Earnings Call Transcript - FDP Q1 2021

Operator, Operator

Good morning, everyone, and welcome to the Fresh Del Monte Produce First Quarter 2021 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, Katrina. Good morning, everyone, and thank you for joining our first quarter 2021 conference call. As Katrina 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 and our call today include non-GAAP measures. Reconciliations of these non-GAAP financial measures are set forth in the press release we issued today and on the company's website under the Investor Relations tab. I would like to remind you that some 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. In today's press release and in our SEC filings, we detail our material items. With that, I'd like to turn the call over to Mohammad.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Thank you, Christine. Good morning, everyone. In the first quarter of 2021, we delivered strong profits across all of our business segments, while net sales were slightly lower year-over-year. Gross profit increased 53% from last year's first quarter. Net income increased 228% to $43 million or diluted EPS of $0.90 compared with net income of $30 million or diluted EPS of $0.27 a year ago. We believe that these results reflect the resilience of our company and demonstrate the initiatives we implemented in 2020 to further strengthen our operating model and improve working capital. Thanks to our sales, marketing, and operations teams, the reorganization in North America has optimized the way we work, and our overall organization has done an excellent job despite the market challenges. I assume you all know what is happening in the global markets. The structure of the economy has changed. We recognize the new economic reality and market challenges we face, specifically the inflationary pressure we are facing on all fronts, which is forcing us to increase our prices. We intend to continue to proactively manage and anticipate these challenges as we have done in the past by taking decisive actions to counterbalance any adverse conditions to our business. As we move forward, we intend to continue to operate with agility so that we can quickly respond to market changes as they come. What you see today is only the beginning of our potential. Now I will turn the call to Eduardo to talk about the first quarter financial results. Eduardo, please?

Eduardo Bezerra, Senior Vice President and Chief Financial Officer

Thank you, Mohammad, and good morning, everyone. As you may have seen from our press release this morning, we had a strong first quarter, and we are pleased with how well we performed against the backdrop of the persistent global COVID-19 pandemic and impact on fruit supply due to the two hurricanes in Guatemala in the fourth quarter of 2020. We also dealt with rising inflationary pressures during the first quarter. Now let's review our first quarter of 2021 results. Net sales decreased $29.7 million or 3% to $1.88 billion compared with the prior year period, with favorable exchange rates benefiting net sales by $16 million. The decrease was primarily attributable to lower net sales in our fresh and value-added and banana business segments. Adjusted gross profit increased 39% to $107 million, and our adjusted gross profit margin increased to 10% compared with 7% in the prior year period. We benefited from increased profitability in our fresh and value-added business segment, partially offset by higher food production, procurement, and distribution costs. However, I would like to point out that if you apply the adjusted gross profit margin for the fresh and value-added products segment of 8.7% to the $19 million of net sales impacted by COVID-19 in this segment, we estimate we would have delivered an additional $1.7 million in adjusted gross profit. Adjusted operating income increased 140% to $58 million compared with the prior year period, mostly driven by increased gross profit. And adjusted net income increased 154% to $42 million compared with the prior year period. We achieved a diluted earnings per share of $0.90 compared to diluted earnings per share of $0.27 in the prior year period. Excluding nonoperational and nonrecurring items, we delivered adjusted diluted earnings per share of $0.88 compared with adjusted diluted earnings per share of $0.34 in the prior year period. Adjusted EBITDA increased 61%, and adjusted EBITDA margin increased 300 basis points when compared with the prior year period. Let me now turn to segment results, beginning with our fresh and value-added product segment. For the first quarter of 2021, net sales decreased $30 million or 5% compared with the prior year period. The primary drivers of the variance were lower sales volumes of melons as a result of the hurricanes in Guatemala, the impact of COVID-19 on net sales in January and February in our fresh-cut vegetable and vegetable product lines, an increase in avocado volume, which was offset by the lower per-unit sales price that impacted the industry, and an increase in pineapple volume in most of our regions and an increase in net sales in our prepared food products line due to higher per-unit sales prices. For the quarter, adjusted gross profit in our fresh and value-added product segment increased 9% to $55 million, and adjusted gross profit margin increased 100 basis points. During the quarter, we began to benefit from the actions we took in 2020 to optimize our operations, primarily in our fresh-cut fruit, melon, avocados, and prepared food products. Fresh-cut fruit margins recovered back to double digits. Rationalization in our domestic melon operations and higher per-unit prices helped offset the damage from the hurricanes. Avocado gross profit margin doubled during the quarter and achieved double digits. Prepared food products margins achieved high teens. We also pursued volume expansion during the quarter in pineapple and avocado product lines. Pineapple volume increased 22%, and avocado volume increased 12%. Gross profit in our non-tropical product line decreased primarily in rates due to damage caused by severe rainstorms to some of our farms in Chile, which resulted in a $3.1 million inventory write-off. Our Mann Packing business was impacted by lower sales volume in our food service distribution channels, which drove higher per-unit product costs. Net sales in our banana segment decreased $9 million to $418 million while adjusted gross profit increased 93%, or $23 million during the quarter, primarily driven by lower net sales in North America and the Middle East, mainly as a result of decreased sales volume, partially offset by strong demand in Asia. Overall volume decreased 8%. Pricing increased 7%, which offset an increase in production and procurement costs due to the impact of hurricanes Eta and Iota in Guatemala as well as inflationary pressure on cost of goods sold. Now moving to selected financial data. Selling, general and administrative expenses decreased $4 million to $49 million compared with $53 million in the prior year period. The decrease was primarily due to cost-saving initiatives in our North America region that resulted in reduced promotional expenses and lower selling and marketing costs. The foreign currency impact at the gross profit level for the first quarter was favorable by $13 million compared with an unfavorable effect of $6 million in the prior year period. Interest expense net for the first quarter at $5 million was in line with the prior year period. The provision for income taxes was $11 million during the quarter compared with an income tax of $300,000 in the prior year period. The increase in the provision for income tax of $10.7 million is primarily due to increased earnings in certain jurisdictions. During the quarter, we generated $47 million in cash flow from operating activities compared to $2 million in the prior year period. The increase was primarily attributable to higher net income and higher balances of accounts payable and accrued expenses, principally due to our optimization efforts associated with working capital. As it relates to capital spending, we invested $34 million in the first quarter compared with $17 million in the prior year period. Our investments were mainly related to our new refrigerated container ships, one of which was received during the first quarter and the expansion and improvements to facilities in North America and Asia. As of the end of the quarter, we received cash proceeds of $42.4 million in connection with our asset sales under the asset optimization program, of which approximately $40 million was received in 2020. The gain during the first quarter of 2021 primarily related to a gain on the sale of a refrigerated vessel. We believe we are on track to achieve the $100 million program by the first quarter of 2022. We paid down our long-term debt by $8 million, resulting in a total debt balance of $534 million. And based on a trailing 12 months, our total debt to adjusted EBITDA ratio stands at 2.4 times. As announced this morning in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.10 per share payable on June 11, 2021, to shareholders of record on May 19, 2021. This concludes our financial review. We can now turn the call over for Q&A.

