Hey everyone, welcome to Fresh Del Monte Produce's first quarter 2019 conference call. Today's conference call is being broadcast live over the internet and also being recorded for playback purposes. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you would like to ask a question during this time, simply press star, then the number 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.
Thank you, Lisa. Good morning, everyone, thank you for joining our first quarter 2019 conference call. As Lisa 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 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. Good morning, everyone. 2019 is definitely a new year for Fresh Del Monte. We have a new outlook on expanding our business. We have new opportunities to generate strong returns, and we have new team members, including Eduardo Bezerra, who officially became our Chief Financial Officer on March 25th of this year and joins us today for this call. Before I turn the floor over to Eduardo to discuss the financial details for this quarter, I would like to briefly talk through what I see as our biggest wins during the first quarter of 2019. I'm very encouraged by the impact of the broad-based operating decisions we made during 2018 to strategically realign our Chilean businesses, our tomato and melon programs in the U.S., and changes in our operations in the Philippines. All of that brought immediate improvements.
Additionally, the Mann Packing acquisition, along with fresh-cut and avocado sales increases, helped us spend in year-over-year positive sales results for the first quarter. With total net sales at approximately $1.2 billion, while at the same time expanded several of our value-added product lines. Consumer trends towards healthy eating and wellness remain strong. Sales of products designed to provide convenience to customers, whether through direct-to-consumer, online grocery, and restaurant delivery categories continue to grow even more rapidly. These market forces present tremendous opportunities for 2019 and beyond. Strong sales in our fresh-cut vegetables and fresh-cut fruit lines during the first quarter of 2019 reflect these trends, as do the higher sales in our fresh vegetables and avocado product lines. Showing we are beginning to capitalize on our efforts to accelerate growth through value-added categories.
I believe several of the challenging market conditions of 2018 are behind us. Nevertheless, the global economy is at a tipping point, and we are watching it closely to act fast and leverage our global scale infrastructure in case headwinds face our path. We remain committed to our vision and business objectives of controlling costs, increasing operating efficiencies, consolidating operations, and optimizing our cost structure with a focus on long-term growth for our shareholders. At this time, I would like to introduce Eduardo Bezerra. I have spent several weeks with Eduardo and can assure you that he brings proven skills and high-level insight to the role of Chief Financial Officer. He will be an asset to all of us, seeing that he has a thorough knowledge and understanding of the agriculture industry. Eduardo, would you like please to start your financials?
Thank you, Mohammad, good morning, everybody. For the first quarter of 2019, excluding asset impairment and other charges, on an adjusted basis, we reported earnings per diluted share of $0.48 compared with earnings per diluted share of $0.89 in 2018. Net sales increased $48 million year-over-year. Our gross profit decreased to $93 million in the first quarter of 2019 compared with $107 million in 2018. Operating income for the quarter was $41 million compared with $58 million in the previous year. Net income was $23 million compared with $43 million in the first quarter of 2018. Before I turn to our segment performance, I want to highlight the changes we announced in our press release regarding segment reporting.
The decision was made to realign our operating segments to reflect the internal reporting used by our management team, particularly in light of the recent realignment of member of our senior management team. We have realigned Other Fresh Products and Prepared Food business segments into one segment titled Fresh and Value-Added Products. Fresh and Value-Added Products include pineapples, melons, non-tropical fruit, including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries, and kiwis. Other fruits and vegetables, avocados, fresh-cut fruit and vegetables, prepared fruit and vegetables, juices, other beverages, prepared meals and snacks. Our banana business will remain in the banana segment. Our other businesses will now be comprised in a segment titled Other Products and Services. Other Products and Services includes our poultry and meat products, our plastic products business, and third-party freight services.
Prior periods have been adjusted to reflect periodic reports that are filed to conform to the new reportable segment composition. In our Fresh and Value-Added Products business segment for the first quarter of 2019, net sales increased 12% to $690 million compared with $617 million in the prior year period, primarily driven by increased sales in our fresh cut vegetables, prepared food, and avocado product lines. Gross profit increased 20% to $62 million, compared with $51 million in the first quarter of 2018, primarily as a result of the realignment in Chile and the U.S., along with the Mann Packing acquisition and growth in our avocado product line.
In our gold pineapple category, net sales decreased 7% to $111 million compared to $120 million in the prior year period, primarily due to lower sales volume in North America, Europe, and the Middle East, partially offset by higher volume and selling prices in Asia. Overall volume was 9% lower as a result of lower production coming from our Costa Rica operations. Unit price was 2% higher and unit cost was 3% higher than the prior year period. In our fresh cut fruit category, net sales increased 1% to $119 million compared to $118 million in the prior year period. The increase was primarily the result of higher selling prices in North America, along with increased sales volume in Asia and the Middle East. Overall volume was 1% higher.
