Earnings Call Transcript - FDP Q3 2022

Operator, Operator

Good day, everyone. And welcome to Fresh Del Monte Produce Third Quarter 2022 Earnings Conference Call. Today's 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, Global FP&A and Investor Relations with Fresh Del Monte Produce, Ana Miranda. Please go ahead, Ms. Miranda.

Ana Miranda, Vice President, Global FP&A and Investor Relations

Thank you, Cheryl. Good morning, everyone. And thank you for joining our third quarter 2022 conference call. As Cheryl mentioned, I am Ana Miranda, Vice President, Global FP&A and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Monica Vicente, Senior Vice President and Chief Financial Officer. I hope you've had a chance to review the press release that was issued earlier this morning via Business Wire. You may also visit the company's IR website at investorrelations.freshdelmonte.com to access today's earnings materials and 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 and earnings presentation, which is available on our website. I would like to remind you that much of the information we'll 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 laws Safe Harbor. In today's press release and in our SEC filings, we detail material risks that may cause our future results to differ from these forward-looking statements. Our statements are as of today, November 2nd, and we have no obligation to update them, any forward-looking statements we may make. During the call, we’ll provide a business update along with an overview of our third quarter 2022 financial results. With that, I'm pleased to turn today's call over to Mohammad.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Thank you, and good morning, everyone. And thank you for joining our third quarter 2022 conference call. As per our press release, we delivered another solid quarter with strong performance across our entire operations. We generated strong net sales and profitability despite ongoing macroeconomic headwinds. Our team's efforts enabled us to thrive this quarter in the face of a wide range of challenges, including persistent inflation, geopolitical risks, and volatility in the fuel market, to name a few. During the third quarter, our net sales increased 5% compared with the prior year period. We saw a continuation of our robust topline trend marking six consecutive quarters of growth versus the prior year periods. We realized adjusted EBITDA of $58 million, representing more than a twofold increase compared with the prior year period. As a result, we posted a robust adjusted EBITDA margin of 5.5%. Gross margin in our fresh and value-added segment was 9.2%, the highest level achieved in two years, benefiting from a product mix of higher margin products. We accomplished these results while maintaining a healthy balance sheet. Our debt balance remained relatively in line with the same period last year below $490 million. Our adjusted leverage ratio stands at 2.4 times. We invested $30 million in CapEx with an emphasis on automation, including optical sorters for our leading snap peas program and process enhancements at our fresh cut facilities, all while maintaining our dividend payout of $0.15 per share as part of our continuing commitment to return cash to shareholders. In October, we launched exciting new higher margin product offerings in the ready-to-eat and convenience category. I'm proud of the team's commitment to provide wholesome and convenient offerings based on developing value-added products aligned with our deep understanding of consumer insights and trends while delivering on diversification and expanded technology solutions. During the quarter, we invested in Decapolis, a startup technology company that provides blockchain-driven traceability technology for the food industry. The technology focuses on capturing each stage of production from planting to distribution. We believe this will enable our food-conscious consumers to see a complete log of product information from farm to table. During the quarter, we also finalized an agreement with a tech firm to digitize our network shipping operations, which we believe will make our ocean logistics more attractive to commercial cargo customers. This will allow us to automate manual processes, including scheduling, contract management, and vessel tracking. Year-to-date, our other products and services segment has realized significant top and bottom line growth, driven by our commercial cargo services. Although the category is benefiting from transitory logistical pressures due to market conditions, we remain keenly focused on continuing to expand this double-digit margin offering. On ESG, we recently published our 2021 Sustainability Report, which shows solid progress towards achieving our 2030 goals, including significant improvement toward the reduction of our Scope 1 and 2 greenhouse gas emissions, in addition to delivering 95% of our food waste from landfills and having 82% of our global product volume being certified as sustainably grown by third parties. In line with our efforts to evolve and improve, this year marks the first time we are reporting in conformance with the Sustainable Accounting Standards Board within agriculture products for the food and beverage industry. As we close out the fourth quarter, we expect broad-based cost pressures to continue to affect our results but at a more stabilized rate. We don't foresee input costs getting worse from current levels. Having said that, fluctuations in exchange rates are expected to continue to go against us in key selling markets in Europe and Asia. We are partially hedged against movements in the euro and Japanese yen through the end of the year, helping us to mitigate a portion of the impact. I remain confident in our growth path grounded on profitable sales, disciplined expense management, digital transformation, and sustainability, all while remaining true to our core mission of high-quality fresh and fresh cut fruit and vegetables. Now I will turn the call over to Monica to talk about the third quarter financials. Please, Monica.

