Good day everyone. Welcome to Fresh Del Monte Produce's fourth quarter and full year 2019 conference call. Today's conference call is being broadcast live over the internet and is being recorded for playback purposes. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question- and- answer session. To ask a question during the session, you'll need to press star one on your telephone. If you require any further assistance, please press star zero. For opening remarks and introductions, I would now like to turn today's call over to the Vice President of Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Miss Cannella.
Thank you, Julian. Good morning, everyone, and thank you for joining our fourth quarter and full year 2019 conference call. As Julian mentioned, I'm Christine Cannella, Vice President 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 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 distributions. This conference call is being webcast live on our website and will be available for replay after 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 would like to remind you that much 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. With that, I am pleased to turn today's call over to Mohammad.
Thank you, Christine, and good morning, everyone. Our performance in 2019 highlights the decisions we made in 2018 to realign certain production units and the progress we have made towards shifting our strategy to becoming a more value-added and more diversified company. We advanced on many fronts in 2019, which I will highlight in a minute. I want to first touch on our fourth quarter performance. The fourth quarter is traditionally a tough quarter for the industry. Our quarterly results were impacted by our Mann Packing Units Voluntary recall in November. To a lesser impact, competitive pressures on avocados and pineapples affected selling prices in the quarter. Collectively, these fourth quarter factors constrained our full-year performance in 2019. I would like to highlight a few of our accomplishments in 2019.
We gained strength in our fresh and value-added business, driven by demand from both our existing and new customers, particularly for our fresh cut fruit product line, which continues to expand globally. We proceeded with our rollout of the new healthy, innovative products by introducing our Better Break vegetable-based, on-the-go convenience snack line. We opened our new avocado production facility in Mexico, which will allow us to increase our pack-out capacity, further strengthening our competitive position. In 2019, we augmented our strategic direction by expanding global customer supply partnerships. I'm encouraged about how these key relationships are trending as they play important roles in the value-added product diversification strategy for our distribution channels. We reduced our debt in 2019. We brought back our quarterly dividend, and we repurchased shares.
We also initiated capital investments in technology, automation, and logistics as part of our strategic goal to transform Fresh Del Monte to be a technology-driven and efficient producer. Looking forward to 2020, I am optimistic about the future of Fresh Del Monte. We are a different company today than we were a year ago. We have embarked on a five-year plan to transform Fresh Del Monte. The key elements of our transformation involve protect and grow the core business, drive innovation and expansion growth on value-added categories, evolve our culture to increase employee engagement and productivity, become a technology-driven company to drive efficiencies, become a consumer-driven company, and sustainability, which means waste less for a better world tomorrow.
While this transformation is a multiyear strategic plan, and there is still a lot of work to do, I continue to be inspired by the commitment and resilience of our organization as we transform our company. I look forward to updating you regarding the actions we take and our path forward in our upcoming earnings call. Before I turn the call over to Eduardo, I would like to mention that we are carefully monitoring the coronavirus outbreak and the supply and demand dynamics in the global markets we serve. Due to service cancellations and containers being unable to clear at certain Chinese ports, industry supply is being shifted to traditional markets such as Japan and Korea, and may have an adverse impact on our operations. Like everyone else, we are closely following developments of the rapidly changing situation and our ability to supply our customers in the region.
At this point, I would like Edwardo to take over.
Okay. Thank you, Mohammad, good morning. As Mohammad mentioned, our Mann Packing unit announced a voluntary recall of products in our fresh and value-added business segment in November 2019. As a result, we reported adjustments of $11 million related to inventory write-offs, sales claims, and other costs associated with the product recall. We expect to have some continuing impact from the recall in 2020. I'll now get into the results for the fourth quarter and full year 2019. In regards to the product lines, I will update you on fourth quarter numbers. For the full year 2019, adjusted earnings per diluted share were $1.12, compared with adjusted earnings per diluted share of $0.40 in 2018. Net sales were in line with the prior year at $4.5 billion, with unfavorable exchange rates negatively impacting net sales by $43 million.
