Q3 2019 Earnings Call
Produce third quarter 2019 conference call today's conference is being broadcast live over the Internet and is being recorded for play back purposes.
At this time all participants are in listen only mode. After the speakers presentation that'd be a question answer session.
Yes. Good question during the session you want me to press Star 100 telephone if you recall any further assistance. Please press star zero for opening remarks, and introductions I would like to turn the call over to the Vice President Investor Relations with fresh del Monte Proteus Kristine Canalys. Please go ahead.
Kelly.
Thank you Christine good morning, everyone and thank you for joining our third quarter 2019 conference call as Christine mentioned, I'm, Christine Cannella, Vice President Investor relation to his first on any protein joining me in today's discussion our mohamadi, though the Dalai Chairman and Chief Executive Officer anymore.
Cara Senior Vice President and Chief Financial Officer, I Hope that you had a chance to review the press release issued earlier. This morning by Businesswire. You May also be just the company's website and fresh del Monte Dotcom for a copy of today's release as wants to register for future distribution.
Previously advised our press release includes reconciliations of any non-GAAP financial measures, we mentioned today to their corresponding GAAP measures I.
I would like to remind you that much of the information we will be for money today, including the answers. We gave in response to your question May include forward looking statements within the provision or the federal Securities Safe Harbor dog.
We ask that he reviews are forward looking statements information included in the press release, we issued this morning and in the company's much reconciling to D.S.P.C. with that I'm pleased to turn todays call over to Mahoney.
Thank you Christine good morning, everyone and thank you for joining goes.
I'm pleased with our overall performance and that's important.
Net sales totaled $1.1 billion gross profit increased 42% from last years that Gordon.
And we generated a b S. One of adjusted basis, all 55 cents, but ship.
From a loss per share 14 cents theater.
During the quarter, we continued to make bullish on our strategic objectives as we transform our company to a value added.
Higher margin business.
Disrupting the legacy of being a volume based banana business.
Much of the improvement came from old fresh and value added business segment.
Most notably our fresh cut fruit product line in North America.
We continue to see strong demand from existing and new customers.
Oh, what a new fresh got unit and Yokohama, Japan is on track to open in the first quarter of 2020, and we have begun expansion of our existing fresh got facilities in the UK.
This will allow us to keep pace with global demand trends and expand our foodservice and retail customer base.
Our vegetable business through the map that can also performed well during said well.
As part of our meals and snacks.
But like we were excited to see the launch of all of <unk>, but the rate line vegetable rich convenience that.
We are moving ahead as well with some of our new awards biggest opportunities.
For example, we continue to grow what foodservice partnerships across the Middle East Asia and Europe .
Which is increasingly a focus of new business for us.
We are all scheduled to open or fast food and beverage store in the United States. During the first quarter of 2020 in Florida good.
This call Sip has proven itself in the middle East.
We are looking forward to the possibilities in the United States.
We're about to bring our news the <unk>, Oh, God bucking facilities online and Mexico.
Which wouldn't give us even more control over our supply.
This should improve or margin and secure new additional in sourcing opportunities to sell their rapidly expanding consumer market for other problems.
We recently released on our website the latest corporate social responsibility report.
Well I think fresh the remote this commitment to making but the world Tomorrow.
Sustainability has always been a bottle who we are as what we do every day.
We recognize setting a meeting what its sustainability goals.
Is that not unfortunately for us to positively, but people and there but.
We look forward to building on our momentum as we observed a false.
We all our corporate responsibility goals.
And make it but they weren't tomorrow.
In summary, we remain committed to transforming the company growing our product lines, increasing share up shareholder value.
And inspiring healthier lifestyles for generations to come.
Let me now turned the corner or what would what to do more financially because slotting fees.
Thank you Mohammed good morning, everyone.
Our financial performance seemed a bit fourq is demonstrates that dollars throughout the G. Two years old fresh del Monte floods anyway, the efficient Ross to go and more focused business is under way.
For the third quarter of 2019.
Adjusted net income per diluted share was 35 thing.