Unit price was 1% lower, and unit cost was 1% higher than the first quarter of 2018, primarily due to higher fruit costs. In our fresh cut vegetable category, net sales increased 95% to $123 million in the first quarter of 2019. The increase was primarily the result of having a full three months of sales from our Mann Packing acquisition in the first quarter of 2019. Overall volume doubled. Unit pricing was 5% lower, and unit cost was 3% lower than the prior year period. In our avocado category, net sales increased 5% to $89 million compared with $84 million in the first quarter of 2018, supported by higher demand from both our existing customers as well as new accounts. Volume increased 25%. Pricing was 16% lower, and unit cost was 18% lower than the prior year period.
In our fresh vegetable category, net sales more than doubled to $42 million in the first quarter of 2019, principally due to the acquisition of Mann Packing. Volume also more than doubled. Unit pricing was in line with the prior year period, and unit cost was 5% higher. In our non-tropical category, net sales decreased 7% to $61 million compared with $66 million in the first quarter of 2018, principally due to lower sales volume of stone fruit in Asia and lower sales volume and selling prices of apples in the Middle East. Volume overall decreased 7%. Unit pricing was in line with the prior year period, and unit cost was 9% lower.
In our Prepared Food Category, which includes our traditional canned products and meals and snacks product lines, net sales increased 20% to $66 million compared with the prior year period, primarily due to higher sales of prepared food products in North America as a result of our Mann Packing acquisition. Volume increased 3%, unit pricing increased 16%, and unit cost was 24% higher than the prior year period. In our Banana Business Segment, net sales were $432 million, or 5% lower compared with $453 million in the first quarter of 2018, primarily due to lower selling prices in Europe, the Middle East, and Asia. Overall volume was 1% higher than last year's first quarter. Worldwide pricing decreased $0.84 to $14.84 per box compared with $15.68 in the first quarter of 2018, or a 5% decrease in pricing.
The total worldwide banana cost decreased 1%, and gross profit decreased $19 million to $33 million, compared with $52 million in the first quarter of 2018. Now moving to costs for the first quarter. Banana fruit costs, which includes our own production and procurement from growers, decreased 2% worldwide and represented 25% of our total cost of sales. Carton cost increased at 6% and represented 4% of our total cost of sales. Bunker fuel costs per ton increased 6% and represented 2% of our total cost of sales. Total ocean freight cost during the first quarter, which includes bunker fuel, third-party charters, and fleet operating cost, was 3% higher than the prior year period. For the quarter, ocean freight represented 8% of our total cost of sales.
Labor costs continue to be a challenge to our cost structure, and we remain focused on increasing automation in our operations to minimize such impact. On Selling, General, and Administrative Expenses, we saw an increase of $4 million to $53 million compared with the first quarter of 2018 as a result of three months of Mann Packing results being included in the first quarter of 2019 versus only one month in the first quarter of 2018. The foreign currency impact at the sales level for the first quarter was unfavorable by $19 million, and at the gross profit level, the impact was unfavorable by $3 million. Interest expense net for the first quarter was $7 million compared with $4 million in the first quarter of 2018 due to a higher average loan balance as a result of the acquisition of Mann Packing, along with higher interest rates.
At the end of the first quarter, our total debt was $701 million as compared to $662 million at the end of first quarter of 2018. Income tax expenses was $7 million during the quarter compared with income tax expenses of $4 million in the prior year, mainly due to a gain in settlement of litigation in our North American business. As it relates to capital spending, we spent $34 million on capital in the first quarter of 2019, and we are taking a deeper look at the capital allocations for the remaining of the year, and we will update you when we have better visibility on those capital expenditures. This concludes our financial review. We can now turn the call over for Q&A.
Thank you. 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 a Q&A roster. Our first question comes from the line of Jonathan Feeney from Consumer Edge. Your line is open.
Good morning, guys. Thanks very much.
Good morning.
I think you just told me, but I think I missed it. Did you give us the exact dollar impact for the two months of extra Mann Packing on the quarter? Because I want to see what the organic sales growth is.
You have it, Eduardo, here.
We mentioned on the SG&A piece, Jonathan.
Not specifically we disclose Mann Packing information.
Can you give me a sense what the, I guess roughly speaking, let me ask you this. Could you tell me whether it's up or down on a like for like basis, Mann Packing itself? I could look up what the historical sales were.
Mann Packing as a whole, as you can see in the different components of categories, is spread between fresh cut and vegetables, as well as in the prepared meals and snacks. We saw a significant increase year-over-year on Mann Packing sales. Mainly because in the first quarter of 2018, we had only one month, and now we have three months of that impact.
