Good day, everyone. Welcome to Fresh Del Monte Produce's Second Quarter 2020 Earnings Conference Call. Today's conference call is being broadcast live over the internet and is also 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 will need to press star one on your telephone. For opening remarks and introductions, I would like to turn today's call over to the Vice President, Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.
Thank you, Lindsay. Good morning, everyone, and thank you for joining our Second Quarter 2020 Conference Call. As Lindsay 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 statement 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. The message we want to deliver today is one of resiliency. Fresh Del Monte Produce is driven by a team that understands there will always be challenges somewhere in the world, and we operate under a model and philosophy in line with that understanding. Even with the new challenge brought on by the COVID-19 pandemic, our vertical integration and portfolio diversification strengths helped to maintain our business continuity in the second quarter of 2020. As a global business that operates in over 100 countries around the globe, each of our locations were impacted by COVID-19 in different ways, to different degrees, and at different times based on mandatory government shutdowns, including restaurants, schools, food service, and business closures.
While we did benefit during the quarter from gradual reopenings in certain regions globally, in North America, we continued to experience reduced demand from our customers in the restaurant and food service industries, as well as ongoing shifts in demand at retail that suppressed our quarterly financial performance. Despite these challenges, our global farms, plants, and distribution centers remained operational with minimal disruptions in our shipping and logistics operations. We also strengthened our liquidity position, and we were able to reduce our debt despite the market disruption. During the quarter, as the pandemic took hold, we remained focused on our business transformation plan for 2020 and beyond to respond to the economic environment and position us for better performance as we work through the global impact of the pandemic.
We identified several opportunities to drive efficiencies and improve utilization of our assets that will de-leverage our business and provide liquidity to fund our investments with the potential sale of available properties we do not intend to use in the future. We capitalized on our new avocado processing facility in Mexico, ramping up production four months sooner than expected. We commenced our move to our new Gonzales, California facility with a goal to have our mass packing operations consolidated under one roof by the end of the third quarter of 2020. The consolidation also includes moving our fresh cut facility from Fresno, California to Gonzales. This will offer us the unique advantage of processing fresh cut fruit and fresh cut vegetables in one facility in the Salinas Valley.
Another highlight of our transformation is consolidating two facilities in Phoenix, Arizona, which we believe will offer significant savings. In early July, we received the first of our six new containerized vessels. We are scheduled to receive three additional vessels spread over the next five months, which will replace existing chartered vessels. We believe these new containerized vessels will allow us to generate substantial savings in our sea logistics, expand our commercial cargo business, as well as ensure cold chain optimization, increased quality, and have a positive impact on the environment, getting us closer to our commitment to reduce our vessel emissions by 10% with an estimated savings of nearly 19,000 metric tons of fuel each year. During the quarter, we aligned our sales, marketing, and operations team in North America under one leader to further optimize the way we work as an organization.
Another example of our business transformation was taking steps to accelerate the expansion of our e-commerce strategy launched in the Middle East in the first quarter. I am pleased to share that in mid-July, we launched a pilot of myfreshdelmonte.com in the Dallas, Texas, area, bringing our e-commerce initiative to North America, our largest market. We look forward to enhancing our offerings and expanding delivery to additional areas in the near future, allowing us to market and message our Del Monte brand and products directly to consumers. We are extremely proud that we will introduce our new Del Monte Pinkglow pineapple on our e-commerce site in the coming weeks. Our initial test launch has gone well, and we are excited to share this innovative product with consumers. In summary, we remain intensely focused on continuing to execute our plan to further strengthen our operations and fortify our balance sheet.
At this point, I will turn the call to Eduardo to talk about the second quarter financial results. Eduardo?
Thank you, Mohammad. Good morning, everybody. I'm extremely proud of our team for their focus and perseverance through an extraordinary set of circumstances brought about by the COVID-19 pandemic and the unprecedented challenges presented by this situation. I want to highlight some key financial accomplishments. Despite continued disruption in foodservice sales and shifting demand at retail during the second quarter of 2020, we achieved a net income per diluted share of $0.38 per share versus net income per diluted share of $0.78 in the second quarter of 2019.