Compared with an adjusted loss per diluted share of 14 cents in 2018.
Net sales were in line with the prior year period.
Adjusted gross profit increased 42%.
The $75 million in the third quarter 2019.
Compared with $53 million in 2018.
Adjusted operating income for the quarter increased to $25 million compared with $3 billion and deploy your year.
And adjusted net income was $17 million compared with an adjusted net loss.
$7 million into thirds cancer all 2018.
Turning to our business segments and key product lines.
No fresh and value added business segment for the third quarter of 2018, net sales were $653 million compared with $640 million into probably your periods, primarily as a result of higher net sales in all fresh good fruit I won't go and.
That's the both product lines.
Partially offset by lower net sales in all pineapple and non tropical product lines.
Gross profit increased 27%.
$54 million compared with $42 million into third quarter throughout 2018, primarily due to higher gross profit to know fresh goods pineapple and vegetable product lines.
Gross profit margin Ford segment.
<unk> by 1.6 for Central point month ended the girls trend of the first half of 2019.
In our by not pick up territories, net sales decreased $202 million compared to $112 million in the prior year period. The result of lower production volumes due to adverse growing conditions in our production. There is the degrees was offset by higher selling prices.
Okay and Europe .
Overall volume was 20% lower.
You any pricing was 14% higher and unit cost was 7% higher than the prior year period.
In our fresh cut fruit category net sales were $145 million compared with $132 million in the prior year period, primarily due to higher sales volume and higher selling prices in North America.
Overall volume was 10% higher you're only pricing was 1% higher and unit cost was 2% lower than the third quarter of 2018.
In our fresh Cook vegetable category net sales increased $224 million compared with $123 million into third quarter. All 2018. The increase was primarily the result of higher selling prices.
Volume was 9% floor.
Unit price he was 11% higher and unit cost was 9% higher than the prior year period.
No I hope gobbling up degree net sales increased to $98 million compared with $85 million into third quarter of 2018 supported by higher selling prices as a result of by industry supply.
Volume decreased 8%.
Right. So you're was 26% higher and units cost was 28% higher than the prior year period.
In our fresh vegetable category.
Net sales increased to $46 million compared with $40 million into third quarter of 2018 due to higher sales volume and increased selling prices.
Volume increased to 9% unit price increases the 6% and unit cost was 1% dealer.
In our known tropical category, which includes all the grave Barry Apple sit through spare beach slum that three cherry and acuity product line.
Net sales decreased to $32 million compared with $42 million into third quarter of 2018, primarily due to blend rationalization of low margin products in these categories beginning in 2018.
Volume decreased 22%.
Units pricing was in line with the prior year period and unit cost was 2% dealer.
You know prepared food category, which includes our traditional can brothers and meals and snacks product line net sales increased due to higher sales volume.
Gross profit was impacted by lower selling prices and just traditional prepared product lines.
You know banana business segment net sales were $386 million.
Paired with $397 million in the third part throughout 2018, primarily due to lower net sales in North America in Asia, partially offset by higher sales in the middle East and Europe .
Overall volume was 7% lower than last years third quarter.
Worldwide pricing increased 4% over the prior year period.
And Billboard wide Banana unit cost was 3% higher than the probably your peers and gross profit increased to $70 million compared with the $10 million in the third quarter of 2018, reflecting a 1.7 percentage point increase in girls.
Profit margin.
Now moving to selected financial data.
On.
Selling general administrative expenses, we were in line with the prior year period.
Regarding foreign currency.
Our foreign currency was impacted at the sales level for the third quarter with an unfavorable impact of $7 million.
And at the gross profit level, they backed was unfavorable by $2 million.
Interest expense net.
The third quarter was $6 million compared with $7 million into third quarter of 2018.
Due to lower that volume.
Income tax expense was 3 million.
Dollars during the quarter compared with income income tax expense of $1 million into probably a year, mainly due to higher taxable earnings in North America.
At the end of the quarter, our cash flow cash from operating activities was a $130 million compared with net cash provided by operating activities all $271 million into same period of 2018, primarily due to lower accounts payable.
