Good day everyone, and welcome to Fresh Del Monte Produce's second quarter 2019 conference call. Today's conference call is being broadcast live over the internet and is also being recorded for playback purposes. If you would like to ask a question, please press star one on your telephone keypad. If you would 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 Vice President of Global Corporate Communications and Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Miss Cannella.
Thank you, Sharon. Good morning, everyone, and thank you for joining our second quarter 2019 conference call. As Sharon mentioned, I'm Christine Cannella, Vice President, Global Corporate Communications and 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 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. As we previously advised, 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 providing 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, good morning, everyone. Thank you for joining us. I want to begin by saying we made solid progress in the second quarter of 2019. The quarter started with a conscious strategic decision to shift our focus towards becoming a value-added and more diversified company. During the second quarter, we delivered positive year-over-year numbers in gross profit, operating income, and net income. Certainly, we wish our sales could have been stronger, and we believe they will. Adjusted gross profit for the second quarter was up 23% from last year, a total increase of $80 million. We also saw adjusted operating income and net income increase by $24 million and $27 million respectively, year-over-year. This signals that we do not have to be completely reliant on volume as long as we are actively cultivating our value-added focus and diversification strategy.
I sincerely believe this year will be a turning point for our company. I want to share some of what you should expect on the road ahead for Fresh Del Monte. Based on the second quarter of 2019, we believe that it is probable that the pineapple market will contract further. The industry forecast is for fewer boxes to be exported from Central America with the exit of several smaller growers. We continue to maintain our leadership position in the gold pineapple category with premium pricing over our competition. With respect to Mann Packing, we are continuing to execute our integration plan. We are pursuing exciting new retail opportunities with the U.S. first fresh food and beverage stores featuring our fresh and wholesome fruit and vegetable offerings. Our plan is to open our first store in Coral Gables by year-end, followed by Dallas in 2020.
There are currently 17 of these food and beverage stores operating throughout the Middle East in airports and hospitals. We see these stores as powerful connection points between our products and consumers as we further promote our company as an essential component of healthy living and provider of wholesome, convenient, fresh food. We are also on track with the completion of our state-of-the-art packing facility in Mexico that we expect to open during the fourth quarter, which is mainly for avocado and other products. As many of you may have read, the Colombian government recently confirmed infestation of Panama disease on certain farms in Colombia. These farms are under quarantine. We have been following this closely and are actively working on preventive measures to protect our interests in this region and beyond.
As I have shared in the past, Panama disease is an issue that may potentially affect the entire industry on both the commercial and a socioeconomic level for the communities that depend on the banana industry. In summary, 2019 is a year of transition, a year in which we will move to incorporate more diversification into our business approach, further reducing our dependence on bananas while strengthening our leadership position in key value added product lines and further expanding our brand leadership in world markets. At this time, I will turn the call over to Eduardo. Please, Eduardo.
Thank you, Mohammad. Good morning, everyone. For the second quarter of 2019, excluding asset impairments and other charges, on an adjusted basis, we reported earnings per diluted share of $0.69 compared with earnings per diluted share of $0.14 in 2018. Net sales decreased $33 million year-over-year. Our gross profit increased to $97 million in the second quarter of 2019, compared with $79 million in 2018. Operating income for the quarter increased to $53 million, compared with $29 million in the prior year. Net income was $34 million, compared with $7 million in the second quarter of 2018. Now we review our business segment and key product lines.
In our Fresh and Value-Added Business Segment for the second quarter of 2019, net sales were $764 million, compared with $781 million in the prior year period, primarily as a result of lower net sales in our non-tropical pineapple and fresh cut vegetable product lines, partially offset by higher net sales in our avocado and vegetable product lines. Gross profit increased to $58 million compared with $51 million in the second quarter of 2018, primarily due to higher gross profit in our pineapple, non-tropical, and fresh cut fruit product lines, partially offset by lower gross profit in our fresh cut vegetable and avocado product lines. Our gross profit margin for the segment improved by one percentage point, maintaining the trend that we saw in the first quarter of 2019.
In our gold pineapple category, net sales decreased to $126 million compared to $139 million in the prior year period, primarily due to lower sales volume in North America and Europe, mainly due to lower production from our operations in Costa Rica. The decrease was partially offset by higher selling prices in North America and Europe. Overall volume was 16% lower as a result of lower industry volume. Unit pricing was 8% higher, and unit cost was 1% higher than the prior year period. In our fresh cut fruit category, net sales were $147 million, in line with the prior year period. Overall volume was 1% higher, unit pricing was 1% lower, and unit cost was 3% lower than the second quarter of 2018. In our fresh cut vegetable category, net sales decreased to $121 million compared with $125 million in the second quarter of 2018.