Excluding, among other things, the effect of other product-related charges, which resulted in a $10.6 million gross profit impact related to inventory write-offs, which included donations of produce to local communities, we delivered adjusted net income per diluted share of $0.54, compared with adjusted net income per diluted share of $0.72 in the second quarter of 2019. However, I would like to point out that if you apply the adjusted gross profit margin of 8.1% to the $132 million of net sales impacted by COVID-19, we estimate that we would have delivered an additional $10 million in adjusted gross profit. Additionally, keeping strong liquidity has been a key focus for our team. Despite the headwinds of the COVID-19 pandemic, we generated $111 million in cash flow from operating activities during the second quarter.
We reduced our long-term debt by $52 million since the end of 2019, and we reduced our long-term debt by $64 million compared with the end of the first quarter of 2020. During the quarter, we also focused on investing in critical higher-margin capital projects to optimize our operations, and we undertook a review of underperforming assets. As Mohammad mentioned, the strength of our company and the diversity of our portfolio are most apparent in times like these, and I remain confident Fresh Del Monte will emerge stronger from the challenges imposed by this pandemic. With that, I'll now get into the results for the second quarter of 2020. Net sales were $1 billion and $92 million compared with $1 billion, $239 million, in the second quarter of 2020. With unfavorable exchange rates negatively impacting net sales by $6 million.
Adjusted gross profit was $89 million compared with $98 million in 2019. Adjusted operating income for the quarter was $44 million compared with $53 million in the prior year. Adjusted net income was $26 million compared with $35 million in the second quarter of 2019. In regards to our business segment performance in the second quarter of 2020, in our Fresh and Value-Added Products, net sales decreased $128 million to $636 million compared with $764 million in the prior year period. The decrease in net sales was primarily the result of lower net sales in our fresh cut fruit and vegetables, avocado, pineapple, and prepared food product lines.
As compared with our original expectations, the COVID-19 pandemic affected our net sales of fresh and value-added products by an estimated $117 million during the quarter when compared with our original expectations, driven by reduced demand for and price competition in the retail channel. Also, the continuing effect of the November 2019 Mann Packing voluntary product recall affected our net sales in the second quarter of 2020. Gross profit decreased $21 million to $37 million compared with $58 million in the second quarter of 2019. Other product-related charges represented $9 million for the segment, primarily related to inventory write-offs, including donation of pineapples, fresh cut vegetables, and melons. In our pineapple product line, net sales were $114 million compared with $126 million in the prior year period, primarily due to lower selling prices and sales volume in North America and Europe.
Also contributing to the decrease in net sales was the impact of the COVID-19 pandemic, which resulted in lower demand for pineapples. Partially offsetting this decrease were higher sales volume in Asia and higher selling prices in the Middle East. Overall, volume was 5% lower, unit pricing was 4% lower, and unit cost was 10% higher than the prior year period. In our fresh cut fruit product line, net sales were $110 million compared with $146 million in the second quarter of 2019. The decrease in net sales was primarily the result of lower demand in our big box club store distribution channel as a result of social distancing measures imposed by governments around the world. Overall volume was 26% lower, unit pricing was 2% higher, and unit cost was 1% higher than the prior year period.
In our fresh cut vegetable product line, net sales were $86 million compared with $119 million in the second quarter of 2019. The decrease in net sales was due to the effect of the COVID-19 pandemic, which resulted in a significant reduction of most of our global food service business during the quarter, mainly in our Mann Packing subsidiary. We also faced the continuing effects of our voluntary product recall in November 2019. Volume was 32% lower, unit pricing was 6% higher, and unit cost was 11% higher than the prior year period. In our avocado product line, lower selling prices and decreased sales volume in North America as a result of COVID-19 led to net sales of $94 million compared with $125 million in the second quarter of 2019.
Volume decreased 7%, pricing was 19% lower, and unit cost was 23% lower than the prior year period. Primarily due to favorable exchange rates and increased efficiencies as a result of our new processing facility in Uruapan, Mexico. In our vegetable product line, net sales were $35 million compared with $43 million in the second quarter of 2019. Primarily due to lower sales volume as a result of the COVID-19 pandemic, and lower net sales due to the impact of the Mann Packing's voluntary product recall. Volume decreased 21%, unit pricing was 3% higher, and unit cost was 9% higher than the prior year period. In our non-tropical product line, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry, and kiwi product lines, net sales were $75 million compared with $70 million in the second quarter of 2019.