I got it. I got that part, I'm trying to understand. Can you comment? If the answer is no, you don't want to comment, that's fine, I'm asking, would the organic sales, same for same, like for like of Mann Packing, have you grown that business since you bought it, or have you rationalized that business? Has it declined since you bought it?
No, it has increased.
Yes, it has increased.
Good.
That's important message there.
Thank you. I just wanted to clarify that. Thank you very much. Mohammad, could you give me an update on, I know we talk about this at least twice a year, but on the JVs. I guess maybe I'm wrong, but I expected those, the brand JVs you own in North America, to be more impactful more quickly. Can you talk about where we are in process with some of those products, and when we can expect to have a bigger JV contribution from the Del Monte branded value-added products?
Yes, we are actually It's an ongoing process as we speak. I think that we have a meeting with our colleagues from Del Monte Foods next month, in June, I think. We are in the process. We had several JVs vehicles. One of them was for the F&B project, one for the juice, one for avocado guacamole. I think the first one, F&B, the first flag, let's say, store will be open during this year, in the U.S. I believe that probably it will be more than one from now to the end of the year. This is already in place. As far as the juice itself, it's in process. We are not going to take any kind of commitment on either side unless we make sure that this business is viable 100% to the advantage of both companies. We are working on this.
All in all, I think the arrangements between ourselves and Del Monte Foods has been very beneficial to both companies in the sense that have really freed up the scope of operations. In our case, we are making a lot of new SKUs that we were not able to do before, and at the same time.
Del Monte Foods, I believe, have more kind of freedom to be able to move their products in a more beneficial way. I think the gain and benefits that came from the agreement is more on the making our flow and ability to create new products is a lot more beneficial than what used to be in the past.
Thanks, Mohammad, just one more before I get back in the queue. We talked a little bit about last quarter. You mentioned capital allocation, clearly suspended the dividend. We've seen the corporate bond market and credit markets broadly, not only interest rates drop, but conditions get even tighter, friendlier borrowing conditions. Can you update us on any progress you might be making in renegotiating some of those covenants. A very unusual situation to have a positive cash flow business, apparently pointed in the right direction, that had to suspend its dividend. I think that's a big issue in terms of the marketing of the stock, because a certain number of folks are just not going to buy something that doesn't pay a dividend.
I guess I'm wondering, as you stand right now, what are the prospects for rearranging your credit facilities in such a way that you can restore that? Thank you.
It's not the credit facility, actually, Jonathan. It's more or less I always believe that we don't like to operate in a very high debt level. That was my main concern. It's not about the covenants or the banking arrangements. We have an excellent banking arrangement, and we have very convenient covenants. In my situation, the decision was taken because I want to deleverage the company in terms of debt. I want to reduce that debt to a more comfortable level. This has been the way the company has been operating for the last 20 plus years. This would be the way going forward. I know that we are going to deleverage quickly, hopefully within this year. We are going to revisit the dividend issue towards the end of the year. That's not off the table.
We are very prudent in terms of conducting our businesses without taking additional leverage debt. Especially that we have been going into very expensive capital expenditure program during last year and continuing into this year. Hopefully by the end of this year, we have several projects, Jonathan, that are under completion right now. We have a very big packing plant for avocados in Mexico that should be finished within the third quarter. We have our Gonzales facility, which is the new packing facility in Salinas for the Mann Packing, which is also a tremendous investment. We have in Yokohama, a new fresh-cut facilities that is being under construction. We have several projects. We have the Panama, we have the new ships. All these actually have influenced the decision when I said we will stop dividends.
I am the first one to be harmed by that, but I think.
No doubt
Business comes first, but definitely, dividend is not off the table.
Understood. Thanks very much. We'll get back in the queue.
If you'd like to ask a question, that's star one on your telephone keypad. We have another question from the line of Jonathan Feeney from Consumer Edge. Your line is open.
Hey, guys, me again. Thanks. I always want to give other people a chance. I love this new investor presentation you have up on your site. I don't know if it's Christine who put it up there or Eduardo, but it's a terrific presentation. I noticed that 45% of your business, you now say, is grown on company-owned farms in that presentation as of February. Does the vast majority of that still tropical, like bananas and pineapples, or are there other vertical integration, if you will, other crops that you're growing now at a greater rate than before?
Well, Mann Packing, we grow a lot of commodities and a lot of our own products. It's grown by us and not through third parties. That's number one. We are going more into lettuce production, for instance. We have bigger businesses expanding our business with McDonald's in the Middle East and other parts of the world, which is new businesses for us, other than the Middle East. We have a lot of new ventures and a lot of new opportunities that is really undergoing as we speak, which will transform our business. I think the most important thing that you have to look at, and if you have been following, which you have been, Jonathan, for the last many years, is that I said that we will reduce our dependence on bananas year-over-year.