Well in accrued expenses.
Expenses.
Partially offset by higher net income.
At the end of the quarter, we're able to reduce our dad by an additional $50 million to 590 million from $614 billion at the end of the second quarter of 2019.
In October 2019, we amended and restated our $1.1 billion unsecured credit agreement and extended the credit facility and fuel Gilbert 2024, with a more favorable rate.
We also included an accordion feature that could increase their their ability by up to $300 million and we are pleased to have the continued support of our lenders and appreciate the confidence Damon day in fresh del Montes future.
As it relates to kept those spending we invested $94 million on capital expenditures in the first nine months of 2019 compared with $190 million in the same period in 2018 [noise].
[noise] also.
As announced this morning in our financial results press release, our board of directors declared a need dream cash dividend of eight centsper share payable on December six 2019 to shareholders of record on November 13, 2000, then.
Steve.
This is up 33% or two cents increase over the dividend paid in September 2019.
This concludes our financial review so we can now turn the call over Fourq Una Christine.
As a reminder, chaska question you will need to press star one on your telephone to withdraw your question press the pound or Haskins. Please standby well, we compile the Q and a roster.
Your first question comes from a line of Jonathan Feeney from consumer edge. Your line is open.
[noise] good morning, Thank you very much.
I wanted to.
So maybe start with a bigger picture question, what I think about.
Your fresh and value added products segment, which is essentially the combination of at least most of your old prepared foods and other fresh prototype I'm trying to understand how the addition of man packing as well as a bunch of all the other products other products you've added to that affects the mid cycle.
The average gross profit right because that was pretty consistent for [noise].
Last five years its <unk>, it's volatile like every other line, but it was averaged 200 million that average something like 190 million. The five years before that I'm trying to understand like where you know where where with the expectation should be of additional kinda profitability or anything you can do to help me think about that.
As we model going forward, because you've added a lot and it doesn't seem appropriate for me to just assume it's gone up you have stayed flat, which is kind of where habit. This year and I have a couple others right.
Yes, good morning Johnson.
Good morning.
Everything that you have.
Scene, I mean, or so and the loss.
Mm Hmm quarter and this quarter is actually as a result of what we have been planning and building up in the last two or three years.
2013 was a in my opinion very disruptive in the sense that we were transforming the company.
The same time, we were hit by very unfortunate you know events climatic UBS market exchange and and so many other reasons now when I mentioned you know that for instance.
We are expanding into the.
Foodservice sector, you know historically for the last several years I would say seven eight years or more we have been supply and Mcdonald's and the middle East almost an exclusive basis for lettuce and other vegetable items as well as some fruits.
Are you are not as we have proved to ourselves to be very dependent but did you know kind of supply of that is a multinational supplier and not just at local or regional player.
Mcdonald and our subs have come to realize that our collaboration is getting more and more beneficial mutually beneficial. So we have and the loss actually a few months.
We have expanded into Japan into Korea.
Now without expanding and ER in Italy, and and other places as well you and I do want to mention every.
Come clear or every region, but as we speak this business is growing.
US together with my gone into them so.
Becoming.
Global supplier.
Oh set that item, especially elecsys and vegetables. So in my opinion. This is a business that would grow Fred <unk> friends and will open also new opportunities for us to introduce and to come with ideas and ER products.
That might also a set of a euro Mcdonald's and of course, we do have also so many other Q.S. odds that also what clients and the middle East and I am sure as we go into these new companies will have also the M. tennis DC same Qs ours.
In the new regions that we started operating so this is one of the things were doing.
We have got into the protein salads during the last.
Six month, when I say protein salads, it means that not only fresh.
Ingredients, but also adding up a you know protein items as well as sandwiches and the other items. This has grown quite a in my opinion.
It has.
Moving nicely and we have proven that.
We can deliver better product than competition.
And we have gained businesses and I think that that would open the door for us to gain more business as we go forward. So these are some of the.
Things that are being evolving here.