Volume increased 14%, unit pricing decreased 5%, and unit cost was 7% lower. In our prepared food product line, which includes the company's prepared traditional products and meals and snacks product line, net sales decreased primarily due to lower sales in the company's meals and snacks product line, principally due to the impact of COVID-19 pandemic, the continuing impact of the 2019 product recall, and product rationalization efforts in our Mann Packing operations in North America. The decrease was partially offset by higher sales volume and per-unit selling prices of canned pineapple products due to increased customer demand, and higher selling prices of pineapple concentrate due to lower industry supply. We look for performance in our prepared food product line to improve as a result of entering into new contracts with higher selling prices versus prior year contracts.
In our banana segment, net sales decreased $10 million to $413 million, compared with $440 million in the second quarter of 2019. Primarily due to lower net sales in North America and Europe as a result of decreased sales volume and lower demand due to COVID-19. The decrease was partially offset by higher net sales in the Middle East and Asia. The COVID-19 pandemic affected banana net sales by an estimated $15 million during the quarter versus our original expectations. Overall volume was 1% lower. Worldwide pricing decreased 1% over the prior year period, and total worldwide banana unit cost was 2% lower. Gross profit increased to $39 million compared to $37 million in the second quarter of 2019. Other product-related charges represented $1.6 million for the segment, primarily related to inventory write-offs, including donations. Now moving to selected financial data.
Selling, general, and administrative expenses during the quarter were in line with the second quarter of 2019. The decrease in travel, administrative, and promotional expenses in most of our regions was partially offset by an increase in selling and marketing expenses recognized in the quarter. The foreign currency impact at the gross profit level for the second quarter was unfavorable by $0.9 million, compared with an unfavorable effect of $4 million in the second quarter of 2019. In March 2020, we entered into several fuel hedges that extend through the end of 2021 to take advantage of lower fuel prices to reduce the exposure of our shipping costs in the Americas and Asia. The fuel hedges are similar to the foreign currency hedges we have in place to reduce our exposure in different countries that we market our products.
These hedges are intended to minimize our financial exposure to volatility in the market. Interest expense net for the second quarter was $6 million compared with $7 million in the second quarter of 2019 due to lower average loan balances and lower interest rates. The provision for income tax was $4 million during the quarter compared with income tax expense of $9 million in the prior year period. The decrease in the provision for income taxes was primarily due to lower earnings in certain taxable jurisdictions. For the six months of 2020, our net cash provided by operating activities was $111 million, compared with net cash provided by operating activities of $65 million in the same period of 2019.
The $46 million increase in net cash was primarily attributable to lower payments of accounts payable and accrued expenses and lower levels of inventory and accounts receivable, partially offset by lower net income. Our total debt decreased from $599 million at the end of the first quarter of 2020 to $535 million at the end of second quarter of 2020. As it relates to capital spending, we have postponed several projects to the second half of the year, as well as into 2021. We invested $19 million in capital expenditures in the second quarter of 2020, compared with $36 million in the second quarter of 2019. For the first six months of 2020, we invested $36 million, compared with $17 million in the same period of 2019. We continue to prioritize investments while keeping a strong liquidity position for the remainder of the year.
Our investments in 2020 will be in key projects that were in the pipeline, including delivery of the four new container vessels, the consolidation of Mann Packing and our Fresno operations in our new Gonzales, California facility, and as Mohammad mentioned, the consolidation of our two distribution centers in Phoenix, Arizona. During the second quarter, we repurchased approximately 549,836 shares for approximately $13 million. As announced this morning in our financial results press release, our board of directors declared an interim cash dividend of $0.05 per share, payable on September 4, 2020, to shareholders of record on August 12, 2020. This concludes our financial review. We can now turn the call over for Q&A.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. We do have a question from the line of Mitch Pinheiro with Sturdivant & Co. Your line is now open.
Hi there. Good morning.
Morning, Mitch.
A couple things. First, looking at the virus-affected operations here, other than the write-off of $10 million of unsalable fruit, and obviously the loss of sales, were there any other costs related that weren't part of just your normal gross margin? Anything unusual in there that we can also call out in the quarter?
