Earnings Call Transcript - FDP Q3 2020

Operator, Operator

Good day, everyone, and welcome to Fresh Del Monte Produce's Third Quarter 2020 Earnings Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. 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.

Christine Cannella, Vice President, Investor Relations

Thank you, Lindsey. Good morning, everyone, and thank you for joining our third 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. You may also visit the company's website for a copy of today's release as well as to register for future distribution. 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 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.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Thank you, Christine. Good morning, everyone. 2020 is shaping up to be one of the most challenging periods ever for our industry and Fresh Del Monte Produce. The difficulties we experienced in the third quarter of 2020 were driven by the continuing impact of the COVID-19 pandemic, which continued to hinder our performance with decreased demand due to mandatory government shutdowns, including schools, restaurants, food service, and business closures being our biggest headwind. These challenges continued to hamper our ability to achieve our financial targets for the third quarter. Net sales for the quarter were $990 million compared with $1.1 billion in the third quarter of 2019. We reported adjusted gross profit of $69 million compared with $76 million in the third quarter of 2019, with gross profit margin improvements in our fresh and value-added products segments. Due to the early actions we took by adjusting our business in response to these challenges, we reported adjusted EPS of $0.35 compared with adjusted EPS of $0.38 in the third quarter of 2019. I'm pleased to report that during the quarter, we completed our move to our new Gonzales, California facility. Today, our Mann Packing facilities and Fresno fresh-cut facility are now operating under one roof, which we anticipate will enable us to improve gross profit in our fresh and value-added products segment by approximately $10 million on an annual basis; a benefit we expect to achieve over the next 12 months. We also made progress with the optimization plan we announced in the second quarter of 2020, reducing underutilized facilities and land assets. We believe this will allow us to shift assets that better serve the long-term growth of the company. We identified assets across all our regions that we plan to sell over the next 12 to 18 months for the total anticipated cash proceeds of approximately $100 million. Since we last spoke, we added two new containerized vessels to our fleet, the Del Monte Rose and the Del Monte Harvester, replacing vessels we have previously chartered. This important sustainability initiative reduces our carbon footprint and brings us closer to our 2025 commitment to reduce emissions by 10%. Also during the quarter, we continued our efforts to diversify our product line and the channels we market our products in with the launch of our newest product, the pink glow Del Monte pineapple. The variety is produced on our farms in Costa Rica. In October, we published an update to our 2018-2019 corporate social responsibility report that includes progress towards our 2025 commitments. I encourage you to visit the Sustainability section of our website to learn more about our progress, including our recently announced partnership between our Del Monte Kenya operations and the United Nations Foundation to promote the health and empowerment of women employees and community members, along with the announcement that we were honored to receive the best Green and Environmental Stewardship Award. Today, I'm confident that the decisions made in 2020 will be a driving force behind our future performance. In the third quarter, we demonstrated the value of our business model and generated improved cash flow and continued to reduce our debt to better position us to weather this pandemic and emerge stronger. Now I will turn the call over to Eduardo to talk about the third quarter financial results. Eduardo, please?

