Q4 2017 Earnings Call

Carl.

Today's conference call is being broadcast live over the Internet and also being recorded for playback purposes all.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question press the pound key.

For opening remarks, and introductions I would like to turn today's call over to the assistant Vice President of Investor Relations with fresh del Monte produce Christine Cannella. Please go ahead Ms Cannella.

Thank you Jody good morning, everyone and thank you for joining our fourth quarter and full year 2017 conference call as Jerry 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 <unk>.

Chairman and Chief Executive Officer, Andy Richardson for senior Vice President and Chief Financial Officer I.

I hope that you had a chance to review the press release that was issued earlier. This morning by business wire. You May also visit the company's website at fresh del Monte Dot Com for a copy of today's release as well as to register for future distributions.

This conference call is being webcast live on our website and will be available for replay approximately two hours. After conclusion of this call. Please note that our press release includes reconciliations of any non-GAAP financial measures, we mention today to their corresponding GAAP measures.

I'd like to remind you that much of the information we will be speaking to today, including the answers we get a response to your questions may include forward looking statements within the provisions of the Federal Securities Safe Harbor long.

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 S E T.

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

Thank you Christy and good morning, everyone.

I'm glad 2017 is behind us.

Throughout the year, we faced particularly with the challenges in our operating environment.

That reduced our ability to deliver optimal earnings.

We contended with one of the most depressed global.

Banana market.

In my 45 years in the industry.

There were a number of major weather events, including hurricane severe rain storms of the harsh winter weather.

Whether in the United States, that's it but just our ability to conduct business.

Good food grew month on transportation costs.

However, 2017.

Without accomplishments.

The year was highlighted but it gives us some growth.

<unk>.

And expanded demand in our avocado product line, which grew by 37%.

We introduced the del Monte branded birds, hydroponics vegetables, as well as several innovative.

You added fresh and ready to eat products.

We invested in our distribution capabilities in North America, and then our sourcing locations in Central America and immediately.

We activated new sales channels and seize opportunities by forging new customer relationships.

In late June we announced a settlement agreement and the number of joint ventures with del Monte Pacific.

We look for this joint venture to come on stream in 2018.

We have said from the beginning that the strength of our company is our infrastructure and our ability to leverage that platform to transfer transform our company.

I am pleased with the progress we made in 2017 to further leverage our infrastructure advance.

Our diversification strategy.

Throughout the year, we focused on opportunities that would extend our marketing.

Capabilities and global reach.

But I think the rapidly evolving consumer demand for healthier products.

Earlier this month, we entered into definitive agreement to acquire non packing.

A leading grower processor and supplier of fresh and value added vegetable products in North America.

This acquisition would it be an excellent opportunity for us to enhance our leadership position in the fresh and value added through and vegetable industry and drive future profitability over the long term.

As always we are focused on and determined to reach our goals.

I would now like to turn the call to Richard Richard.

Okay.

Thank you Mohammad and good morning.

For the year 2017, excluding adjustments on a comparable basis, we reported earnings per diluted share of $2 44.

Compared with earnings per diluted share of $4 74 in 2016.

Net sales were $4 1 billion compared with $4 billion in the prior year.

Gross profit was $332 million compared with $461 million in 2016.

Operating income for the year was $155 million compared with $266 million in the prior year.

And net income was $123 million compared with $246 million in 2016.

For the fourth quarter of 2017, excluding adjustments on a comparable basis, we reported a loss of <unk>.

Compared with earnings per diluted share of <unk> 26 cents in 2016.

Net sales were $954 million compared with $955 million in the prior year.

And gross profit was $51 million.

Compared with gross profit of $57 million in the fourth quarter of last year.

Operating income for the quarter was in line with the prior year and net loss was $4 million compared with net income of $14 million in 2016.

Now I will turn to our big business segments, and I will only give fourth quarter statistics as reported.

Sure.

In our banana business segment net sales were $421 million.