I don't think so, Mitch. I believe that actually the figure, it's almost $11 million of goods that we had to unfortunately dump or donate to the food banks. The whole issue of that is because all of a sudden there was a lockdown, and we got caught with so much inventory in our stores and on the water coming into the markets that we could not, of course, rationalize. At the same time, customers, especially in the food service business, completely shut down, or almost 60% down, 70% in some cases, as well as retailers were not able even to receive the volumes into their
Distribution centers because of disruptions with the COVID-19 and having less people working inside, as well as they were overwhelmed in their stores that they couldn't put on the shelves enough fruits and vegetables. That's why, actually, the main reason why we had this kind of loss, unfortunately. Other than that, it was mainly because of market conditions. That was the only reason. Of course, once we got that shock, we realized that we have to rationalize as well our volumes going into the market. We started matching demand with supply, and now things are under control, of course, once the market started to normalize again. Still, the food service is still down by about 50% as we speak. Retail also is down, but not as much as we saw in the second quarter, especially in March, April, and early May.
The avocado business, I was surprised it was down as much as it was. Is that because you sell a lot of your avocados into the food service sector?
Not really, no. Most of our avocados goes really into the retail and certain food service— I mean certain QSRs. One of the main reasons why we saw there is a difference in price between last year. Last year, during the second quarter, we had prices of about $60 and over $60 per box, while we saw prices around $30 and $33, $35 during the second quarter because of the demand and the supply. Of course, it does not affect us because we buy according to the market demand. The prices in Mexico went down also drastically. It's all a matter of pricing, not because we are selling to food service or to retail. Our major sales are going into retail, and few as well in the food service.
Mitch, if I may complement. With the opening of our facility in Mexico, there was a significant business model change. As you may remember, in the past, we would source our products through co-packers. As Mr. Abu-Ghazaleh mentioned, last year, with a huge spike in prices, either the growers or the co-packers, they were the ones that were mostly benefited from that. With the change in our business model, we are sourcing directly from growers in Mexico. If you compare the margins, our margin expanded almost more than 400 basis points in this quarter versus last year because we were able to capture better costs at managing our relationships with the grower, and also benefit from the currency variance that took place in this quarter.
The other thing is important, as we highlighted, our original expectation was that we would achieve full capacity more towards the end of the year. Given the strength of our business and the focus that we gave, we were able to ramp up it faster, four months in advance. That also contributed to have a better margin than what we originally expected.
Okay. Thank you for that. Can you talk, as we look at the third quarter here, we're going to see a little more of the same, maybe a tad better sort of in the fresh cut area because food service is opening up a little bit more than it was maybe in June. Is that fair? It'll be sort of more of the same in Q3?
No, Mitch, to be honest with you, the food service is still being impacted really very hard. We are seeing food service down by 50%, 60% as we speak. What we see is QSR getting a little bit better than what we saw in the second quarter. I don't believe that the food service is going because as we speak now, the pandemic is really spreading back again, and I don't believe that food service is going to open up until the situation clears up more clarity in the future. I believe that, yes, we see a little bit improvement in the retail section and the, let's say, the club stores, but still, it's down year-over-year. It's still down, though it has improved from the second quarter, but we're still down on what we saw in 2019.
Okay.
Mitch, if I may complement what Mr. Chairman mentioned is, if we look into the fresh and value-added products, I wanted to highlight some positives, right? Pineapples was hardly impacted in the second quarter, and we're seeing an important recovery in prices. It's not clear if that's going to be sustaining towards the end of the year, but that's a very positive sign. I think we passed the most difficult part of the year. When you look into fresh cut fruits, although we cannot control the demand, we are able to control our cost. If you look, we were able to improve even with 30%, 26% lower volume, we were able to improve our margin by 1%. That's mainly because of the focus that we're taking on managing our cost in all our facilities around the world.
Because of the recovery in certain markets took place later in the quarter, we do believe there is still opportunity to see the same trend continuing. When we look into fresh cut vegetables, and meals and snacks, the consolidation of Mann Packing that is going to take place in the third quarter will start bringing profits right away because we're going to be able to get out of leases that we have today. There are lots of costs associated with logistics of moving product around. Consolidating that in one facility, is state of the art, with much higher automation, that also will drive lower labor costs. That's going to be a margin expansion that we expected.
Also the important thing, the prepared traditional products that over the last couple of years suffered a lot because of oversupply in the marketplace that drove significant competition in prices and lower margins. That has improved significantly in Europe, and so we were able to reduce the losses and even turn that into a significant profit contribution for this year. Also there will be a factor on improving our working capital as we're able to reduce inventories and optimize our operations that we have in Kenya. It's hard to predict what's going to happen to the demand, but it's important to highlight that everything that is under our control in terms of driving efficiencies in our operations, optimizing our costs, improving underutilized assets efficiency. We're going to see a significant contribution of that more towards the last quarter of this year and in 2021.
