Fresh Del Monte Produce Inc (FDP) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fresh Del Monte Produce Company's Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ms. Christine Cannella, Assistant Vice President, Investor Relations. Ma'am, you may begin.

Thank you, Andrew. Good morning, everyone, and thank you for joining our second quarter 2017 conference call. As Andrew mentioned, I'm Christine Cannella, Assistant Vice President of Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Richard Contreras, 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 distribution. This conference call is being webcast live on our website and will be available for replay approximately 2 hours after the conclusion of this call.

Please note that our press release includes reconciliation for any non-GAAP financial measures we mention today to their corresponding GAAP measure. I would like to remind you that most 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.

Now I would like to turn today's call over to Mohammad. Mohammad?

Thank you, Christine. Good morning, everyone, and thank you for joining us. I'm pleased to report that Fresh Del Monte achieved a 5% increase in net sales over last year's second quarter with our other fresh produce business segment the key driver. We benefited from increased demand for our value-added fresh-cut business across all delivery channels and in all of our sales regions. Second quarter sales were also enhanced by higher volume in our fresh pineapple business in North America and Europe as a result of higher production and continued strong consumer demand for our premium Del Monte Gold pineapple, which remains the worldwide leader in market share. Higher pricing in our avocado business also contributed to our increase in net sales.

During the quarter, we took steps to further solidify Del Monte's momentum and leadership position in the fresh, prepared and packaged food and beverage industry when we signed 4 joint venture agreements with Del Monte Pacific. These partnerships will enable us to expand refrigerated offerings sold across all distribution and sales channels and [draw] out our Del Monte food and beverage stores in the United States.

We also reached an agreement with Del Monte Pacific and Del Monte Foods to resolve longstanding licensing and distribution litigation and to allow us to place the Del Monte mark on value-added fresh products we currently sell under other brand names in the United States, such as fresh sandwiches, protein salads and snacks, along with new value-added product and visions.

Looking forward, this partnership provides tremendous opportunities for continued brand expansion and creating products and consumer experiences for healthy premium quality food options.

At this time, I would like to turn the call over to Richard to discuss our financial results in more details. Richard?

Thank you, Mohammad. For the second quarter of 2017, excluding asset impairment and other charges on a comparable basis, we reported earnings per diluted share of $1.40 compared with earnings per diluted share of $1.75 in 2016. Net sales increased $59 million compared to the prior year period. Gross profit decreased to $124 million in the second quarter of 2017 compared with $145 million in 2016. Operating income for the quarter was $82 million compared with $101 million in the prior year. And net income was $71 million compared with $90 million in 2016.

In our banana business segment, net sales increased to $500 million compared with $497 million in the second quarter of 2016 with higher sales volume and pricing in North America and Europe, partially offset by lower net sales in Asia and the Middle East due to higher industry supply. Overall, volume was 3% higher than last year's second quarter.

Worldwide pricing decreased $0.37 a box or 2% to $14.92 per box compared with $15.30 in the second quarter of 2016. Total worldwide banana unit cost was in line with the prior year. And gross profit decreased to $58 million compared with $67 million in the second quarter of 2016.

In our other fresh produce business segment for the second quarter, net sales increased 14% to $568 million compared with $497 million in the prior year. Gross profit decreased to $55 million compared with $60 million in the second quarter of 2016.

In our gold pineapple category, net sales increased 9% to $135 million during the quarter due to higher volume. Overall, volume increased 23%, unit pricing was 11% lower and unit cost was 4% lower than the prior year.

In our fresh-cut category, net sales increased 25% to $169 million compared with $135 million in the prior year. The increase was a result of higher sales volume in all of our regions, along with higher selling prices in North America. Overall, volume was 23% higher, unit pricing was 1% higher and unit cost was 6% higher than the prior year.

In our avocado category, net sales increased 48% to $85 million compared with $58 million in the prior year due to increased customer demand and tight industry supply. Volume decreased 6%, pricing was 58% higher and unit cost was 63% higher.

In our nontropical category, net sales decreased 10% to $78 million compared with $87 million in the second quarter of 2016, principally due to lower sales volume and pricing in the Middle East, a result of planned reductions. Volume decreased 15%, unit pricing increased 6% and unit cost was 4% higher than the prior year.

In our prepared food segment, net sales were $80 million compared with $94 million in the prior year. The decrease was a result of lower sales in our processed pineapple product lines. And gross profit was $10 million compared with $19 million in the prior year.