Compared with $431 million in the fourth quarter of last year. The decrease was the result of lower sales volume in the middle East and Asia, partially offset by higher selling prices in all of our regions.

Overall volume was 6% lower compared with the prior year.

Worldwide pricing was 4% higher than the prior year at $13 51 per box.

Total worldwide Banana unit costs increased 2% due to higher distribution costs.

And gross profit was $15 million compared with $5 million in the fourth quarter of 2016.

In our other fresh produce business segment for the fourth quarter net sales were $455 million compared with $441 million in the prior year and gross profit was $31 million compared with $38 million in the fourth quarter of 2016.

In our gold Pineapple category net sales increased 3% to $128 million compared to $124 million in the prior year the.

The increase was primarily due to higher sales volume in the middle East and Asia.

Overall volume increased 7% driven by higher production unit.

Unit pricing was 4% lower and unit cost was 2% higher.

In our fresh cut category net sales increased $8 million or 6% to $139 million during the quarter. The increase was driven by higher sales volume and higher selling prices in North America, Europe and Asia.

Volume was 3% higher unit pricing was increased 3% and unit cost was 9% higher due to unfavorable weather conditions that drove food costs higher.

In our avocado category, net sales increased $8 million or 13% to $68 million.

Compared to the prior year, the increase was driven by higher sales volume. The result of increased consumer demand.

Volume increased 20%.

<unk> was 6% lower and unit cost was 3% lower.

In our non tropical category net sales decreased $4 million to $41 million.

Compared with $45 million in the fourth quarter of 2016.

Volume decreased 13%.

<unk> was 6% higher and unit costs were 5% higher.

In our prepared foods segment, net sales were $78 million compared with $82 million in the prior year.

Gross profit was $5 million compared with $14 million in the prior year.

The decrease in gross profit was primarily due to lower selling prices in our industrial pineapple product lines.

As for costs for the fourth quarter banana fruit cost, which includes our own production and procurement from growers increased 1% worldwide and represented 30% of our total cost of sales.

Carton cost increased 11% and represented 4% of our total cost of sales.

Bunker fuel cost per ton increased 25%.

And represented 2% of our total cost and total ocean freight cost during the quarter, which includes bunker fuel third party charters and fleet operating cost was 7% lower.

For the quarter Ocean freight represented 9% of our total cost of sales.

Yes.

For foreign currency, the foreign currency impact at the sales level for the fourth quarter was favorable by $6 million.

And at the gross profit level. The impact was also favorable by $6 million.

Other expense net for the quarter was an expense of $1 million compared with other expense net of $5 million in the fourth quarter of 2016.

The decrease attributable to fewer foreign exchange losses this year.

As far as our stock repurchase plan during the fourth quarter, we repurchased approximately 987000 shares for approximately $45 million $750000.

At the end of the quarter, our total debt was $350 million $358 million.

For income taxes income tax was a $6 million of expense during the quarter compared with a $14 million benefit in the prior year.

The increase was primarily due to discrete tax benefits in 2016.

We also recorded a onetime noncash increase in income tax expense of $2 million. This quarter as a result of the new U S tax reform legislation.

As it relates to capital spending we spent $139 million in 2017, we expect to spend approximately $230 million in 2018.

Before I close I would like to give some financial information on manned packing as Mohammad mentioned, we recently announced we have signed a definitive agreement to acquire Mann packing.

We expect the transaction to close in a few weeks Mann packing had net sales of approximately $535 million in 2017 and.

And we will pay approximately $369 million for the company.

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

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Jonathan Feeney.

Tumor edge your line is open.

Good morning, Thanks very much.

Hey, Jonathan.

Muhammad your one of your remarks, saying.

Half year 2017 was certainly seem that way.

I know you don't give guidance, but from a just thinking of the banana business, which is the most volatile piece of your business do you think for your planning purposes, whether youre planting youre buying assets whatever it is you have to have some idea in your head what the ranges of profitability of that business going forward would you say that too.