The decrease was primarily the result of weather-related issues that impacted our production and sales volume. Overall volume was 6% lower, unit pricing was 3% higher, and unit cost was 10% higher than the prior year period. In our avocado category, net sales increased to $125 million compared with $95 million in the second quarter of 2018, supported by higher selling prices and strong demand. Volume decreased 4% due to tight industry supply, pricing was 37% higher, and unit cost was 40% higher than the prior year period. In our fresh vegetable category, net sales increased to $41 million compared with $39 million in the second quarter of 2018, primarily due to the acquisition of Mann Packing. Volume increased 10%, unit price decreased 5%, and unit cost was 7% lower due to mix.
In our non-tropical category, net sales decreased to $69 million compared with $86 million in the second quarter of 2018, primarily due to rationalization of our Chilean volume in 2018. Volume decreased 24%, unit pricing was 6% higher than the prior year period, and unit cost was 3% higher. In our prepared food category, which includes our traditional canned products and meals and snacks product line, net sales and gross profit were impacted by a reduction in the traditional prepared product lines. In our bananas business segment, net sales were $440 million compared with $458 million in the second quarter of 2018, primarily due to lower production from the Philippines and Central America. Overall volume was 7% lower than last year's second quarter. Worldwide pricing increased $0.42 to $14.94 per box compared with $14.52 in the second quarter of 2018, or a 3% increase.
Total worldwide banana unit cost was in line with the prior year period. Gross profit increased $11 million to $35 million compared with $24 million in the second quarter of 2018. Now moving to cost for the second quarter. Banana fruit cost, which includes our own production and procurement from growers, increased 2% worldwide and represented 23% of our total cost of sales. Carton cost increased to 6% and represented 3% of our total cost of sales. Bunker fuel cost per ton increased 5% and represented 2% of our total cost of sales. Total ocean freight cost during the second quarter, which includes bunker fuel, third-party charters, and fleet operating costs, was 3% lower than the prior year period. For the quarter, ocean freight represented 7% of our total cost of sales.
On SG&A, our selling, general, and administrative expenses decreased $6 million to $44 million compared to the second quarter of 2018, as a result of lower selling, marketing, and administrative expenses in the Middle East and North America. The foreign currency impact at the sales level for the second quarter was unfavorable by $13 million, and at the gross profit level, the impact was unfavorable by $4 million. Interest expense net for the second quarter was $7 million, compared with $6 million in the second quarter of 2018. At the end of the quarter, our total debt was $614 million as compared to $662 million at the end of 2018. The debt is now reported as current due to its April 2020 maturity date.
Our income tax was $9 million during the quarter, compared with income tax expense of $6 million in the prior year, mainly due to higher taxable earnings. As it relates to capital spending, we spent $70 million on capital expenditures in the second quarter of 2019, almost $12 million lower than the same quarter of 2018. During the quarter, we realized the sale of one of our tomato farms in Florida as part of the reorganization of some product categories in 2018. As far as our stock repurchase plan, during the second quarter, we repurchased approximately 365,000 shares for approximately $9.2 million. This concludes our financial review. We can now turn the call over for Q&A.
If you'd like to ask a question at this time, please press star one on your telephone keypad. Your first question comes from Jonathan Feeney with Consumer Edge.
Good morning, and thank you.
Good morning.
Moh, both in your comments and the numbers I see, in all your major product categories, a decided emphasis on value or volume, and you appear to be pricing ahead of your unit costs as you disclose them by product. I'm wondering, when I look at your fresh products, how much of that is that you're sourcing internally more and you're buying less from third-party growers, and how much is it that there's just a lot of fruit around and you're deciding to only do the most profitable business? That'd be my first question.
I think what we are focusing right now, Jonathan, is on the bottom line, and this is a message that has been spread across the company that we are not here just to sell volume and without taking into consideration the bottom line. Bottom line comes first, and then volume. Of course, taking into consideration that we have certain fixed costs that we have to consider as part of our ongoing business. As you could see, every effort has been put on every cost center. That's why we got to these results, as a matter of fact. It's a joint effort by everyone across the company, really, from the production and the producing areas to shipping to DCs, Fresh Cut, sales. Every one of them have done a very good job in improving his operation, which resulted in better results and better pricing.