Operator, Operator

Your first question or comment comes from the line of Jonathan Feeney with Consumer Edge.

Jonathan Feeney, Analyst

Some very nice results, obviously. My first question is about banana and avocado volumes, which are down in major product categories. Despite this decline, gross margins are up even on an item basis. Did you manage to procure more carefully or did you have better pricing power this time compared to last year when you faced challenges? Typically, when volumes are down, fixed costs impact the business and margins take a hit. I understand this is an easier comparison, but even looking back two years, this reflects strong execution. I would appreciate your thoughts on this and whether you expect this trend to continue into the second quarter.

Eduardo Bezerra, Senior Vice President and Chief Financial Officer

So Jonathan, just to clarify one thing. In your question, you asked about bananas and avocados. So banana volume went down, but avocado volume went up. Yes, net sales were impacted mainly because of overall industry prices in avocado went down, and this was a continuing trend compared to last year.

Jonathan Feeney, Analyst

Oh right. I'm sorry. I misspoke. Sales are down, but volumes were up. Okay. Got you. Okay.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Yes. And I will follow up on Eduardo's answer is that this is not a hiccup or just sheer luck. This is very, very concentrated work by our team to achieve these results through better efficiencies, through better optimization of our assets, and through better planning and execution. So this is an ongoing exercise that is improving as we move forward.

Jonathan Feeney, Analyst

Typically, the Mali currency has a significant impact on your profitability, especially at this time of year when it starts to interact with Europe. Did currency influence your ability to set prices in Europe or more generally in bananas, considering you nearly doubled your profitability there?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No, but the euro has been quite low for several years, and the sterling along with all foreign currencies have really strengthened against the dollar starting at either the end or the beginning of this year. I don’t believe this will change in the foreseeable future. I think the currencies will remain at this level going forward, and we monitor this very closely to take advantage of such situations.