Adjusted gross profit increased to $312 million compared with $280 million in 2018. Adjusted operating income for the year was $113 million, compared with $82 million in the prior year. Adjusted net income increased to $55 million from $20 million in 2018. For the full year 2019, net sales in our Fresh and Value-Added Business Segment increased by $50 million- $3 billion compared to the prior year, primarily as a result of higher net sales in our fresh cut avocado and vegetable product lines. Our gross profit increased $5 million- $195 million, and gross profit was negatively impacted by the Mann Packing's voluntary product recall. For the full year 2019, net sales in our Banana Business Segment decreased $47 million due to lower net sales in North America, Asia, and Europe. While gross profit increased $13 million as a result of higher selling prices in Europe and Asia.
For the fourth quarter of 2019, adjusted loss per diluted share was in line with the fourth quarter of 2018 at $0.45. Net sales were in line with the prior year period at $1 billion, with unfavorable exchange rates negatively impacting net sales by $4 million. Adjusted gross profit was $47 million, compared with adjusted gross profit of $42 million in the fourth quarter of 2018. Adjusted operating loss for the quarter was $6 million, compared with an adjusted operating loss of $8 million in the prior year. Adjusted net loss for the quarter was $21 million, compared with an adjusted net loss of $22 million in the fourth quarter of 2018. In our fresh and value-added business segment for the fourth quarter of 2019, net sales were $597 million compared with $618 million in the prior year period.
Gross profit decreased to $21 million, compared with $45 million in the fourth quarter of 2018. The decrease in net sales and gross profit was primarily the result of Mann Packing's voluntary product recall. In our pineapple category, net sales were $115 million compared to $116 million in the prior year period, primarily due to lower sales volume and selling prices in Europe and lower selling prices in Asia. Overall volume was 2% lower, unit price was 2% higher, and unit cost was 6% higher than the prior year period. In our fresh cut fruit category, net sales were $116 million compared with $113 million in the prior year period, primarily due to increased demand in North America, Europe, and Asia. Overall volume was 2% higher, unit pricing was in line with the prior year, and unit cost was 1% higher than the fourth quarter of 2018.
In our fresh cut vegetable category, net sales were $96 million compared with $120 million in the fourth quarter of 2018. The decrease was primarily due to lower sales volume as a result of Mann Packing's voluntary product recall. Volume was 21% lower. Unit pricing was 1% higher, and unit cost was 19% higher than the prior year period. In our avocado category, net sales increased to $65 million compared with $65 million in the fourth quarter of 2018, supported by higher sales volume as a result of increased customer demand. Volume increased 8%, pricing was 2% lower, and unit cost was 8% higher than the prior year period. With the opening of our new packing facility and changes in how we procure avocados, we believe we will see reduced costs and improvements in margins in this product line.
In our vegetables category, net sales decreased to $47 million compared with the $49 million in the fourth quarter of 2018, primarily due to lower sales volume and selling prices as a result of Mann Packing's voluntary product recall. Volume decreased 4%, unit pricing decreased 2%, and unit cost was 1% higher. In our non-tropical category, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry, and kiwi product lines, net sales increased to $33 million compared with $29 million in the fourth quarter of 2018. Volume increased 1%, unit price increased 11%, and unit cost was 2% higher. In our prepared food category, which includes our traditional canned products and meals and snacks product lines, net sales for the fourth quarter decreased 1% compared with the fourth quarter of 2018.
The decrease was primarily due to lower sales in our meals and snacks product line, partially offset by higher sales in our canned pineapple product line. In our banana business segment, net sales were $399 million compared with $395 million in the fourth quarter of 2018, primarily due to higher sales volume in the Middle East and higher selling prices in Europe, partially offset by lower sales volume in North America and Asia. Overall volume was 1% lower than last year's fourth quarter. Worldwide pricing increased 2% over the prior year period. Total worldwide banana unit cost was 2% lower, and gross profit increased to $13 million compared with a loss of $2 million in the fourth quarter of 2018, reflecting a 3.7 percentage point increase in gross profit margin. Now moving to selected financial data.
