Earnings Call Transcript - FDP Q4 2021

Operator, Operator

Good day everyone and welcome to the Fresh Del Monte Produce Fourth Quarter and Full Fiscal Year 2021 Conference Call. Today's conference call is being broadcast live over the internet and is also being recorded for playback purposes. All lines have been placed on mute to prevent any background noise. After the speaker remarks there will be a question-and-answer session. For opening remarks and introductions, I'd like to turn today's call over to Vice President of Global FP&A and Investor Relations with Fresh Del Monte Produce, Ana Miranda. Please go ahead, Ms. Miranda.

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

Thank you, Chantel. Good morning, everyone. Thank you for joining our fourth quarter and full fiscal year 2021 conference call. As Chantel mentioned, I am Ana Miranda, Vice President Global FP&A and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussions are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer, and Eduardo, 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 website at freshdelmonte.com for a copy of today's release and investor relations presentation. On the site, you can also 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 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 at freshdelmonte.com under the Investor Relations tab. I would like to remind you that much of the information we'll be seeking 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 filing, we detailed material risks that may cause our future results to differ from these forward-looking statements. Our statements are as of today, February 23, and we have no obligation to update any forward-looking statements we may make. With that, I'm pleased to turn today's call over to Mohammad.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Ana. Good morning, everyone. In 2021, we posted double-digit operating income growth compared with 2020. We are most proud of our agility and industry leadership in navigating the current challenging macroeconomic environment as we focus on mitigating industry-wide supply and labor headwinds. We have justified inflation-driven pricing increases towards the end of the year and made investments targeted at improvement, focusing relentlessly on productivity. In the first half of 2021, despite these pressures, gross profit benefited from strong performance across all our segments, particularly higher unit selling prices in our banana segment. These higher prices have offset incremental production and procurement costs, following the hurricanes in Central America in the fourth quarter of 2020, and higher demand across key product categories related to relaxed restrictions on social gatherings in some of our main markets compared with 2020. However, in the second half of 2021, inflationary and other pressures intensified, negatively impacting gross profit. The price increase, which took effect towards the latter part of the year, resulted in improved performance as we moved through the end of the fourth quarter. Overall, during the year, we increased adjusted EBITDA to $207 million from $189 million in 2020. As a result, adjusted EBITDA margin increased 4 basis points to 4.9 from 4.5. As a brief recap during the year, we made significant progress on our strategic initiatives, and I would like to focus on that. We added to our state-of-the-art fleet of vessels in the first half of the year, bringing our fleet to a total of 13 vessels. As previously mentioned, six out of those 13 vessels are new, positioning us strongly to continue providing reliable, quality service to our customers. This also enabled us to expand our third-party freight services. In keeping with our shareholder accretion approach, in the second half, we increased our quarterly cash dividend from $0.10 per share to $0.15 per share, bringing our total dividend payout for the year to $0.50 per share, and we plan to continue this approach in 2022. In 2021, we reduced long-term debt by approximately $23 million. Throughout the year, we also made progress on our strategic partnerships. We successfully implemented a licensing agreement with one of Europe's top frozen goods retailers, Iceland, which allows us to offer a broad product mix while generating consistent income. In June, we invested in Square Capital Global MetraTech funds, firms focused on innovative growth stage companies applying technology in various infrastructure sectors, including logistics, supply chain, and agriculture, which are incrementally or adjacent to our business. In November, through a partnership with Project Equity, we invested in a leading organic consumer products brand that includes granola, oatmeal, and pancake mixes. This partnership provides us with an opportunity to expand our business in the convenience category, facilitating the development of unique and innovative products together. Additionally, we are excited to leverage our vertical integration to support our partners with supply chain and logistics services. Carrying our progress into 2022, we announced today another brand partnership with Good Culture, founded in 2014, focusing on high-quality cultured dairy products, specifically packaged cheese and sour cream. They have been innovative and disruptive in the space, gaining significant market share since their inception. Both investments in Ely edil and Good Culture were facilitated by semi-cap food and nutrition, whose expertise for progress has proven effective in the market and is ready to scale. We are also excited to announce a partnership with McCormick and Company, a global leader in agriculture products, which align closely with our vision and strategy. Through this project, we are leveraging technology coupled with our agricultural expertise to grow products while minimizing costs and preserving the environment. At this moment, both companies have decided to keep the location and products undisclosed. In 2021, we made great progress on our sustainability journey. We were the first global marketer of fruits and vegetables to commit to science-based targets on emissions reductions, which conform to the levels required to meet the goals of the Paris Agreement. Our science-based targets initiative has validated that our emissions reduction targets conform to its criteria and recommendations. You can find further details in our 2020 sustainability report. On the people front, last month we announced the appointment of Mohammad Abbas as Executive Vice President and Chief Operating Officer. Mohammad joined the company in 2009 and has served in various leadership roles, including head of Asia and the Middle East. I'm excited to have him in his new role where I am confident he will add significant value to our operations. Having said that, I am confident in our team's ability to continue executing our long-term strategy of growing our core business, increasing the reach of higher-margin, value-added categories, implementing and leveraging technology solutions as we evolve into an Agri-tech company, and expanding our customer and brand partnerships throughout our global operations. At this point, I would like to move the call to Eduardo to discuss the financial results.

