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Fresh Del Monte Produce Inc (NYSE:FDP)
Q2 2019 Earnings Call
Jul 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Christine Cannella -- Vice President, Global Corporate Communications and Investor Relations

Thank you, Sherry, and good morning, everyone, and thank you for joining our second quarter 2019 conference call. As Sherry 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-Ghazaleh, Chairman and Chief Executive Officer, and Eduardo Bezerra, Senior Vice President and Chief Financial Officer. I hope that you've 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 distribution.

As was 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.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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 started with a conscious strategic decision to shift our focus toward 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 $18 million. We also saw adjusted operating income and net income increase 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 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 2019, 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 growers. 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 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 power connection points between our products and consumers, as we further promote our Company as an essential component of healthy living and provider of 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 positions 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.

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

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 per 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 I will review our business segments 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 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 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 1 percentage points, maintaining the trends that we saw in the first quarter of 2019.

In our gold pineapple category, net sales decreased to $126 million compared to $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 $121 million, compared with $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 $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 decreased 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 line, 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 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 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 cost 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 costs, 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 other administrative expenses decreased $6 million to $44 million compared to the second quarter of 2018 as a result of lower selling, marketing and administrative 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 as current due to its April 2020 maturity date. Our income tax was $9 million during the quarter compared with income tax expense of $6 million in the prior year, mainly due to higher taxable earnings. 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 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 $9.2 million. This concludes our financial review. We can now turn the call over for Q&A.

Questions and Answers:

Operator

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

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Good morning and thank you.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Good morning.

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Mohammad, so both in your comments and the numbers I see there is a decided -- in all your major product categories, the decided emphasis on value or volume and your prepared repricing 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 are sourcing internally more and you are buying less from third-party growers and how much is it that there's just a lot of fruit around and you've decided only to do the most profitable business? That will be my first question.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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 without taking into consideration the bottom line. Bottom line comes first and then volume. Of course, taking into consideration that we have certain fixed costs that we have to consider as part of our ongoing business. But as you could see, every effort has been put on every cost center and that's why we got to these results as 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 have done a very good job in improving his operation, which resulted in better results 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, you know, as a company, as a team. I'm so proud to be honest, I would like to say it on the conference call, I'm so proud of our team across the world, 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.

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Well, you've made -- 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 have pricing that's way ahead of cost?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

It's part of it, I don't believe that's the major thing. You know, 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 in Mexico in the next couple of months. And in Panama, that has started producing and all 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 laser sharp on every cost segment or every cost center, especially the yields and the cost. And I think all this has resulted in better pricing and better cost structure and I'd say that, it's just the beginning. I'm confident of what I'm saying, it's just the beginning, because I see where the future is.

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Thank you. There was a comment in the release about you doing -- also it sounds 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 my understanding is 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.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Yeah, definitely. I mean, don't forget that we just started, it's almost a year since we acquired the 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. You know 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 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 other products in the market, but we would like always to be pioneers and come with new products, that really will command a premium and good value.

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Thanks. 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 I mean, I know you have significant assets but what are you going to do about that debt?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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 a renewal of the credit facilities. So this is going to be continuing, it's not that is going to end in April. As far as, and I would like maybe Eduardo to maybe explain further on that.

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

Yeah. So Jonathan -- so we started negotiations with several banks in that sense. So 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.

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Understood. Thank you very much.

Operator

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

Mitch Pinheiro -- Sturdivant -- Analyst

Hello.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Good morning.

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

Hi, there.

Mitch Pinheiro -- Sturdivant -- Analyst

Good morning. Mohammad, could you just give us a may be near-term outlook for the bananas, looking at each market. I mean, I know with the US it's kind of stable, but how does Europe and Asia Pacific look in terms of supply and demand?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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 are 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 supplies 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 -- 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, especially during the second half of the year.

Mitch Pinheiro -- Sturdivant -- Analyst

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

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

As a matter of fact, in Europe, we see this getting more in flavor. 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, our kind of future objective is to have a blend of spot and fixed prices.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. And then so how serious is the fungus, the Panama disease fungus in Central America. I mean, is it -- I mean, I know it can wipe out farms and there's a lot of talk about this. How serious of a threat is it to your business?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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. I mean, it's just been found in Colombia. And this -- for your information, this disease doesn't show up in one -- in overnight, 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 hopefully, we have taken -- and the governments as well became very much aware 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 countries around the world that have this disease, that you need to co-exist with this, but especially small growers, medium size 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. I always said that 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 long-term 5, 10 years from now, there might be a drastic reduction in banana supply from Central America, which will translate into much higher prices. I predicted many years ago, that a carton would be $100 and I wouldn't be surprised to see that, just like avocado.

Mitch Pinheiro -- Sturdivant -- Analyst

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?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

What fruit do you mean, bananas?

Mitch Pinheiro -- Sturdivant -- Analyst

Do you have all fruit or just bananas, either one?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Bananas is mainly, like we said, always about 30%, 35% coming from our own farms.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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. As far as vegetable is concerned, of course, it is mainly our -- we do have now with Mann, we have our own agricultural arm, where we produce our own vegetables as well as sourcing from third-party on long-term contracts.

Mitch Pinheiro -- Sturdivant -- Analyst

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

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Yeah, 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 continued for a long -- I mean, for a very long period of time. So, Eduardo, do you have --?

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

Yeah, so on the fresh-cuts, 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 in 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 and prices for the remaining of the year.

Mitch Pinheiro -- Sturdivant -- Analyst

I mean, you said costs were up 10%, pricing in the fresh-cut veggies was up 3%.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Yeah.

Mitch Pinheiro -- Sturdivant -- Analyst

Are you unable to get pricing quickly or is it just this is the type of cost hit that you're just going to have to eat? Is there any hope for a little more relation between your costs and pricing?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

No, sometimes you have contracts in 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 cyclicality of pricing. I mean, $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 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.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. Last question was just, did you have any update on your capital spending estimate for this year?

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

We're 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 Panama project, which is progressing and we are rationalizing this. I don't know --

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

Yes, 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 EU operations in Mann Packing.

Mitch Pinheiro -- Sturdivant -- Analyst

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

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

Yeah, we expect that to be more in line with last year, Mitch.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. Thanks for taking the questions.

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Thank you.

Operator

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

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Christine Cannella -- Vice President, Global Corporate Communications and Investor Relations

Mohammad Abu-Ghazaleh -- Chairman & Chief Executive Officer

Eduardo Bezerra -- Senior Vice President & Chief Financial Officer

Jonathan Feeney -- Consumer Edge Research LLC -- Analyst

Mitch Pinheiro -- Sturdivant -- Analyst

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