Eduardo Bezerra, Senior Vice President and Chief Financial Officer

Thank you, Mohammad, and good morning. Despite the COVID-19 disruptions during the third quarter 2020, we achieved net income per diluted share of $0.37 versus net income per diluted share of $0.38 in the third quarter of 2019. Excluding the effect of other product-related charges, we delivered adjusted net income per diluted share of $0.35 compared with adjusted net income per diluted share of $0.38 in the third quarter of 2019. However, I would like to point out that if you apply the adjusted gross profit margin of 7% to the $73 million of net sales impacted by COVID-19, we estimate that we would have delivered an additional $5.8 million in adjusted gross profit. Additionally, despite the headwinds of the COVID-19 pandemic, we generated $63 million in cash flow from operating activities during the third quarter. We reduced our long-term debt by $76 million since the end of 2019, and we reduced our long-term debt by $24 million compared with the end of the second quarter of 2020. As Mohammad mentioned, we announced a $100 million asset sale program to be completed over the next 12 to 18 months to strengthen our cash flow position, reduce our debt, and continue to reinvest in key areas of growth in our business. Our focus on our value-added business is also progressing well. Measures we have taken over the past year demonstrate the significance of our goals to increase sales revenue, enhance margins and maintain our track record of improved cash flow generation. We believe we are on track to realize most of our cost savings actions planned for 2021. With that, I will now get into the results for the third quarter of 2020. Net sales were $990 million compared with $1.1 billion in the third quarter of 2019, with unfavorable exchange rates negatively impacting net sales by $2 million. Adjusted gross profit for the quarter was $69 million compared to $76 million in the third quarter of 2019. Adjusted operating income for the quarter was $25 million, in line with the prior year period, and adjusted net income was $16 million compared with $18 million in the third quarter of 2019. In regards to our business segment performance in the third quarter of 2020, in our fresh and value-added product segment, net sales decreased $52 million to $601 million compared with $653 million in the prior year period. The decrease was primarily due to lower net sales in our fresh-cut vegetable, avocado, fresh-cut fruit, vegetable and prepared product lines, partially offset by an increase in sales of our pineapple and nontropical product line. As compared with our third quarter of 2019 performance for the segment, the COVID-19 pandemic affected our net sales of fresh and value-added products by an estimated $56 million during the quarter, driven by reduced demand in our foodservice channel and shifting demand at retail due to the pandemic. Also, the continuing effect of the November 2019 Mann Pack voluntary product recall affected our net sales in the third quarter of 2020. Gross profit increased to $54 million compared with $53 million in the third quarter of 2019, and other product-related charges represented $2 million for the segment primarily related to inventory write-offs of pineapples due to volatile supply and demand conditions as well as additional cleaning and social distancing protocols associated with the pandemic. In our pineapple product line, net sales were $116 million compared with $102 million in the prior year period primarily due to higher sales volume in all of our regions, mainly as a result of lower production in the prior year period due to adverse weather conditions in our growing regions. Overall, volume increased 15%, unit pricing decreased 1%, and unit cost decreased 1% compared with the prior year period. In our fresh-cut fruit product line, net sales were $130 million compared with $145 million in the third quarter of 2019. The decrease in net sales was primarily due to lower sales volume in North America as a result of the continued impact of the COVID-19 pandemic and a shortage of certain raw materials. Overall, volume decreased 11%, unit price increased 1%, and unit cost increased 3% compared with the prior year period. In our fresh-cut vegetable product lines, net sales were $96 million compared with $122 million in the third quarter of 2019. The decrease in net sales was primarily due to the effect of the COVID-19 pandemic, which resulted in a significant reduction of most of our global foodservice business during the quarter, mainly in our Mann Packing subsidiary. Volume decreased 27%, unit pricing increased 7%, and unit cost increased 15% compared with the prior year period. In our avocado product line, net sales were $77 million compared with $98 million in the third quarter of 2019 primarily due to lower selling prices as a result of normalized industry supply in the market when compared with the prior year period. Volume increased 13%, pricing decreased 31%, and unit cost decreased 37% compared with the prior year period primarily due to the improved capacity utilization at our new packing facility in Mexico, which opened in December 2019. In our vegetable product line, net sales were $42 million compared with $46 million in the third quarter of 2019 primarily due to lower sales volume as a result of the COVID-19. Volume decreased 13%, unit pricing increased 5%, and unit cost increased 26% compared with the prior year period. In our nontropical product line, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry, and kiwi product line, net sales were $38 million compared with $32 million in the third quarter of 2019 primarily due to higher sales volume in Europe as a result of increased demand, along with higher sales volume in the Middle East in developing markets. Also contributing to the increase in net sales was higher selling prices in the Middle East. Volume increased 13%, unit price increased 4%, and unit cost increased 7%. In our prepared food product line, which includes the company's prepared traditional products and meals and snacks product line, the decrease in net sales was primarily due to lower sales in the company's meals and snacks product line, principally due to the impact of COVID-19 pandemic, the continued 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 per unit selling prices of pineapple concentrate due to lower industry supply and increased per unit selling prices of canned pineapple products due to increased customer demand. In our banana segment, net sales decreased $24 million to $362 million compared with $386 million in the third quarter of 2019 primarily due to lower net sales in North America, Europe, and the Middle East due to decreased sales volume and lower demand due to COVID-19. The decrease was partially offset by higher net sales in Asia. The COVID-19 pandemic affected banana net sales by an estimated $17 million during the quarter versus our third quarter of 2019 performance for this segment. Overall, volume decreased 4%, worldwide pricing decreased 3% over the prior year period. Total worldwide banana unit cost decreased 1% and gross profit decreased to $11 million compared to the third quarter of 2019 primarily due to lower selling prices in North America as a result of increased demand, partially offset by lower costs, mainly lower ocean freight costs. Other product-related charges represented $400,000 for the segment incurred due to the COVID-19 pandemic. Now moving to selected financial data. Selling, general and administrative expenses decreased $7 million to $44 million compared with $51 million in the third quarter of 2019. The decrease was primarily due to lower selling and marketing expenses in the Middle East and cost savings initiatives in North America. The foreign currency impact at the gross profit level for the third quarter was unfavorable by $3 million compared with an unfavorable effect of $2 million in the third quarter of 2019. Interest expense, net for the third quarter, was $5 million compared with $6 million in the third quarter of 2019 due to lower average loan balances and lower interest rates. The provision for income tax was $5 million during the quarter compared with income tax expense of $3 million in the prior year period. The increase in the provision for income taxes was primarily due to increased earnings in certain higher taxable jurisdictions. For the first nine months of 2020, our net cash provided by operating activities was $174 million compared with net cash provided by operating activities of $130 million in the same period of 2019. The increase was primarily attributable to lower payments of accounts payable and accrued expenses and lower levels of inventory due to our optimization efforts on working capital. The increase was partially offset by lower net income and higher levels of prepaid expenses and other current assets. Total debt decreased from $587 million at the end of 2019 to $511 million at the end of the third quarter of 2020. As it relates to capital spending, we invested $57 million in capital expenditures in the third quarter of 2020 compared with $23 million in the third quarter of 2019. For the first nine months of 2020, we invested $93 million compared with $94 million in the same period in 2018. Our investments in the third quarter of 2020 included the delivery of two new container vessels, the Del Monte Gold and Del Monte Rose. We also completed the consolidation of four different facilities into our Mann Packing operations into our new Gonzales, California facility during the quarter. As announced in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.10 per share payable on December 4, 2020 to shareholders of record on November 11, 2020. This is an increase of $0.05 per share from our quarterly cash dividend paid on September 4, 2020. This concludes our financial review. I'll now turn the call over to the operator.