Jonathan Feeney, Analyst

Got you. Yes, that makes a lot of sense. So where are you in terms of focusing on the pineapple business? Volumes are obviously up, having recovered from a low. Can you give us a sense of how much of your pineapples you are growing internally now? Is there any external sourcing involved? And what is the percentage of your pineapples that are outsourced versus in-sourced?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No, don't forget that we produce pineapples in three continents. We produce pineapples in Costa Rica. We produce pineapples in Kenya as well as in the Philippines. So we cover three different continents for different markets. As of almost last year, beginning of last year, Kenya was mainly producing for our canning operations. We took the decision about two years ago to start diversifying our operations in Kenya from being just a canned operation into both canned and fresh exports. We have been doing an extremely good job there for our fresh pineapples from Kenya into especially the Middle East and Europe because of the logistics proximity and the quality differentiation between the other locations. So we have been doing very well from Costa Rica, from Kenya, and from the Philippines to the different markets. And at the same time, we have also developed new categories in the pineapple itself. So that has improved the margins drastically. And don't forget as well, we are getting into the pink honey growth now, which is still in the very early stages in terms of volumes, but with very, very high margins in this category, which is exclusive, of course, to Fresh Del Monte.

Jonathan Feeney, Analyst

But I want to know if you were able to support all that significant year-over-year growth with your own volume, or did you have to buy externally due to the high demand?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No, we have our growers that have been with us for so many years, and these are still there. I would say, in Kenya, it's 100% of production. In the Philippines, it's 100% of production. In Costa Rica, we have over 20% outside growers. These have been long term, have been there with us for almost 20 years or so. So this is where we stand.

Jonathan Feeney, Analyst

Got you. Okay. So it sounds like you have a handle on that. What about your license operations, the Cafes, and the foodservice? Obviously, you're considering the investments you've made and the plans to expand in foodservice in North America. The timing is challenging, and it seems you're likely on hold, but where do we stand on that? Are we going to move forward with that in the next year or so?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

That's what we are hoping for. First, the flagship is actually in our headquarters in Coral Gables, and we are seeing very, very promising results. We're not going to go any further until we consolidate and test the model, the concept in a way that will give us confidence and assurance that this will be a successful concept, and then we will roll it over in Florida and different parts of the country.

Jonathan Feeney, Analyst

Can you provide an update on the development of the beverages and other value-added products related to the three joint ventures with Del Monte license holders in North America? Are we planning to move forward with these initiatives?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Not really. We are focusing on our agreement with Del Monte Food, which we established in 2017, and it has been beneficial for both parties. We have reached an understanding where we will each concentrate on our areas of expertise and knowledge. Therefore, we are focusing on value-added products in the fresh sphere and the healthy and wellness area.

Jonathan Feeney, Analyst

I understand. So I don't expect any significant changes in product offerings or mix in North America, although you do have the option to make changes if needed, right?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Yes. And we are actually in the midst of new product developments and new offerings to the market. So we will be coming with new products in the next few months and new offerings to our customers.

Jonathan Feeney, Analyst

I understand. Let me summarize with a familiar point. Looking at the average EBITDA for the five years ending in 2020, it's around $216 million when adjusted. I'm fairly confident that the average over the past ten years is even higher. Considering the significant investments we've made in capital expenditures and the numerous opportunities we've encountered, do you think the average EBITDA for the next five years will remain the same, increase, or rise significantly? I've always understood that any expenditures over maintenance capital expenditures are supposed to enhance that figure. I recognize this is a complex situation, especially with the $100 million range of volatility exacerbated by COVID-19. Now that we're on the recovery path, I'm curious about what the average EBITDA for the company could be moving forward. Do we believe it will be above the last five years, the same, or lower? What insights can you share?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

What do you want me to say? Of course, I'd like to be high. I mean, I would rather go low. I like to be double where I am today.

Jonathan Feeney, Analyst

What would I like you to say? I don't know.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

I believe so for one reason because with the new container ships that we have built, that has given us tremendous leverage in terms of our logistics and future operating income. And that's as far as I can go.

Jonathan Feeney, Analyst

That's helpful. You were likely planning before this all occurred, but it seems remarkably well-timed from when you mentioned these plants to the current value of that type of logistics. Well done. I'll stop there.

Operator, Operator

And there are no further questions at this time. I will now turn the call over to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Thank you. I would like to thank everybody who is on this call, and I wish you well for today. Stay safe, and hope to talk to you on our next second quarter call, sometime at the end of July. Thank you very much. Have a good day.

Operator, Operator

Thank you for your participation. This does conclude today's conference call. You may now disconnect.