Now to discuss costs in the second quarter. Banana fruit cost, which includes our own production and procurement from growers, increased 1% worldwide and represented 20% of our total cost of sales. Carton cost increased 1% and represented 3% of our total cost of sales. Bunker fuel cost per ton increased 41% and represented 2% of our total cost of sales. But total ocean freight cost during the quarter, which includes bunker fuel, third-party charters and fleet operating cost, decreased 2%. For the quarter, ocean freight represented 8% of our total cost of sales.

The foreign currency impact at the sales level for the second quarter was unfavorable by $8 million, and at the gross profit level the impact was unfavorable by $2 million. Other expense net for the quarter was an expense of $500,000 compared with other income net of $700,000 in the prior year period, the change principally attributable to foreign exchange gains during the second quarter of 2016.

As far as our stock repurchase program during the second quarter, we repurchased approximately 1,007,000 shares for approximately $54 million.

At the end of the quarter, our total debt was $227 million. Income tax expense was $8 million during the quarter compared with income tax expense of $9 million in the prior year.

As relates to capital spending, we spent $72 million on capital expenditures in the first 6 months of 2017. We expect to spend approximately $160 million in 2017.

This concludes the financial review. Operator, we can now turn the call over for Q&A.

(Operator Instructions) Our first question comes from Jonathan Feeney with Consumer Edge Research.

Three questions I had. First, on the gross margin compression this quarter, is this consistent, in your mind, with the usual ups and downs of supply, particularly in, as you referenced, Asia and the banana business? But even in pineapples, is this consistent with the typical ups and downs or do you think there's anything structural going on here? Would be my first question.

Jonathan, to be honest with you, we haven't seen worse markets than what we have seen in many, many years as far as banana supplies and banana pricing, especially in the Asia market and the Middle East. Europe wasn't bad during the last few months. It just started getting bad since, I would say, early July. North America is contract pricing, so it's more or less stable. But as we speak, for the first time that I have, in many, many years -- that I haven't seen that Ecuador is selling fruit today at almost $5, $4.50 a box FOB, which is unheard of, never in the last 10, 15 years. We have seen these prices today in Russia. Selling prices in the market today is around $4.50, $5 a box, which cost them over $12, $15 at least in cost to deliver to Russia. So you can see the situation is extremely bad for -- we don't understand the reasons. But it seems that there is an oversupply situation worldwide that has affected the banana markets, which we haven't seen for many, many years, to be honest with you.

So I expect this situation to continue for at least a month more. And then hopefully this whole kind of oversupply situation works itself out. But the gross margin direction was very, very clear to us. I mean, last year was a short year and everything -- like I said last year, we had a tailwind. We never had any headwinds. Everything was perfect, even in the industrial side, which is the prepared food. Pineapple juice concentrate was selling at almost $3,000, $2,800. Today, it's half that price.

So you can see, I mean, this is a commodity that we could not control. But if you look at all other businesses that we are in, they're all expanding and they are all doing very well. So I'm not very worried about the future, even the near future. I believe we know where we are going. And our motivation and our target is to reduce our banana, let's say, part of the pie by another 10% or so from the total activities. I'm not saying to reduce banana volume but really to increase all other items in order to mitigate any influence by the banana pricing or supplies like we are experiencing today. So all in all, this is the situation, Jonathan.

I think I understand. So like we talked about maybe, I think it was a couple years ago, about how there was a little bit better behavior out of Ecuador structurally enforcing minimum reference prices. I guess that's not -- that was some possibility. I guess that discipline has kind of broken down a little bit?

Well, it's not the discipline. It's because of the market situation and because of the supplies. Central America hasn't been hit with any hurricanes or any bad weather for the last several years, so they have -- we are producing at full production and without any interruptions. The same thing happened in the Philippines. Last year, there was a shortage, and that's why the markets were very strong in Asia and the Middle East. This year, there is full production.

So take into consideration as well, some of the big players in the Asian markets have started importing, as well fruits from Ecuador, which really backfired on them, because they are putting more fruit into the market where they shouldn't have. I mean, it's -- the situation is that in Ecuador, they always depend that there is a shortage from Central America or some interruption there to continue making good prices. This year, it hasn't happened. And I don't see, as we speak, that there is any kind of disruption to the supply from Central America. So that's why they have so much oversupply and less buyers, which moved the price even below their reference price that they put as minimum for their export.

Understood. And just a couple other things, Mohammad. Is there anything -- can you give us any update, I know it's only been a few weeks since what I thought was a pretty exciting announcement, your joint venture? Is there any -- can you give us any update on, like, new pieces of business you've targeted or what things that could have an impact, product line-wise for 2018, beyond just the resolved litigation, or resolving the dispute, I should say, between the 2 companies?