The most important thing is rationalization of the business. I believe that focus and rationalization is really our target as we speak and going forward. We are very confident that we can execute and deliver as a company, as a team. I'm so proud, to be honest. I would like to say it on the conference call. I'm so proud of our team across the world and not only across North America, that they have been really striving to achieve the objectives and the targets that we have put for them. I think we are at the beginning of the road. I believe that there is still a lot of mileage to cover and a lot of
improvements to achieve.
Well, thank you, Mohammad. You've made some significant investments in capital over the past few years that presumably I guess I'm trying to figure out, is that what's paying off right now that allows you to have pricing that's way ahead of cost?
It's part of it. I don't believe that's the major thing. These investments, we have put a lot of money in the ships that are being under construction now. The packing plant that will hopefully be operational in Mexico in the next couple of months. In Panama, that has started producing, and delivering the fruit. I think overall, it's the efficiencies and the rationalization of the business. I think we have a team in place now that is really focused on the business, that is really like razor sharp on every cost segment or every cost center, specialty yields, and the costs. I think all this has resulted in better pricing and better cost structure. I say that it's just the beginning. I am confident of what I'm saying. It's just the beginning because I see where the future is.
Thank you. There was a comment in the release about you doing also it sounds like a SKU rationalization, pulling certain products off shelves that were less profitable. Can you give us some more detail about what drives that? It's my understanding that between the Mann Packing acquisition, a lot more products have been going on a shelf, and you're certainly talking about more product forms in the coming year.
Yeah, definitely. Don't forget that we just started. It's almost a year since we acquired Mann. We are still in the kind of synchronization and rationalization of all the products. Definitely, Mann has given us tremendous leverage in making a better offering. We are coming now with new products to the market, which will be introduced very soon. Which, I think will be a novelty in the market. We are going to be adding fruit and vegetables together in some innovative ways that will come to the market, as something new. That's what we would like to do. We would like always to come with something new to the market. We don't want to be just business as usual and try to copy other products in the market.
We would like always to be pioneers and come with new products that really will command a premium and good value.
Thanks. Last question for the moment. Is the $640 million that's coming due in April, that's substantially all of your debt? When we see this in the context of the dividend suspension, can you update us on what your strategy is relative to that? Is the idea that you're going to term it out? I know you have significant assets. What are you going to do about that debt?
No. This debt, what Eduardo just mentioned, just for the sake of record, that it is maturing. As we speak, we are negotiating now renewal of the credit facilities. This is going to be continuing. It's not that it's going to end in April. I would like maybe Eduardo to maybe explain further on that.
Jonathan, so we started negotiations with several banks in that sense. Our expectation is to have by early Q4 that renegotiation concluded. We expect similar terms than what we have today. Our approach is that by year-end, that's going to be back to the long-term debt.
Understood. Thank you very much.
Once again, if you'd like to ask a question, please press star one on your telephone keypad. We have a question from Mitch Pinheiro with Sturdivant & Co. Mitch, your line is open.
Hello.
Hi, Mitch.
Good morning. Hi there. Good morning. Mohammad, can you just give us maybe a near-term outlook for bananas? Looking at each market, I know the U.S. is kind of stable. How does Europe, and Asia-Pacific look in terms of supply and demand?
Europe, as we speak, is actually far better than 2018 in terms of pricing, volume, and stability in the market. It's not that strong, but it's far better than what it was in 2018. There's no question about that. As far as the Far East, we are seeing a stable market. Even as we are at the end of July, we are still seeing reasonably good markets in Japan and Korea, and China and Hong Kong. We see this as a normal year, Mitch, in the sense of 2018 was really an abnormal year in terms of supplies and market conditions. I see this year as being a more normal year. In our case, I think Europe. We have, for the first time, entered into a more blend of Europe used to be a total spot market.
In the last few months, since the beginning of this year, end of last year, we actually started blending longer term contract pricing with retailers as well as spot. We have averaged and mitigated the risk of the spot market, especially during the second half of the year.
Is there a reason European retailers are changing to less spot and more contracted pricing?
As a matter of fact, in Europe, we see this getting more in favor. I think supermarkets realized that they cannot, especially big supermarkets, big retailers that have really substantial volumes, cannot just depend 100% on I think what they are doing is exactly what our trend, our kind of future objective is to have a blend of spot and fixed prices.