On selling general administrative expenses during the quarter, they represented $49 million compared with $47 million in the fourth quarter of 2018. The foreign currency impact at the gross profit level for the full year was unfavorable by $15 million, the foreign currency impact at the gross profit level for the fourth quarter was unfavorable by $5 million. Interest expense net for the fourth quarter was $5 million compared with $7 million in the fourth quarter of 2018 due to lower debt levels as well as lower interest rates. Income tax expense was $1 million during the quarter, compared with income tax expense of $3 million in the prior year. Regarding cash from operating activities at the end of the quarter, our net cash provided was $169 million, compared with net cash provided by operating activities of $247 million in the same period of 2018.
The decrease was primarily due to lower accounts payable and accrued expenses, partially offset by higher net income. Our total debt decreased from $662 million at the end of 2018 to $587 million at the end of 2019. As it relates to capital spending, we invested $122 million in 2019, compared with $151 million in the same period in 2018. As announced this morning in our financial results press release, our board of directors declared a cash dividend of $0.10 per share payable on March 27, 2020 to shareholders of record on March 4, 2020. Just a correction. In our avocado category, net sales increased to $69 million compared with $65 million in the fourth quarter of 2018. This concludes our financial review. We can now turn the call over to Q&A.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jonathan Feeney from Consumer Edge. Your line is open.
Good morning, and thanks very much. A couple questions I had, please. First, it seems that in some ways this quarter, you look at fresh cut and value-added products, every single major product segment had unit cost outperform pricing. I know it's a seasonal business, and you grow fruit, you contract for fruit, you got to move it at the price that it clears. It just seems awfully coincidental that you saw margin apparent and gross margin pressure in every single major segment. I think there was one in there, non-tropical, where you didn't. Was there some spillover effect from the recall into other segments of product where you had to give back on pricing because people are unhappy with the recall? That'd be my first question.
Thank you for the question, Jonathan. No, those were completely separate effects. When you look to our pineapple as well as our fresh cut fruits, that was impacted by the specific higher cost that we faced from our production in Costa Rica. While when you look to fresh cut vegetables and meals and snacks, that's completely related to the voluntary recall that we announced. No impact related to customers as it relates to your question.
I guess following up on that, was there any strategy involved in maintaining those volumes? Like, intra-quarter, was it an idea to maintain service levels at certain retailers to take a hit on the gross margin a little bit, or was it just purely that costs came in in your own production ahead of what you expected?
Jonathan, how are you doing? The cost that you saw there was derived from actually increase of cost. It's because of the volumes in Costa Rica, for instance, for pineapple, did not meet the required demand, and we had to incur additional costs to satisfy our customers.
Got you.
Number two-
Okay. That's perfectly clear.
That's the reason for that. Our cost in pineapple has increased at the end of the year, which really reflected on the cost of the fresh cut on the other end, and that was the reason. We're working to correct that.
Okay. My second question is on bananas. I know counter seasonal. Does this quarter tell us anything about an improving environment going into high season here, or is the fourth quarter really just not all that meaningful given how it's a down quarter for everybody?
No. As we go forward, the banana prices has improved over the last year. In Europe, in particular, as well as in the U.S., the prices have improved in a contract basis. That is not going to be translated immediately. As we go into the year, I think that within the next couple of months, we will see the improvements as well as the increase in the bunker clauses. We have to add the cost of the new fuel that we are using our ships, which will reflect also on higher pricing as far as bananas is concerned going forward. These will be reflected up as we go down through the year. However, I would like to emphasize that our business is shifting away. I'm not saying shifting away completely, but shifting away a lot from just depending on the core products.
We have a lot of initiatives right now as we speak.
Of course.
That will take business in a completely different direction than what we see today.
Sure.
We have taken some steps and initiatives. Some we can talk about, some we cannot talk. There are so many initiatives in process that will translate in a different business model as we go forward.
Yeah, that much is clear, for sure. Just wanted to understand what was going on in that particularly. Just following up on that insight, Mohammad, is it fair to say then, we've talked about you migrating the business, we've talked about different initiatives you've had, and you've had a lot of success doing that. Will you be actively trying to reduce your banana volume going forward and maybe just do business with the most profitable customers or customers where you feel like you have to stay in the banana business, but as the emphasis moves away, does that look like you actively reducing your banana business globally, aiming to do that?