Monica Vicente, Senior Vice President and Chief Financial Officer

Thank you, Mohammed. Thank you for joining us on today's call. Let's discuss our financial results for the third quarter of 2022. As Mohammed mentioned, net sales for the third quarter increased by $49 million or 5% compared to the previous year. This growth was primarily due to price increases that were justified by inflation. However, the rise in net sales was somewhat offset by negative effects from fluctuations in exchange rates, mainly against the euro, Japanese yen, Korean won, and British pound. We were able to partially mitigate these negative impacts through our foreign currency hedges. Gross profit for the third quarter reached $88 million, up from $49 million in the same quarter last year, primarily driven by higher net sales and a favorable product mix in our fresh and value-added products. This growth was partially countered by the ongoing rise in input costs, including higher production and distribution expenses for packaging, fertilizer, freight, fuel, and labor compared to the prior year. Adjusted operating income was $41 million, compared to nearly breakeven in the previous year, with this increase largely attributed to higher gross profit and, to a lesser extent, reduced SG&A expenses. Adjusted net income stood at $26 million, up from $1 million last year. Diluted earnings per share increased to $0.69 from $0.03 in the prior year, with adjusted diluted earnings per share at $0.54 compared to $0.01 in the previous year. The difference between GAAP and adjusted diluted earnings per share for this quarter is linked to a $10 million one-time benefit from a reduction in a North America environmental research cost. Adjusted EBITDA for the quarter was $58 million compared to $26 million in the same quarter last year, with an adjusted EBITDA margin of 5.5%, up from 2.6% the previous year. Now, let's move to the segment results, starting with our fresh and value-added products. In the third quarter, net sales remained relatively stable year-over-year at $600 million, but we saw increases in key product categories such as pineapple and fresh cut fruits due to inflation-related price hikes. Nonetheless, this increase was largely offset by decreased net sales in avocado and fresh cut vegetables due to lower sales volumes. Exchange rate fluctuations in Europe and Asia also had a negative influence. Gross profit for this segment was $55 million, up from $42 million last year, benefiting from a product mix featuring higher-margin items like pineapples and prepared foods. Despite this, our gross profit growth was counteracted by rising costs overall, leading to an improved gross margin of 9.2%, compared to 6.9% last year. In our banana segment, net sales rose by $23 million compared to last year, driven by higher per-unit sales prices due to inflation-related price increases, fuel and freight surcharges, strategic sourcing decisions, and an atypical low industry supply in certain markets during this quarter. This contrasts with the previous year’s excess industry supply. However, the increase was partially tempered by the negative effects of currency fluctuations in Europe and Asia. Gross profit for the banana segment reached $23 million versus $4 million last year, mainly supported by higher net sales, although higher distribution costs and production expenses slightly offset this growth. Gross margin improved to 5.8% compared to 1% last year. Lastly, net sales in our other products and services segment grew by $27 million or 70%, primarily due to increased sales of third-party freight services in North America. Our vessel fleet expansion has enhanced our commercial cargo services, benefiting from high shipping rates and strong market demand. Gross profit rose by $7 million driven by these higher sales. Looking at selected financial data, selling, general, and administrative expenses totaled $47 million, a slight decrease from $48 million in the previous year, mainly due to lower advertising costs. Net interest expense increased to $6 million, a rise of $1.4 million from the prior year, due to higher interest rates and increased average debt balances. Other net expenses for the third quarter were $9 million, compared with $2 million last year, primarily due to higher foreign currency losses. Income tax expense was $3 million, while last year we had a benefit of approximately $7 million. This tax increase is largely due to higher earnings in certain jurisdictions with elevated tax rates alongside a $1.5 million provision for foreign earnings deemed not permanently reinvested. Regarding cash flows, we generated net cash from operating activities of $106 million, down from $152 million last year due to higher working capital and lower net income compared to the first nine months of 2021. Long-term debt showed little change, increasing by $9 million to $486 million at the end of the third quarter, compared to $477 million a year earlier. Our optimization program, initiated in the second half of 2020, remains a top priority. This initiative involves a thorough assessment to identify and divest from non-strategic and underutilized assets with the goal of enhancing asset returns and reducing operational costs. We have generated $65 million in cash proceeds since the program started. While we did not achieve significant asset sales in the third quarter, we anticipate continued progress towards our target of $100 million in cash proceeds while focusing on selling these assets at favorable values. For capital spending, we invested $36 million in capital expenditures in the first nine months of 2022, down from $83 million the previous year, which included final payments for two refrigerated container ships. This year's spending has concentrated on enhancing our banana and pineapple operations in Central America and Kenya, as well as automating production facilities across our operations. This morning, we announced that our Board of Directors has declared a quarterly cash dividend of $0.15 per share, payable on December 9, 2022, to shareholders on record as of November 16, 2022. This concludes our financial review. We can now move to the Q&A session.