Operator, Operator

Our first question comes from Jonathan Feeney with Consumer Edge.

Jonathan Feeney, Analyst

My first question is quite detailed. Regarding the announced nonstrategic divestitures, is there any general gross profit, operating profit, or cash cost associated with the losses of those assets? That would be my first question. My second question is for an update on the challenges in the banana business in your operational areas. It seems a lot of the issues are concentrated in North America. Is this due to competitive activity, and how much of it is related to demand dynamics in the category, food away-from-home, and changing purchasing patterns?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Regarding the assets issue, these assets that we want to dispose of or sell are actually assets that are sitting underutilized or lands that we have had for many years that we never used for agriculture. Just to give you an example, we have a piece of land in Chile, which we acquired in the late '80s, early '90s for about $250,000. Today, we are selling this land for over $11 million. This piece of land is in the northern part of Chile. This was acquired many years ago for an agricultural project that we never used and then sat there for a long time. The same thing applies to many other lands we have in different parts of the world, particularly in Chile and Uruguay. Some of these assets are really underutilized or not utilized at all, some facilities that we have vacated because we consolidated operations, like we are doing right now in California by consolidating a few different facilities under one roof, which means that we have many assets that we can sell. If you look across the world, over the years, we have accumulated many assets that I believe are very valuable assets that we really don't need and that don't affect our business in any way. On the contrary, it might leverage our business better. As far as the banana is concerned, the banana business is really a big mess, let me put it that way. Banana production and oversupply is coming to an extreme in the world, especially from Ecuador. There are so many bananas around that nobody knows what to do with them, not only in North America but all over the world. New countries that have not been on the map, like Vietnam, Laos, and Cambodia, are newcomers to the market, exporting mainly to China. China used to buy more fruit from Ecuador and Central America, now they have more fruit coming from these new countries. So all in all, I don't see the banana sector returning to where it used to be. I believe today, banana will be a business that we need to continue with. The margins will be small, but with proper planning and management of this segment, I believe we are the best to manage it. I am very confident about our future banana business because we are taking a different model in approaching the markets and sourcing this fruit. Bottom line, it's a difficult business; it's not easy. I see many people suffering and probably getting out of the business in the next few months or years. But as far as Del Monte is concerned, I am confident that we will get through this crisis and emerge in better shape than we were two or three years ago.