Yes. Like we said, we are getting into -- we have several joint ventures, 4 joint ventures, which are going to kick in, hopefully, by the end of this year. We're going to market the chilled juice business. We're going to the F&B, which maybe people are not yet acquainted with. We have a very successful concept that is going right now in the Middle East, especially in Saudi Arabia and the Dubai area, where we have, like the Del Monte F&B shops, where it's becoming very popular there and quite successful, as a matter of fact. We have about -- as we speak, we probably have about 16 trucks already operating and we have probably 5, 6 already in the pipeline in the next few months that will open. And they have been doing very well, extremely well, as a matter of fact.

So that's the kind of concept that we are bringing into the U.S., of course with some tweaking to fit the U.S. market. But this will be, in my opinion, a very important milestone for us. Of course we are using the brand on all our stuff that we could not use it before. Part of our agreement with Del Monte Pacific, Del Monte Foods was to put our brand, to put the Del Monte brand on many items of that we could not sell under Del Monte, which was a big handicap, like all the added value products, like prepared meals, like hummus, like protein salad, sandwiches, anything you can think of, dairy products, things like that. That is now in the process. It's in the pipeline of how to start putting it into the market.

Of course we are creating now the recipes. We are creating the packaging. We are creating the -- which hopefully will go into the market also by the end of the year, early next year. That is going to be our big -- in my opinion, our big push in the future as far as our fresh-cut and added value products.

We are going to be -- within a month from now or 6 weeks from now, we will be operating our new fresh-cut DC in Houston, which will be brand new. We are already in the process of putting up our mega distribution fresh-cut and prepared meals location in Delaware. That's a very big -- that should be ready, hopefully, by middle of next year in operation.

So we have many things. We are putting up our new packing house, a very big packing house in Mexico for our avocados, so we will be packing our own avocados rather than through third parties. Many things are actually in the process now in the pipeline. And that's why, when I said I'm not worried about what -- when we make $1.40 for a quarter, it's not really something that we should be sorry or sad about. I think it's a very good result. I believe that we have to withstand the market conditions, what we are going through. And hopefully that we will -- God willing, we will overcome.

Which relates directly to my last question, which is you bought about $180 million worth of stock over the past 18 months, and yet the company still is, by historical standards, relatively conservatively leveraged. Is this the priority -- maybe this is for Richard, but certainly, Mohammad, your views. Is this the priority use of cash right now? And how big of a share repurchase program could you envision given what -- how inexpensive debt is right now?

No, we are continuing with the opportunistic buy, and this has been every quarter. We are looking at acquisitions as well. If there is the right acquisition with the right value and with the right mix for us, we will look at that seriously. So we're -- we are always prudent in using our cash and our capital.

And our next question comes from Mitch Pinheiro with [Loss] Asset Management.

I don't know who I'm working for now, but we'll take whoever that was I'm working.

So hey, I just had -- I just didn't understand the banana business here. You had flat revenue in the quarter and your unit costs were flat. And then we had a decline in gross profit. What was driving that?

Price is the only other variable, Mitch.

You had volumes up, right? So I kind of -- I just kind of thought we would see -- you'd see flattish banana margins year-over-year.

No, but what really helped us was the Asian and the Middle East -- the MENA market. These were the ones that really had a big difference year-over-year in pricing, Mitch, which really affected the whole average.

And so -- and you were saying, Mohammad, you're -- you think some of the oversupply situation can sort of balance out in a couple months? Is that what you kind of see right now?

I believe so, yes. It has to, because otherwise -- I don't believe that this can continue. Something is going to let go.

And then any -- how would you compare, year-over-year, the percentage of your units that were self-produced versus bought by -- from third parties?

As far as banana is concerned?

Yes, yes.

Pretty steady, Mitch, over the last couple years.

Our production in the Philippines is on the rise, our own production on the rise. And that might mitigate that we will reduce third party and increase our own -- replace it by our own production. So it's more or less stable. But it's -- the -- what's happening is that we are replacing some of our own production with third-party production as we move forward.

It was 38% in the quarter, Mitch, of our own production.

Okay, of own production. And where -- and would you like -- is there a -- not a target, but you'd just like to see that continue to increase?

To increase for our own, you mean, or the other (inaudible)

Yes, for your own. You'd like to see that 38%...

No, no, we are replacing third party with our own production as we move forward.

Okay. Okay. Another question, then, on the other fresh produce. Really strong revenue quarter, and gross profit was down a bit. And some of your profitable items, like pineapples were strong, other fresh produce looks strong. I was surprised to see the margin decline despite the really strong revenue growth. Is there any color you can add there?

I mean, the pineapple was down because we had normal ups and downs. So some months ago we were short, and this quarter we had a surge of production. So margin -- volume was up, so it caused the price to come down. That was a piece of it. And then margins were down slightly, even though sales were way up, but margins were down in both the fresh-cut and the avocado just because of the cost of buying from the outside.