Operator, Operator

Your first question is from Jonathan Feeney of Consumer Edge.

Unidentified Analyst, Analyst

This is for John. My question is, what impact has the significant movement in currency had on your profits, both in this quarter and potentially in 2023? Do you consider a strong dollar to be a net positive or negative? I know there are several constant currencies that are somewhat weaker, but there is certainly a revenue offset from the euro as well.

Monica Vicente, Senior Vice President and Chief Financial Officer

Could you repeat the question? It was hard to hear you.

Unidentified Analyst, Analyst

So what role has huge moves in currency played in your profit pools this quarter and potentially in '23?

Monica Vicente, Senior Vice President and Chief Financial Officer

The currency impact was significant in the quarter due to the euro and the GBP being weaker than last year. We do have some hedges that offset partially the impact through year end. So our gross profit was approximately $14 million negative impact.

Unidentified Analyst, Analyst

I have a follow-up question. So FDP has a tremendous amount of strategic assets that show this quarter their ability to deliver value in an inflationary environment, considering the power of the equation on your competitors without so many assets. Is it possible that a sustaining inflationary environment is net positive for you?

Monica Vicente, Senior Vice President and Chief Financial Officer

So we are working towards optimizing our assets, that's definitely one of our priorities. And we will continue to sell underutilized or nonproductive assets.

Operator, Operator

Your next question is from Mitch Pinheiro of Sturdivant and Company.

Mitch Pinheiro, Analyst

First, I want to start with the banana business for a second. From a sales perspective, you had some price increases justified by inflation. Can you share the level of these price increases?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

We cannot disclose, Mitch, what level of price increases, but we are pricing on bananas, as we speak, at a profit level. We are not planning to sell any bananas at a loss going forward. This is our strategy, and we are just rationalizing our supplies to our demand.

Mitch Pinheiro, Analyst

So what did you do? You talk about strategic sourcing decisions. What were those strategic moves that you made?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Matching demand with supply in a much more sensible way as well as trying not to have any excesses at any time of the year.