Aside from that, with the new vessels coming in, that they're going to be run at lower speed, so lower consumption, and the fuel that's used is cheaper. That is going to also help drive efficiencies in the last quarter of the year.
Okay. Thank you for that. Appreciate the color. I'll hop back in the queue. Thank you.
Thanks.
Again, if you would like to ask a question, press star one on your telephone. Our next question comes from the line of Mick Daly with EBMR Holdings. Your line is now open.
Hi. Good morning. Thanks for taking the call. First of all, congratulations on how well you've controlled what you've been able to control during the pandemic. I might have missed this on the call in your comments, earlier in the quarter, you announced that you had reauthorized the stock repurchase program. Did you repurchase any shares in the quarter?
Yes.
Yes, we did.
Yeah, we repurchased almost 550,000 shares for approximately $13 million.
Okay. Secondly, and you have how much left on the reauthorization?
I'm sorry, could you repeat the question?
You have how much left on the reauthorization?
We still have a significant volume of shares that were authorized by the board in 2018 in excess of $200 million that we would be able to repurchase if that makes sense for the company.
Okay. Secondly, Mohammad sold some stock during the quarter, which seemed like when the stock hit 52-week low when he sold it. Would you care to comment on that?
No, actually, I needed some cash. I haven't sold stocks for the last probably five years. This is a personal matter, and it has nothing to do with the company or the results.
Okay. I guess finally is a more longer-term question, probably post-pandemic, but there seems to be a real disconnect between the tangible book value of the company, the real estate assets, all your assets vis-a-vis where the stock is trading. I mean, longer term, have you and the board discussed ways to close that gap?
Yeah, of course. I mean, we are aspiring to go up to unlimited levels in our stock price. Hopefully, $100 one day, maybe sooner than later.
Okay. All right. Thanks very much. Appreciate your time.
Thank you. My pleasure.
Our next question comes from the line of Katia Tavares with Wells Fargo. Your line is now open.
Hi. Thank you for the question. Just wanted to follow up on the net sales and looking at fresh value-added products and the decline. If we put aside price mix and we only look at just the volume losses, which I assume came mostly from North America, how much of that volume decline can you tell us what's attributable to consumer demand, and how much of that was volume lost because of other factors like you mentioned, product rationalization or recalls? Thank you.
Do you mean fresh-cut fruits or fresh-cut vegetables? We do have two categories there. You're not mentioning the both of them.
Yeah. The entirety of the fresh and value-add products.
Well, I would like to divide this into two. As far as the fresh-cut vegetables is concerned, which is mainly by Mann Packing, this has been affected negatively at the end of 2019 when we had the recall, if you are aware of that. That has impacted our sales during the first and the second quarter. Now, as we're moving into our new facility in Gonzales, which is state-of-the-art facility, which will contain all our business, moving from four different facilities in Salinas into under one roof, that is going to give us a tremendous leverage with our quality and assurance of consistency. We believe we are going to kind of recoup what we have lost in the last six months or seven months as we go forward towards the end of the year and in 2021.
As far as the fresh-cut fruit itself, mainly it was because of the closures of, again, especially the food service and retail in particular, as well as convenience stores. We cater to many areas in the industry, food service, retail, convenience stores, as well as QSRs and others. When we look at the fruit itself, we had sales decline during that quarter of about 30%-35% minimum of sales. As far as the vegetable itself, we saw in the food service almost 50% and above in reduced sales. As we speak today, we see the fresh fruit coming back. We still have about 15%-20%, 15% decline in sales year-over-year. As far as the food service, we still see a big decline in that area. It's just mainly because of the closures of restaurants and food service buyers.
Okay. That helps. Thank you.
Thank you.
There are no questions at this time. Mr. Mohammad Abu-Ghazaleh, I turn the call back over to you.
I would like to thank everyone that gave us the time to be on this call. As we speak, I am very confident about the future, and I want to assure you that we are doing everything to mitigate all the risks and disruptions that we are facing today in the market because of the pandemic. We are on top of it, and we will take the measures that will keep us as profitable as always. Thank you very much, and hope to speak to you on the next call. Thank you.
This concludes today's conference call. You may now disconnect.