Okay. How serious is the fungus, the Panama disease fungus in Central America? I know it can wipe out farms and there's a lot of talk about this. How serious of a threat is it to your business?
It's not to my business, it's to the industry. It will be a kind of variable between one and the other. This is a disease that has already, we have said before, and if you remember on different previous conference calls, I said, "It's not if, it's when." The when has happened. It just been found in Colombia. For your information, this disease doesn't show up overnight. This disease usually takes sometimes two, three, four years to show up. We don't know, maybe it's already in Ecuador, maybe it's already more spread in Colombia. Hopefully, we have taken, and the government as well became very much aware and alert about this danger that is coming to them. They are taking very strict measures in order to protect their industries.
However, this disease is something that I believe that what is happening, seeing it from different countries around the world that have this disease, that you need to coexist with this. Especially small growers, medium-sized growers that don't have the means and tools and the R&D and the quality controls to be able to cope with such a disease. I always said that banana will be rationalized not by logical measures, but by this disease. Bananas will become, in the years to come, I'm not saying tomorrow or after tomorrow or next year, but definitely as I see it, if I'm talking long term, five, 10 years from now, there might be a drastic reduction in banana supply from Central America, which will translate into much higher prices.
I predicted many years ago that a carton would be $100, and I wouldn't be surprised to see that, just like avocado.
Very helpful. What percentage of your, you might have already answered this to Jonathan question, but what percentage of your fruit in this quarter came from company-owned farms, company-owned production?
What fruit do you mean? Bananas or?
Well, do you have all fruit or just bananas? Either one.
Bananas is mainly, like we said, always about 30, 35% coming from our own farms.
Okay.
Pineapples, about 90% is coming from our own production worldwide. Grapes from Chile, probably around 80%, 75% our own farms. Majority is coming from our own farms. As far as vegetables concerned, of course, it is mainly our, we do have now with Mann, we have our own agricultural arms where we produce our own vegetables as well as sourcing from third party on long-term contracts.
Okay. Just a couple other questions. On the fresh cut veggie side, what drove the unit cost higher? Is it just agriculture, just prices?
Yeah. Some products were very high in price. Very high. Like celery, for instance. We have seen prices on celery that we have never seen in years. It continued for a very long period of time. On the fresh cuts, we saw an impact on our costs related to some weather-related issues that we saw in the second production that we take in the south of Arizona. That impacted the production volumes as well as our costs in that sense. We expect that to stabilize now that we're getting more and more the Salinas season coming in, so that we should expect more stable costs and prices for the remaining of the year.
Costs were up 10%, pricing in the fresh cut veggies was up 3%.
Yeah.
Are you unable to get pricing quickly or is it just this is the type of cost hit that you're just going to have to eat? Is there any hope for-?
Yeah
a little more relation between your costs and pricing?
No. Sometimes, you have contracts in place where you have to deliver to the buyers with fixed cost, I mean, or fixed price. You have to eat it yourself. In other instances, it's a market fluctuation. For instance, iceberg lettuce, two months ago was $10, $11 a box. In the last six weeks, it's been $30 a box. You can see the kind of cyclicality of pricing. I mean, $30, it's great opportunity for us and others that are in this field. All in all, in my opinion, what we need to do and that's what we are doing is that we are kind of diversifying our product lines and the offerings that we are doing are not the traditional offering that everybody is delivering. That's the most important thing.
Okay. Last question was just, did you have any update on your capital spending estimate for this year?
We are mainly focusing on the ongoing capital expenditures, which is the ships that we have. We have six ships under construction. This is something that we need to keep spending and we are almost done with our Mexican plant. We have Panama project which is progressing, and we're rationalizing this. I don't know. Yeah, we have also fresh cut facility in Yokohama in Japan that we expect to have that up and running, and also some additional expenses on the expansion of our operations in packing.
Are you still looking for in the $100 million, $110 million range?
You mean? yeah, we expect that to be more in line with last year.
Okay
Mitch.
Okay. Thanks for taking the questions.
Thank you.
Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Once again, that's star one to ask a question. We do not have any questions at this time. I will turn the call over to Mr. Mohammad Abu-Ghazaleh.
I would like to thank everyone for joining us today, and I'm happy to report the good results, and this will be hopefully a continuing trend. Thank you very much. Have a good day.
This concludes today's conference call. You may now disconnect.