Mitch Pinheiro, Analyst

So when I look back historically, I know you have been sort of trying to diversify away from bananas, and you have been focusing on profitable volume growth, I guess across the board, but certainly in the banana business. So bananas seem to have been sort of stuck in a range. They're not really growing on a revenue number, if you look back five years plus, long term. And your profitability has been stable, maybe a little lower than you'd like and right now that could be accounted for by the current environment. But can you talk about the banana business in the context of your overall growth algorithm? Are bananas going to be what they are right here, is this what we should expect going forward, or do you see growth in that segment?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

I think that's a reasonable assumption. In my last call, I mentioned that I expected banana prices to reach about $20 a box. Currently, the exit price from Ecuador is around $13 just for the fruit. When you factor in all the additional expenses like packaging, forwarding, and handling, it adds about $2.5 to $3 more. So, you’re looking at nearly $16 FOB, and then you need to include ocean freight and other costs. What I predicted three months ago is nearly accurate today. I don’t think that with the current expenses and production costs for bananas, including fertilizers and other inputs, anyone, including Fresh Del Monte, can sell bananas at a loss without a meaningful return on investment. Therefore, I believe the percentages you’ve seen for our bananas will either hold steady or we will work to maintain those percentages.

Mitch Pinheiro, Analyst

Last question of the bananas or two more questions actually. Broadly speaking, is banana consumption, is it still stable, is it flat to up 2%-ish globally?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

I believe, yes. And if you look at the banana today, it's the cheapest item on the shelf in any supermarket around the world, considering other fruits and products, vegetables. Banana today is still the cheapest. In this inflationary period, I think there will be more kind of focus on bananas for consumers rather than buying other products as a priority. So even considering the increasing cost or increase of prices of bananas today, we are still far cheaper than any other product in the market.

Mitch Pinheiro, Analyst

And then you spoke about the low industry supply in this quarter. How's the supply look for the next three to six months in your view?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

It will be mostly consistent. I don't anticipate any changes, but we must remember that we are still at risk from hurricanes. Currently, a hurricane is approaching the east coast of Central America. We cannot predict what will occur in the next 24 hours, but any impact during that time would be significant.

Mitch Pinheiro, Analyst

Just moving on to the fresh and value added segment. How has Mann Packing done, is it recovering from the demand impact from the pandemic? Can you talk a little bit about the progress you're making there?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

It's definitely improving week by week, and we are confident that by next year a new page will take place.

Mitch Pinheiro, Analyst

So from a food service point of view, have you recovered to pre-pandemic levels?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Not yet, but we are improving week by week. As I said, Mitch, we are confident that hopefully by next year we should be able to recover most. And we have to identify and recover what we don't want any loss-making products to be included. We will be looking at the bottom line and we will be looking for profitability; that's what we will be focusing on. And don't forget that as we saw that water is becoming an issue and inputs are becoming an issue. So commodity prices in the last few weeks have skyrocketed, and that was because of certain issues that happened in the last few months. And I don't think this will change. I think that more rationalization is taking place in the producing areas, and I believe things are changing. As far as we are, we believe that we have already got the business under control through different methods, be it on the administration management level or on the product selection and production. Don't forget that we have integrated Mann into Del Monte about a few weeks ago, and that has definitely led to significant improvement going forward.

Mitch Pinheiro, Analyst

And then I guess just last question, on your commercial cargo services. Is that something that can grow from here? You have excess capacity beyond what we're seeing in the numbers today, or is this something that sort of just becomes like a flat line growth moving forward?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No, I think that our target is to have annual growth. And don't forget we're not just focusing on ocean freight; we are a 3PL company where we can provide services door to door. I cannot discuss this here on this call, but we do have a lot of plans for our services sector segment going forward.

Operator, Operator

There are no further questions at this time. I will now turn the call over to management for closing remarks.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

I would like to thank everyone today for joining us. I look forward to talking to you on our next call, and I hope that it'll be even better news. Thank you very much and have a good day.

Monica Vicente, Senior Vice President and Chief Financial Officer

Thank you.

Operator, Operator

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