No, that's not the case. That banana business volume-
Okay
will stay as this is our core item. For instance, we just introduced a few weeks ago, the Pinkglow Pineapple. This is our patented new pineapple, which is coming in a very small volume into New York market, actually, for certain customers.
Lucky me.
I'm sorry?
I said lucky me. You'll have to tell me where.
Well-
We can follow up on that later.
It's only offered, I think, in cocktails and in very certain restaurants and bars.
Just to give you an idea, this is an item that we will ramp up, not now, but we'll have small volumes during 2020. In 2021, 2022, then volume starts climbing up. Just to give you an idea, I mean, if we're talking about 20% on margins on the gold, we are talking here about, I don't want to say the number, but several folds.
Significantly higher.
Several folds more. We have a lot of stars that will come out in the next few months, in the next couple of years, that will completely change the business. We are starting our F&B shop in Coral Gables in Miami by the beginning of April, and that is completely different approach to the business. We have already 20 shops in many regions which are successful.
Starting our first shop now in the U.S., in Coral Gables, by end of next month. We have very big hopes. I mean, not hopes, but we are confident that this will become a completely different approach to the business as far as Fresh Del Monte is concerned.
That's great, and it's very helpful. Thank you so much, Mohammad. I'll immediately begin searching high-end cocktail bars in New York for these products.
We will send you a couple.
Thank you. Thank you so much. Appreciate your time.
My pleasure.
Your next question comes from Mitch Pinheiro from Sturdivant & Co. Your line is open.
Good morning.
Morning, Mitch.
Couple questions here. First on the recall. Could you just go over the numbers for me, exactly what it cost you in the various buckets on the revenue side and what it cost you on the buckets on the cost side?
Thank you for the question, Mitch. When you look overall, we had lower sales related to the recall. Aside from that, we had claims that impacted that. The impact of lower sales, when you think from a gross profit margin there, just lower sales as compared to the previous year, we were talking about $27 million. That was significant. We need to take into consideration that in Q4 2018, as you may remember, there was a recall on other products that we were not impacted on lettuce. We took opportunity of that, and we saw higher sales of our products in Q4 2018. We didn't see that in 2019, and also we saw lower sales impacting there.
You're estimating that you've had lost sales of about $27 million?
Yes, exactly.
Okay.
And so-
On gross profit?
In the gross profit level, as we compare to last year, we had several specific impacts. We had about $7 million related to lower sales, but also we had an additional $10.4 million that you see as one-time events on claims and other charges that we recognize at the gross profit level. Below that, we had a half a million dollars impairment. Those are reflected in the footnotes of the press release when we compare our GAAP results versus our adjusted results.
The one thing, I'm a little mystified that a hit to this extent wouldn't have been called out in a press release.
Maybe-
I know you wouldn't know the exact extent, but just to say that there was a voluntary recall of some Mann products is doesn't sound like $27 million. That sounds like $2 million.
Yeah. No, if you look to the footnotes there, you're going to see that in the footnotes, when we do the ongoing versus adjusted results, we're talking about the one-time events that we had of $11 million. We clarify also when we talk about the specific segments about the significant impact that we had in the fourth quarter on the specific fresh cut vegetables, a significant impact on volume, as well as higher cost. The higher cost is mainly because we had lower volumes. Also, the same you are able to see in the vegetables piece as well. Those are reflected there.
Mitch, let me just add to this, you know that we are insured. We haven't yet received our claim from the insurance.
Right.
That loss that you see, and we have announced, most of it will be recovered.
So-
Well, there's two points. You're insured, also how does that affect customer relationships? When I've seen recalls in the past. There's grocery stores without product that are losing gross margin. The buyers in these categories are never particularly happy when their gross margins are getting hit and their bonuses are in jeopardy. Sometimes there's an issue with the relationship between the buyer and you guys that could last a year or more. How's that stand?