2017, given all the investments in logistics efficiency, you've made it something like a bottom.

What were.

Some of the bottom for the banana business.

Average profits, you'll be a lot higher or where does that sit.

Yes, I think Youre right I think Thats, one 2017 was the bottom in my opinion.

As we go forward.

Everything.

<unk> doesn't have a catastrophe it all somewhere but given that everything is as usual I think that.

We should be heading towards better times.

Now how about the you've made it initiative pretty clearly to diversify this business could you characterize the amount in volatility of profitability and Manpack Union.

It strikes me that I guess on a pro forma basis.

Fresh cut will now be about a quarter of your global business is that profitability any comments you can make about how profitable that business is and how volatile businesses relative to your banana business. Another tropical fruits would be appreciated.

Okay.

First of all we are getting into vegetable business that we haven't been before in a big way and we do have a burst of fresh cut vegetables.

In our Dcs, However, we never had that full fledged.

Kind of.

Operation and vegetables <unk> operation.

Value added about 50%.

50% are kind of commodity which is their home.

Let's say.

Kind of vegetables, like whole foods and.

Fresh cut fruits more or less as Sam however, a bit.

Ratio is much better than our ratios are about 50% of their business is the value added.

We have that growing further.

Growing at a very.

Al.

Okay aggressive way the value added products that they are putting which is really fantastic products that they out of contributing into the market.

So I'm very I'm very we are very very good.

Kind of excited and pleased about the acquisition because I believe it's going to gives us completely new from <unk>.

Leveraging our infrastructure take into consideration that man is mainly.

The West Coast.

And then also <unk>, but however, they don't.

Have too much at almost level activity in the southeast and southwest of the U S. So that's why we give us a lot of new opportunities.

New businesses that wasn't existing as well as leveraging our total infrastructure across the U S.

Sure.

April marketing and distribution of products.

I'm very pleased about this really going forward.

Thanks. So just one last question is for Richard I think.

I would love.

I'm a little surprised by the tax movements. This year can you give us how does it.

Four years going forward, how does tax reform affect fresh del Monte's tax rate, what should we model for out years.

So Jonathan as you know, even though obviously our rate moves but.

We've always modeled 15% effective tax rate with the new tax law, we were modeling 12%.

However, now that we acquire man, which is 100% U S.

It creeps back up to about 14%.

At least that's how we are.

Sure.

Thank you very much.

You too.

Your next question comes from the line of Mitch scenario of a stellar asset management. Your line is open.

Yes, Hi, hi, everybody.

Thanks for taking the questions two things on.

On the man acquisition.

Yeah.

Did I hear you say you said the ratios were better I mean is that is that was that in sales or did you mean was that also profitability the profit margins compare.

To your existing business.

When I said ratios I meant.

Between value added products and the whole product when I say whole product it means like cabbage electric cauliflower like all kinds of vegetables.

And the bulk full.

Value added everything else that they're doing so it's 50 50 between this digital businesses. However.

Profitability and margins on the value add it is but our margins on our value added products.

And how about as a whole so including the the more commodity piece of the business are you or are the margins similar to your current margins.

Commodity is usually depending on the availability.

And it's mainly California product so.

One year.

They have.

We have no shortage of the prices spike.

For the year, they have good weather, which.

Got it can create.

But all in all I think it's not as volatile as banana is what it is.

All of our products, so I think the vegetable.

Segment has a long life.

Yes.

I wouldn't say controllable controllable, but more kind of steady business.

Yes, I mean, I definitely see the advantages of diversification, but having.

Having followed you know sort of the vegetable business in California for some time.

One thing I know is that there is nothing normal theres never it hasnt been a normal year.

In all my years of following that industry, it's either sourcing issues.

Raines droughts.

El Nino La Nina sure did the same thing my face globally, yes.

Okay.

The vegetables is more predictable and defense that they have part of the business and so complex.

And I'll, let Bob is like spot markets.

Plus.

They are sourcing.

<unk> from Mexico as well.