I just want to add to this. We always constantly have to face with the fresh-cut, the labor cost, because the labor rate is going up all over the country. And to catch up with this, we are increasing our pricing. But that's not -- doesn't happen overnight. I mean, you cannot just go next day to the customer and say, "I'm raising my price equal to the rate and labor cost." So it takes maybe a month or 2, kind of transitional. We -- as we speak, we are raising our prices to compensate for the increased labor cost.

As far as other items, like avocados and others, we buy and sell. And that is -- usually margins are more stable and constant, except in cases, if you are long on some items where you have both, let's say, high and then the market went down a little bit later, then you are caught in the middle. But these are not really any significant events.

As far as pineapples, like Richard said, sometimes we have a kind of surge in production. And we know these periods. So we go into promotion kind of campaigns with our retailers and move these volumes to -- but if you look at the whole year, I think this will kind of normalize and then they will see, more or less, the same margin.

Okay. And then -- so we're only halfway done the year, but as you're looking into '18, how does some of -- like how does some of your sort of growth areas look? For instance, in the berry business, how is that looking now and any -- what are your sort of plans as you enter next year? And same -- I guess fresh-cut next year, we'll just fill out the new capacity, so that seems to be pretty visible. But I was curious about some of your growth areas, your new lines, how they look to contribute.

I think you will see very important -- in terms of berries, I think you will see a very important move into that category. By next year, we will be, I would say, an important player in this field, as we are building up the business and it looks very, very promising. We are already selling berries into the market. And we are building up the sourcing and the channel and the customer base. So it looks very promising.

And as far as all the other items, like I was mentioning to Jonathan a few minutes ago, they are all in the pipeline. I mean, definitely what we are doing is taking -- as you can see, there is an increase in our revenues, and our revenues mainly coming from other items other than bananas. So that, by itself, is a testament for what we are -- what Fresh Del Monte is gearing towards. So -- and I think this momentum is going to continue going forward. And hopefully we will come to a time where bananas will become the minority of our business.

So one more question just relating to sort of your free cash flow. Even after spending $160 million in CapEx, you still have substantial free cash flow. You obviously bought back a lot of stock. I was curious, one, how the -- your acquisition pipeline might be looking. And then, in absence of that, do you plan to continue to be aggressive about repurchasing stock?

We will do all these things. I always said that if there is an opportunity to find the right acquisition with the right value, with the right synergies, we will do that. As far as stock, buying back is on the table all the time. And we do that opportunistically whenever we see that there is a good value for the company. And we keep spending on our expansion.

And our next question comes from Ajeya Patil with Evaluate Research.

So my first question is regarding avocados. We have been seeing this situation of tight supply and high prices since the last 3 quarters or so. So what more is your view, like how -- what is the current situation in avocado? Is the supply still tight? The volumes went down 6% this quarter. Was it just because of the supply being tight, or was it something on the demand side, too?

No, the demand is always there. It is the supply, actually. And the supply is always tight from Mexico, because Mexico supply is very regulated. Let's say it's just like a cartel. And they can decide how much they want to export and how much they don't want to export. So it is, like, regulated. And that's why you see the very high prices and sometimes smaller supply and sometimes more supply. But we do get -- as you can see, we are expanding and we are -- our business is growing into avocado, and this is going to continue. So -- but this is the situation for Mexico.

Okay. And my second question is about the nontropical segment. So last time, I think nontropical was the main segment because of which the margins and everything was down. And so I think last time it was because of grapes. And so I just want to know what has happened this time in the segment? The volumes are 15% down. In which specific category there did you see the volumes going down? And pricing increased, so what is going on there?

So the -- actually, the margin on nontropical was higher this time. As you mentioned, the grape season starts tapering off, at least the Chilean grape season, towards the end of the second quarter. And as we mentioned in the -- earlier in the call, we purposely reduced some of the volume into the Middle East that was not looking to be as profitable. So again, you saw a little bit less sales because grapes were down, if you're comparing it to last quarter. That's just normal seasonality. And we made some changes ourselves to improve the margins, and it did go up a bit.

Okay. And one last question on your -- the new facilities and everything. So I think you're starting something in Costa Rica and Philippines as well. So any update on that?

Costa Rica and Philippines is mostly expansion. It's not a facility, per se, it's just expanding production. Especially in the Philippines we're expanding banana production.

(Operator Instructions) And I'm showing no questions at this time. I would now like to turn the call back to Mohammad Abu-Ghazaleh for any further remarks.

I would like to thank everyone for attending this call today. And I hope that we can get together next quarter, and wish you a good day. Thank you. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.