If you can look now at our portion of bananas compared to our total volume for revenue is almost 37%. My main objective, our main objective is to go to 30% of our total pie, expanding our pie, but at the same time into the value-added businesses, which is our direction. This is where we are going from now on.
Makes sense. You've certainly come a long way in that presentation. Well, even in the time I've covered it since 2000. Let me see. This avocado business, can you explain to me how when you do a tremendous growth in volume in that business. First of all, I assume there's no vertical integration or you own very few avocados, if any. First of all, and second of all, when you grow a business like that, how much more money do you make? Do you leverage infrastructure pretty drastically? I used to cover an avocado company, and they had some pretty attractive margins on their distribution-only business, and I'm wondering if that's pretty high margin business for you.
It's a good margin business. However, since we started avocado business, it has been done through third party packers. We have never had our own packing facilities. In the next few months, we will start packing our own fruit in our own packing facility. I think that is going to make a huge difference by almost, I wouldn't say 100%, but almost all our production will go through our own packing, which will give us an advantage in terms of cost as well as in terms of quality and safety assurance. That is going to make a big difference in that category. I think our network across the U.S. has given us also a tremendous advantage in terms of delivery and reach to our customers, which is a very big advantage that we have. I think our ability to meet customer needs and especially in tough times.
During the last few weeks, prices of avocados have went almost twofolds. We were one of the few, probably we are the only ones in the U.S. during that year that was able to deliver to our customers on a continuous basis without even any interruptions. In some cases, shouldering some of the cost ourselves, but at the same time satisfy. That's why our customer base is expanding in a very fast manner. We are very satisfied the way our business is growing in the avocado category.
Okay. Can I follow up on something you said earlier about capital expenditure and the dividend conversation? I don't want to put words in your mouth now, but I think we would both agree that the asset value of Fresh Del Monte Produce is substantially in excess of what the enterprise value the marketplace is putting on it today. I'm wondering how, when you think about expanding capital expenditures, how that hurdle rate, what expected payback there is. I think you used to talk about there being a five-year minimum payback on capital expenditures. Is that still the case? How do you think about that with respect to your stock that's out there kind of trading at what appears to be a significant discount to what the asset value at least appears to me to be?
Well, I'll give the opportunity to Eduardo to answer this question.
Yeah.
From a financial guy, maybe you can get into that better.
Jonathan, that's a great question. We are looking deeply about the process that we have today to make sure that the expected return on those investments are higher than the hurdle rates that we have imposed in the recent past. Of course, we are really making sure that those investments are 100% aligned with our long-term strategy, which is mainly focused on Value-Added Products. I also mentioned a little bit in my comment on cost, we focus a lot on automation, to make sure on our fresh cut operations, we can streamline some of those processes as well. As part of some of these JVs and collaborations that we're doing to grow our footprint in the marketplace, we're going to be able to get a high return versus what we saw in the past.
That's really our focus and our commitment, and that's why we're looking to 2019 capital plans and really take advantage of that to be in a better position for the growth that we expect in the upcoming years.
Just to clarify, Eduardo, would you say, I guess you want a better return than you've gotten in the past, but you wouldn't say there's a five-year payback? You'd just be a little bit less specific about that?
We expect the payback to be lower in that sense, at a shorter period of time. That's why the higher threshold that we're going to put there, it will automatically translate into a faster payback as we expect.
Final last question. Mohammad, it looks like you recently had a legal success against a Costa Rican pineapple grower in arbitration case. I just read that on one of the fruit news sources that I monitor. Does any legal activity that you've been successful in in the past few months, will that change the competitive landscape at all as far as people violating your trademarks or supply? Will that reduce supply at all?
Well, definitely. I mean, that we have established the fact that nobody can overstep our field. We have succeeded in several legal cases in the last few months. I think that puts Fresh Del Monte in a much stronger legal position, be it on the production side or even on the market side. To be honest, I'm very pleased with the results so far, and that demonstrate this has been going for several years, this case, which has gone from arbitration to the court, to the superior court, and now to the appellate court. Now we are hoping, and we are working very hard to make sure that this is implemented in Costa Rica as well. I mean, our legal team is now enforcing this judgment in Costa Rica as well.
Hopefully in the next few months, we can have some news about that as well.
Great. Well, thank you very much, Eduardo, formally for the first conference call welcome, and I appreciate both of your time as always.
Thank you, Jonathan.
We have no further questions at this time. Mr. Mohammad Abu-Ghazaleh, I turn the call back over to you.
I would like to thank everybody for joining us today on this call, and I'm glad that we have had an encouraging first quarter and, in my opinion, that's a turnaround for Fresh Del Monte, and I hope to talk to you on our next call with better news as well. Thank you and have a good day.
This concludes today's conference call. You may now disconnect.