 4
Okay. And then so how serious is the fungus, the Panama disease fungus in Central America. I mean, is it I mean, I know I know it can wipe out farms and and and and and, you know, there's a lot of, you know, talk about this. Is this how serious of a threat is it to your business?
Speaker 2
It's not to my business, it's to the industry. And it will be kind of variable between one and the other. This is a disease that it has already you know, we have said before, and if you remember on different previous conference calls, I said it's not it, it's when. And the when has happened, you know? I mean, it just been, you know, found in in Colombia.
And this for your information, this disease doesn't show up in one in overnight. You know? This disease usually takes sometimes two, three, four years to show up in there. So we don't know. Maybe it's already in Ecuador.
Maybe it's already more spread in Colombia. And 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 is this disease, you know, is something that I I I believe that what is happening, seeing it from different countries that 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 and D and the quality controls to be able to cope with such a disease. You know, I I always said that, you know, banana will be rationalized not by logical, you know, 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, five, ten years from now, there might be a drastic reduction in banana supply from Central America, which will relate which will translate into much higher prices. You know, I predicted many years ago that a car stone would be a $100, and I wouldn't be surprised to see that, just like Abu Dhabi.
Speaker 4
Very helpful. What about, what percentage of your you guys already answered this to John's question, but what percentage of your fruit come in this quarter came from company owned farms, company owned production?
Speaker 2
What fruit? Do you mean bananas?
Speaker 4
Well, do you have all fruit or just bananas? Either either one.
Speaker 2
Bananas is mainly like we said, always about 35% coming from our own farms.
Speaker 4
Okay.
Speaker 2
Pineapples, 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. You know, as far as vegetables goes in, of course, it is mainly our you know, we do have now with Mann, we have our own agricultural arm where we produce our own vegetables as well as sourcing for third party or long term contracts.
Speaker 4
Okay. And then just a couple other questions. On the fresh cut veggie side, what drove the unit cost higher? Or is it just prices?
Speaker 2
Yeah. Some products were very high in price, very, very high. I mean, like salary, for instance, we have seen prices on salary that we have never seen in years, and it's continued for a long I mean, for a very long period of time. Jeff, do you have
Speaker 3
the Yes. So the Fresh Cut, so we saw an impact on our costs related to some weather related issues that we saw in the second production that we've taken in the 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 the Salina season that's coming in so that we should expect more stable cost and prices for the remaining of the year.
Speaker 4
I mean, so costs were up 10%, pricing in the fresh cut veggies was up 3%. Are you unable to get pricing quickly, or is it just this is the type of cost hit that you're just gonna have to eat? Is there any hope for for Yeah. A little more relation between, you know, your cost and pricing?
Speaker 2
No. Sometimes, you know, you have contracts in place where you have to deliver to the buyers, you know, with fixed cost, I mean, or fixed price. So you have to eat it yourself. And in other instances, you know, it's a market fluctuation. For instance, I said letters, two months ago was $10.11 dollars a box.
In the last six weeks, it's been $30 a box. Mhmm. So you can see the kind of cyclicality of of of pricing. I mean, $30, it's it's it's great opportunity for for us and others that are in this field. So 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 lines and the offering that we are doing are not the traditional offering that everybody is delivering.
And that's the most important thing.
Speaker 4
Okay. Last question was just did you have any update on your capital spending estimate for this year?
Speaker 2
Well, we are going to we are mainly focusing on the ongoing capital expenditures, which is the ships that we have. We have six ships under construction. So this is something that we need to keep spending, and we are almost done with our Mexican plant. We have Panamanian project, which is progressing, and we are rationalizing this.
Speaker 3
I don't know if Yeah. We have also fresh cut facility in Oklahoma in Japan that we expect to have that up and running and also some additional expenses on the expansion of our operations in Mann Packing.
Speaker 4
Is that so are you still looking for in the $100,000,000 $110,000,000 range?
Speaker 3
You mean? So, yeah, we expect that to be more in line with last year,
Speaker 2
mix. Okay. Thanks for taking the questions. Thank
Speaker 0
And we do not have any questions at this time. I will turn the call over to Mr. Abdul Ghazaleh.
Speaker 2
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.
Speaker 0
This concludes today's conference call. You may now disconnect.