And what I would like just to highlight is that this is a trend that push them up there wouldn't be will be a kind of moving towards I mean, it or it will all be about value added products and value added.
Services.
And so on and as we go forward you know quarter to quarter I am sure that you'll be hearing more news.
How about many other.
Initiatives that will add or.
Very you know kind of.
<unk> well disciplined glad to do to change the company from a banana based company into.
It more diversified value added brother scoping.
[noise], that's very clear and that's very clear in the numbers Oh, I guess, what I'm trying to figure out is maybe to ask this more specifically the other fresh produce line historically was dominated by the dominated but largely influenced by the goal pineapple business and carried something like an 11 in a bad year be about 11, and a good year be about.
13% gross margin.
Now you know you've made a nice recovery this quarter, but they were modeling at eight five it got down to six five last year, how much of that as a structural change in the margin structure that segment and how much of that is just to kind of craziness that went on in 2018 like any flavor for what kind of margin. All this business is is that well is that mcdonald's businesses that lower than 10% more.
Virgin typically I'm, just trying to get a handle on how does this change structurally.
Any value added business should not be Oh.
Hopefully less than 10% I mean that should be clear as far as are both by an open last year wasn't very determinant than you in terms of you know they did markets I knew from the beginning that there will be I knew two years 340 years ago that there will be a time when.
Oversupply would take over the market and that happened in 2018 late 17, and 2018 that production went like Crazy in Costa Rica, ER and there was an oversupply all over the world. So we have talked to endure that's kind of.
You know tidal wave, which which of course, we survive, but the than any other and the market.
But I can tell you for for a full for the fact that production and Costa Rica has come down but almost over 20%.
And prices today by gross to settle Fob.
Yeah.
Human sake. It was like $5 a couple of years ago to do a box of sign up and today, it's about $7 and that of course reflects on the market and I you know we as leaders in this we are the only company in the world that produces in three different continents. You know we produce in Costa Rica would produce in Kenya.
And now you know it used to be only a can pineapple operation.
For the last.
Nine months, we have put us from part of that into fresh as well. So we aren't producing now the remote the gold and Kenya for supply to Europe to the middle East and even to Asia and trying to reduce our dependence on the prepared or the can which wouldn't happen.
In improving our margins tremendously in that part of the company they sent back well producing in the Philippines, mainly for the Asian markets. So we are the only company Hayden Blair well really that we have three production.
ER areas.
To supply or markets.
And that's something that gives testament to where our strengths and leverage as far as fighting happens is concerned.
After this.
No we have the thing I find out there, which will stop marketing very soon and this is a patented.
Pineapple that no one else would have and I believe the it's going to make as they did that impact a funnel what business going forward. So.
As far as probably not but I'm very confident and very short that we will refer them to the oh the level that we had before and hopefully better so I hope that I answered your question.
[noise] that was a very helpful answer Mohamad I appreciate the one maybe for eduardo on the or or or mom or your mom into on the on the capital program I'm a little lower this year can you characterize what youth you know what the emphasis has been on capital expenditure this year what kind of.
Hurdle rates, you're looking at and what you did what if possible what you would expect for 2020 as far as capital expenditure I appreciate it.
I wouldn't have my blood on said this on the if I need to I will add to it yeah. So thank you Jonathan So this year there first of all the assets is has been investments are tied to our value added brothers. So.
In Q4, we're going to have our Oh God, though you know unique up and running so that was a big investments that we had this year.
Also in the some with our key fresh cut the units there in the Oklahoma in Japan and also in other expansions that are doing there are some investments that we need related to the Neil vessels that to come in and the important dimension that.
Not only we expect efficiencies there, but we also foreseen the future that the adding to the bottom line, we don't commercial cargo operations as well. So I I think that was Oh, we put a more rigor in our capital investment a review process and 420 20.
We have a significant investment related to four ships that to come up and running and beyond that we would consider probably a rival our years last means that we have been doing with the same emphasizes that we had been duly.
Before a couple of those are related to your previous question.
Oh man or how to make sure. We can you know consolidate further our operations the become more efficient on our cost side.