No, it's not as bad as you think. Definitely, we have worked with our customers on a very open, transparent way, and some customers had to stop taking the product until all the issues were rectified in the plant. Some of them came back and already restarted again receiving the products. Some are still in the pipeline. I don't believe that this has been a major hit in that respect. To add to this, the whole problem is with this facility, that when we acquired the company, this facility was in existence and had a lot of issues regarding sanitary and hygiene. In the meantime, we were constructing the brand new state of the art facility, which is called Gonzales, in Gonzales City, about 30 miles away from Salinas. We are shifting, we are moving that in the next few months as we speak.
We are shifting all our production now to our new facility, which will completely change the business in a much different way in terms of quality, in terms of delivery, in terms of pricing, cost, you name it. We are very confident about the future for Mann and the vegetable business, in particular, going forward into 2020. This was a one-time event. This will be recovered, most of it, by the insurance. Our relationship with the customers is solid, and we have addressed it in a very efficient and professional way. I'm not really worried about going forward in the future. It's all under control.
Just how about the point where an event such as this is a meaningful event. I'm surprised that you wouldn't have put out a press release indicating to investors.
Oh.
That this is-
Yeah.
bigger event than just a couple million dollar recall. This was a $27 million hit. I didn't do the gross margin hit, but it's a big number, and I'm surprised you would leave it till February 19th to give us the numbers. Can you talk about that a little bit?
Let me correct one comment there. On November 3rd, 2019, we came out with a press release and we announced the recall. We came and announced all the products that were impacted by that, and I think perhaps because the recall was related to Mann Packing, perhaps that may be overseen by some investors and analysts, but we came out proactively, and that's the important piece. This was a voluntary recall that we did, and we communicated all of our customers, and we communicated the media about that impact.
Well, I would disagree. I think that what I've seen in the news, on November 4th, a Dow Jones story picked it up. It said that it was a voluntary recall on quote unquote, some products. Some sounds like a little bit, not $27 million. Number two, if you know that it's going out via Mann Packing's website and their communication network, but you guys are a public company, I think that it ought to have been at least brought to an investor awareness, not just to the grocery store customers. I'm just saying that I wish I would've seen this and had known that it was more than just a couple million dollar hit. That's that. Second question is on bananas. What was your carton growth in the fourth quarter? Was that 1%?
What do you mean?
Volume, however.
Sorry, I did not understand your question.
What was the volume in the quarter?
In bananas?
Yeah.
Yeah. In bananas, our overall volume was 1% lower compared to the last year's fourth quarter.
Okay.
As you can see, our Increased prices and our gross profit increased by $11 million as compared to last year.
It was a good gross margin.
I'm sorry?
It's a good gross margin. Pricing in Europe was really strong, and it looks like it remains elevated. Did that have the impact on volume or because of pricing, or you didn't have enough supply there? Or what would cause the volume decline in the quarter? A modest decline.
Again, this year we focused a lot on value versus volume in that sense. We have some impacts on volume in Asia as compared to what we had before, and a little bit in North America. The prices that we had more than offset them, because also the actions that we took in terms of reducing our cost, that helped us expand the margin and had that almost four points differential that I mentioned about.
Okay.
Just one thing to clarify. At the time that we announced the recall, we didn't have the idea of the extent of that, because we had to wait until the clearance from the FDA and then understand all that impact. We came to that more closely during early 2020. That's why we decided to communicate that at this time.
Okay. Well, I would think that it would have been appropriate to communicate it a lot earlier than today. Especially given it's a meaningful number. That's okay. I understand where you're coming from. The last question I had was with regard to, Mohammad, I guess your coronavirus comments.
Yes.
Are you saying that they're not accepting bananas in certain Asian ports and therefore that supply has got to get diverted, and therefore there'll be some oversupply in other markets that would cause maybe some pricing pressure? Is that one takeaway?
Yeah. Actually, let's make it very clear. The ports in China, most of the ports in China have stopped operations because of the coronavirus. The goods were stacked up in the ports. I can tell you, for instance, when the coronavirus was announced and the ports stopped. It just happened during the Chinese New Year, which was a long holiday. It really made the problem more compounded that there was a holiday, and then the coronavirus immediately hit in. They extended the holidays, and the ports were not working. The trucking almost was coming to a halt. What happened is that, for instance, for example, the Chilean cherry season, they had like 1,500 containers sitting at the ports in China, and they couldn't clear them.