Eduardo Bezerra, Senior Vice President and Chief Financial Officer

And Jonathan, just to complement what the Chairman mentioned, it's very important to highlight that although the prices are very unstable in the market, all the investments that we have done in recent years, the important one being the new vessels, are really to drive our longer cost position. We can leverage these to navigate through the oversupply in the marketplace, so that we can have a better cost position across all geographies to face that. Once these conditions stabilize, we expect that to be accretive to our margins going forward.

Operator, Operator

Our next question comes from Mitch Pinheiro with Sturdivant.

Mitch Pinheiro, Analyst

Just to follow up on Jon's question regarding the banana business. I mean, Mohammad, you said it's a difficult business. I mean, it's always been a difficult business, and there always seems to be oversupply, and demand has been relatively stable. So you always had these doubts with the ups and downs in this business. Is there anything different today, just in terms of your comments saying it's difficult? Anything different than the usually difficult business historically?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No, nothing difficult, except that as we see now in the last 10 to 12 months, there is a lot more supply than what it used to be, coupled with the present market conditions because of the pandemic, leading to less consumption. Food services are almost dead, schools are impacted, and all these convenience stores are disrupted. So on top of the additional volume that Ecuador has produced and the optimal conditions for production in other countries, we did not experience any climatic disasters during the year. However, this means there is more supply, and the trees are producing at optimal levels. But it hasn't changed; there is just more supply. I believe that hopefully, once the pandemic passes, bananas will improve. As Eduardo mentioned, we are taking many actions to bring the business into a different path by having new vessels which will be state-of-the-art for any vessel on that route, and that will be not only cost-effective but also logistically the best available. At the same time, we are optimizing our supply and demand to avoid unnecessary risks. Therefore, I am very hopeful and confident that we will be able to achieve even better results than we see today, even with the challenges of banana oversupply worldwide. One unfortunate situation that I have discussed before is that our business has been affected by other businesses using bananas as a means of transportation, and this has also added to the challenges in this sector.

Mitch Pinheiro, Analyst

So when I watch the European banana prices, they've been awfully weak. I imagine that's where a lot of the excess supply is also heading. But when I look at the USDA, the prices for bananas in North America were actually up 10% in the third quarter. Are you not seeing any of that benefit because you've contracted prices earlier in the year, is that correct?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No. North America operates on contracts; 90% of our volumes in North America are contracted to buyers, retailers, and others. Therefore, we do not experience that kind of volatility in prices during the year, except for the spot market. What really helps us is that during soft markets, like we've been seeing over the last few months, retailers are unable to absorb the contracted volumes they have. They tend to request reductions in their orders, leading us to have additional fruit without a home except for the spot market. Unfortunately, this means we must navigate to either the spot market or other markets, which unfortunately underpay compared to selling in North America.

Eduardo Bezerra, Senior Vice President and Chief Financial Officer

Just to complement a little bit. If you look at the export prices from Ecuador, they are currently at historical low levels. This is a very important element in the equation that illustrates the oversupply and demands issues in the marketplace.

Mitch Pinheiro, Analyst

Just one more banana question. Do you have any update on the Panama disease? Is there any further spread? Do you feel like it's a little bit under control? Anything regarding actions you've taken in your own facilities?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No. The Panama disease is status quo. We haven't seen anything abnormal in any of our plantations or other plantations. As far as we speak, it's under control. It doesn't happen overnight; it takes years for it to expand or to go to other areas. As we speak, there is nothing really to mention.

Mitch Pinheiro, Analyst

Okay. And my final question, I'll get back in the queue. But you've done a nice job on deleveraging here with the asset sales and other things to further delever. That kind of sets you up, at least the balance sheet with some dry powder. Do you have an appetite for acquisitions at the moment? What's your feeling there?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No. I don't think we are looking at acquisitions. We did an acquisition a couple of years back, which is the Mann acquisition, and we are driving that acquisition to become very profitable and consolidating this business. At this moment, our focus will be to reduce our debt and increase dividends.

Operator, Operator

And there are no further questions in queue. At this time, I'll turn the call back over to Mr. Mohammad Abu-Ghazaleh for closing comments.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

I would like to thank everyone today for attending this call. I know it is hard for everyone today with the pandemic and the way we are conducting our lives, but we will endure and overcome, I hope. I assure you that Fresh Del Monte is on the right track. We will be delivering good results and better results every time we speak with you. Thank you very much, and have a good day. Bye.

Operator, Operator

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