Also we have some further expansions in our fresh cut in Europe that we have planned for next year include the you know the expansion of our UK.
Our UK operation and also we continue you know focusing on lowering the cost a base of our you know car business, mainly on on Banana you know continue to invest in Panama.
That to bring.
Competitive advantage versus our cost position that we have today.
[noise], that's very helpful. I will Oh I'll leave it that thank you for your time quarter.
Thank you.
Again, if you like to ask a question. Please press star and the number one on your telephone keypad. Your next question comes from line of Mitch Pinheiro from stood Avast. Your line is open.
And wanted to follow up on a couple of John's questions.
You know in pineapples.
Did you say you expect to see like a full recovery to where you were.
Several years ago, I mean, when I look back in 2014.
You were doing 576 million in pineapple revenue.
Roughly now I I'm looking at you know maybe 450, so that's down 30%.
Are you going to recover all that plus the profitability.
I think we are focusing on is really profitability more than volume.
Okay that that would be our focus really is the bottom line and this has being you know kind of that message that we have been conveying to all our people be if that production or says so I am not too much concern about volume as my actually more on onto the bottom.
In light volume, we can ramp up whenever we need to either through a increasing our on production or buying from third party to but what we need to make sure that our margins has it improved and hopefully reach a you know there.
The same level that we used to have a few years back.
Okay, and that's but that's sort of your.
The you know.
Profit over volume.
Is it has been Youre you know newer newer strategy. It. So that's just a part of this too.
Yeah actually <unk>, why we have shifting our airports and focus on where can we make more money, which products can <unk> that I I mean that puts us in a in a better position and that's one way I mentioned about value added products and new categories that we are working on which is.
Moving to be very successful at very beneficial at loss as a company I think this is where our future is is moving towards the value added products and services as well.
As we go along but at the same time I'm not I'm going to cutting our core products, what I'm, saying is that I shouldn't realizing our volume into these are areas and making sure that our messages out of maintained and ER and grow so.
We are working on both levers and I don't want to go into the kind of becoming a commodity.
A producer we are especially the producer.
Our geographical.
Got it gives us that kind of leverage where I like I mentioned a minute ago about our presence in three different continents as producers that I think makes it a huge makes a huge difference between us and everyone else that you know went down shortages in one area.
We have the ability to cover that from another region, which over the years I'm not saying the long term future, but even in the near future wouldn't make a big difference for us.
And that in my opinion is is it is a huge plus a that we will enjoy going forward.
Okay.
And staying in the in the in the fresh cut or the fresh and value added segment.
The fresh cut vegetables.
In the quarter were down slightly but what's the driver of that is that getting rid of lower margin.
Business were.
How would you.
Couple of snow.
Then the vegetable business, you know that though sometimes because of the climatic conditions, you'll get a short on sept items and.
Sometimes you have to cup on other items that the doesn't make sense to us so it's it's nothing or.
Really significant and as a and one of the just mentioned.
While ago that you know when we acquired a bad or Matt backing at the beginning of last year. A we acquired the company that is very a successful in terms of presence in the market and the creativity and innovation and the product lines that they said however that the company was that.
In the governance the systems the procedures policies and Oh. This is something that we have been working on for the last seven.
Months or from all aspects in terms of financial legal edge.
And I think the company is becoming now streamlined and our kind of.
They want their way.
So I believe that we would see more value as we go forward because I believe that the business wouldn't be streamline and a leverage in a way that will add more value to us when I say more at a value. It means that we will use these products across our distributor.
And Suntrust across the United States and be able to increase.
Uh huh volume distribution as well as value.
And does the French and value added segment.
I'm.
I mean is that it is that a segment that should be able to do.
Reach double digit.
Gross margins.
So that's a that's our target the image you know.
I think we're trending in that direction. So you have seen that consistently we add the lizards, you know an increase in our gross profit margin and I think there are there are several components there right. So one piece of that the restablishing to profitability on the pineapple increasing.
The profitability on our fresh cut fruit by improving operations also there or because of the rationalization that with the tomatoes.