So they are hedging at all between California, and Mexico now in the future going forward also.

Leverage our presence in Guatemala, which is a very important.

The producer as well.

The U S and that would add also some value to us so really our focus going forward Mitch is the value added products. This is our focus.

The bulk will stay.

But I think it will become a smaller portion of the total business as the value added products increase as our business increase so the total let's say bye.

Will it be bigger but they.

The commodity or the whole vegetable segment would be smaller.

As we move forward.

Okay, and then and then.

And one more thing I know the deal hasn't closed but as you.

What will be the next two or three sort of tangible steps that youre going to take once the acquisition closes I mean I understand your focus on the value add but what should I expect to see.

Like what kind of actions are we going to.

Immediately integrate distribution I mean, how do you how do you see that planning out over the next 12 to 18 months.

The most important thing is that they have.

Excellent modern is obsessed with all want to disrupt that model number one number two we want to add on that by introducing del Monte label onset.

Items of most items that they ought not to customers that are not handling that at this time, so that would be an additional let's say business.

The second thing we are going to.

Put them into areas that they haven't been operating like the northeast of course, they have operation, but through a third party that would change in the future.

We have a Delaware.

Facility that is under development right now.

We'll have also we have facilities.

Yes.

<unk>.

And our own.

Areas that we are going to also include the products I mean processing the product that is both I think right now so we are going to leverage our infrastructure.

Several parts of the country.

And expand the distribution and sales.

Okay. Thank you and then the last this last question on bananas, how do you see the banana market here in the near term over the next six months or so.

From a supply and demand and pricing point of view.

As we speak today.

<unk> is exceeding supply because there is a supply shortage shortage in lawsuits.

Late last year into the new year, and then we had.

<unk>.

Events, we had.

And both at.

Sourcing and at.

This donation.

So that has created a lot of <unk>.

<unk> of the supply side with prices improve.

The market's improved but I think as I see the future in the near future.

The long term, but the near future doesn't look too bad.

As we speak.

Our case, what we are trying to do within the hour.

Our capability is to streamline the business and invest that way then.

That it used to be and diverse so hopefully we can achieve that which will give us more kind of steadiness and.

And the banana segment.

Okay. Thank you Mohammed Thank you everybody.

Again, if you'd like to ask a question press Star then the number one on your telephone keypad. Your next question comes from the line of Jonathan Feeney of consumer edge. Your line is open.

Thanks, very much for taking the follow up but just one question I had is on your friends at Conagra today divested a del Monte.

Can vegetables packed vegetables business I think that one that would have been within the scope of maybe your trade JV trademarks in North America.

Can you comment on your observations about that business why it did or didn't fit.

With fresh del Monte and if transactions there are other delmonte properties globally.

Come to market or those things that you have.

Proven and interested in the past Gordon.

In growing that business does that continue to be the case. Thank you.

I don't think I would be interested in growing anything with package.

Our food.

And.

In our opinion that it's not we're looking into more fresh healthy items.

So unless you do you have any comment.

Sure.

I would agree that was primarily a can that business and that's not our.

My target.

But you do have some care businesses in Europe , Middle East and Africa, we bought that business in 2000 for Jonathan.

Oh, no, but listen autonomy.

But you'll see as.

We bought it for one reason because that gave us the leverage to use the food with the fresh which has given us tremendous leverage.

Bye.

Could you at all.

And now our our joint venture with <unk>.

Our agreement with our.

Uh huh.

The Pacific.

That has given US also some leverage at some.

Way to use our <unk>.

Flesh with love.

Some fish.

Even in North America, So I don't think that.

Looking at the other units.

In different parts of the World del Monte.

Canned or is.

It is not really our.

Kind of.

<unk> option of wishes.

Thank you very much.

Q.

There are no further questions in queue at this time I'll turn the call back over to Mr. Mohammad Abu Gabelli.

Thank you very much everybody and.

Hopefully, we wouldn't give you better news.

Our next call have a good day. Thank you.

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