Yes.
Some of it's still sitting until today. Fortunately, as company ourselves, we are not so much involved in China in this respect. Our main business is in Hong Kong, and we sell to China on a CNF basis. We don't have presence in China itself.
We are not hit in China as such, but what we are worried about is that the spillover, if goods cannot go into the Chinese market, that they might be diverted to the nearby markets, be it in Japan, Korea, or even in MENA. We are watching this situation carefully. Hopefully, the Chinese market will open up soon. I mean, let me emphasize here that the Chinese market is not closed 100%, but definitely there are difficulties in getting the fruit and moving the fruit inside or the products inside China. I believe that this problem with the coronavirus, and I've been saying it, I don't believe that it's going to be away before April. Usually these viruses, they don't subside until the weather starts warming up, and then we will see the situation getting improved.
Okay, that's very helpful. For the first quarter here, in which areas might we see your operations affected? In the non-tropical, what other product lines might you be affected in Q1?
The banana, in particular in Europe, is a very strong market. The U.S. is doing normal. Asia is the one that has really been impacted because of the coronavirus, and as well MENA, because the ripple effect of the Chinese thing. So far the two markets that have been impacted is really Asia, which is Japan and Korea, as well as the MENA market themselves. As far as bananas is concerned. Pineapple is very strong market in Europe, in the States, and in other parts of the world. This is the situation as we see it.
Mainly it'd be in your non-tropical business, where you might see where you're moving things from either, as you said, cherries or other things into the Asia markets?
No, as a matter of fact, with our deciduous going into Japan and Korea are doing quite well. Our cherries that went to China was earlier than the coronavirus, thank God.
Okay.
Before the coronavirus. We don't usually sell too much grapes. Our major markets are Japan and Korea. These markets on deciduous are doing very well.
Okay. All right, that's all for me.
Mitch, just one thing to comment regarding Q1. As you may remember, last year we had a one-time event that was a gain on a litigation that we had, that we do not-
Right.
expect that to happen this year. At the same time, we're working very diligently, as Mohammad mentioned, about the insurance claims that we have. We expect that to have a positive effect in Q1, not to the full extent, because some of the business interruption and the impacts related to loss of sales, that usually takes longer in terms of all the analysis that insurance company takes place. We do expect to see a positive effect from that in Q1.
Okay. Thank you.
Your next question comes from Richard Shuster from Boston Partners. Your line is open.
Hey, guys. Just a little more clarification on the Mann incident. What was the EBITDA impact in the fourth quarter? You said that it was a one-time event, but I missed the beginning of the call. Will there be any impact in 2020 from the recall? Thanks a lot, guys.
Thank you for the question, Richard. In the non-GAAP, we explain on the operating loss operating income standpoint, we recognized about 10.9, almost $11 million there. That is the key thing related to the one-timer on the recall. Also we had on sales an additional 10 to 11, I would say, because the $27 million that I mentioned was mainly on sales. When you bring that to the gross profit, we're talking about $21 million, $22 million. In 2020, we're taking several actions, as Mohammad mentioned, about shifting our operations into our new facility. There is also a curve of recovery and that on sales to our customers.
We expect to see some improvement on sales that will take place in the first half of the year, but that's going to be more consolidated in the second half of 2020.
Just as a follow-up, how much do you think the insurance proceeds will be from the recovery?
I would say that we expect to be a significant amount. We don't share our insurance policies in that sense, but we expect that to be very representative related to the total impact that we saw.
Got it. Thank you very much, guys.
Thank you.
Thank you, Richard.
Unfortunately, we are out of time for questions today. I would like to turn the call over to Mr. Abu-Ghazaleh for closing remarks.
I would like to thank everyone. I know that it has been a disappointing quarter, for me and for everyone. I am very confident about the future, and I hope that next call we can share with you other good news. Thank you very much, and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.