Indices use as anything metals last year, we're starting to see that that recovery.
This year as well.
I'm also meals and snacks, it's a very working contribute or you know to our growth. So I think by by having you know pineapples in a very high teens margin and all the others balancing more towards you know the.
Close to 10% I think on the average on the segment, we should be you know, India, India teens range going forward.
I cannot emphasize exactly when because we're still you know revisiting some parts of the operation that require you know some adjustments and that has been our priority, but oh, let's say on the long run we should expect to see you know a bananas in the range of that has always been before.
6% and that'll depend on supply and demand and pricing et cetera, but then the fresh and value added products that shouldn't get to two you know a teens range. So that we should expect to see overall margin you know growing year over year after year.
Okay.
Switching to bananas for second just houses current supply and demand outlook.
Looked like for you through the year end.
It's just the normal trends you know they the second half of the other usually the last three four months of the are usually the low end of the it I mean that demand is much lower than in the first half of the it. So we haven't seen really much difference from previous years, I would say, it's more and more money.
She is that the previous years.
The only difference is that we see euro are doing better than normal at this time of the which is a good sign.
The U.S. North America is more or less the same <unk> Asia is behaving and trending the same as normal trends or normal here. So I don't see any really big surprises at the banana ER sector or from out at the end of the.
Yeah.
And all.
This business you know we're always.
Are sensitive to natural disasters saw Uh huh.
You know unless nothing happens you know this would be a very normal.
Oh, Yeah, Yeah, I think also.
You don't need to just to complement the silicon valley. So.
You know we have been.
Focusing a lot when we call reading the margins on these segment you know a so that's an important focus that wed be doing and also revisiting your portfolio all customers in that sense and making the right.
You know a decisions to two to more of the product where we believe we can get the most all of that investment yeah, I'd like to add to this match that this business. The banana business has been you don't want that won't fall, but a lot I would say 10 15 years and I think that this cannot hold or whatever.
No I mean costs are going up you know.
Every respect you don't be it on the production level, you know on the shipping levels or for you and then a transportation everything.
And I believe that either you know I mean that insistence on keeping the banana prices low as it's going to come to a point, where there is that you know you kill the goes or do you I mean.
Got to go on forever like this I mean, even the ER producers or the our says as as you know produce a mark to.
Ship a we this cannot go on forever I mean are the retailers the buyer has to understand that unless the prices adjusted going forward.
Are there wouldn't be a time when well then that would be issues that in this industry and ER.
I believe it will just by itself as we go forward.
Aside from the disease, you know I mean, I don't want even dimension the disease, but right actual situations. The structure of this business cannot be sustained forever. This cannot sell or whatever and you can see I don't know if you've got a if you read all your follow up on the produce news you at all or produce.
The city you know I keep looking you know and global kind of overview and you would see so many on the produce companies not only in bananas, but in other areas that they have been really going through very financial severe financial difficulties.
ER and it's just because of you know not coping with it with the cost increase and and rationalizing that business. So.
I think as as fresh del Monte I think we are in my opinion here at all not just because we are especially went about them in my opinion without playing into this area we know.
How to take it was the future I believe that we can see the future an ugly away.
I am just one more question.
Balance sheet question.
I saw.
Operating leases.
Up $100 million from year end.
What are you using operating leases differently than before or in the new way can you explain that.
Oh, so so so Mitch I guess are aware does do you know we the new lease accounting that took place yet. This year you had to disclose that you know in the into balance sheet. You know both on the assets and the liabilities. So that's that's just a reflect of new accounting guidance.
Okay, I did but it wasn't required from last year.
No no. It starts it kinda. These so that's why December 18, when you did I have to disclose that there.
Okay didn't I just was looking for the comparison there.
Yep.
Okay.
That's it thank you much.
Thank you bench.
There are no further questions at this time, Mr. Mohammad Abu Dhabi, I turn the call back over to you.
I would like to thank everyone for having the time to put its based on our call today and we look forward to speak to you on our next confident school.
Thank you and have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.