Eduardo Bezerra, Senior Vice President and CFO

Thank you, Mohammad, and good morning. I will start with our fourth quarter performance by product lines, followed by a consolidated overview of our full fiscal year 2021. Net sales for the fourth quarter of 2021 increased $50 million or 2% compared with the prior-year period. The increase was driven by higher net sales in our other products and service segment, which includes third-party freight services and various categories. As it relates to comparability between periods, the fourth quarter of 2021 consisted of 13 weeks compared with 14 weeks in the fourth quarter of 2020. The additional week in the fourth quarter of 2020 contributed an estimated $72 million in net sales. On a comparable basis, net sales increased $87 million or 9%. Adjusted gross profit for the fourth quarter of 2021 was almost $40 million compared with $49 million in the previous year. The decrease was primarily driven by the continuation of inflationary and other cost pressures, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland ferries, labor, and field costs. The decrease was partially offset by an inflation-justified price increase effective towards the latter part of the fourth quarter. The price increase was implemented in an effort to maintain our continuous supply and service levels with our business partners. That said, during the fourth quarter, we realized sequential improvements in gross profit, specifically in December. In addition to pricing, gross profit also benefited from fluctuations in exchange rates. Adjusted operating income for the fourth quarter was a loss of $7 million compared with a loss of $4.5 million in the prior-year period, primarily related to lower adjusted gross profit, partially offset by a decrease in selling, general, and administrative expenses. The adjusted net loss was $8.5 million compared with a loss of $3.7 million in the prior-year period. Our diluted earnings per share for the fourth quarter was a loss of $0.24, compared with earnings of $0.02 in the prior-year period. The adjusted diluted earnings per share was a loss of $0.18 compared with a loss of $0.08 in the prior-year period. Adjusted EBITDA for the fourth quarter was $15 million compared with $24 million in the prior-year period, and corresponding adjusted EBITDA margin decreased to 1.45% from 2.4% in the prior-year period. Let me now turn to segment results, beginning with our fresh and value-added products segment. Net sales for the fourth quarter of 2021 increased by $12 million or 2% when compared with the prior year period. As previously noted, the fourth quarter of 2021 consisted of 13 weeks compared with 14 weeks in the fourth quarter of 2020. The additional week in the prior-year period contributed an estimated $42 million in net sales. On a comparable basis, net sales for the fourth quarter of 2021 increased $54 million or 10% compared with the prior year period. The primary drivers of the increase were in our melon and financial products line. Melon net sales increased in North America, driven by higher sales volume and per-unit sales prices. Additionally, net sales increased across most regions, driven by higher per-unit sales prices. However, sales of fresh-cut vegetables decreased during the fourth quarter compared with the prior-year period. Fresh-cut vegetable net sales decreased primarily in North America, including our main packing operations. This decrease was driven by lower sales volume and lower per-unit sales prices, related to lower demand from food service channels and a lack of sufficient labor availability. For the quarter, adjusted gross profit in the fresh and value-added products segment was $28 million compared with $32 million in the prior-year period. The decrease was driven by inflation and other cost pressures which resulted in higher per unit production and distribution costs. In terms of comparability, the additional week in the prior year contributed an estimated $2 million in gross profit. From a broader perspective, the primary drivers of the variance were in avocados; gross profit decreased primarily in North America driven by lower sales volume coupled with higher per-unit procurement and distribution costs. Fresh-cut vegetable gross profit decreased in North America, primarily in our manufacturing operations, driven by lower net sales coupled with higher per-unit production and distribution costs. This decrease was partially offset by higher gross profits across most of our other key product categories, including non-tropical fruits, melons, and other fruits. Moving to our banana segment for the fourth quarter of 2021, net sales decreased by $13 million or 3% compared with the prior-year period, primarily driven by North America and Asia. The additional week in the prior year contributed an estimated $28 million in net sales. On a comparable basis, net sales for 2021 increased $15 million or 4% compared to prior-year periods. Adjusted gross profit for the fourth quarter of 2021 was $9 million compared with $17 million in the prior-year period, primarily driven by North America and Asia. In both regions, the decrease was driven by lower net sales. As it relates to per unit costs, North America gross profit was negatively impacted by higher production and distribution costs, while Asia was negatively impacted by higher production and ocean freight costs. Now, moving through selected financial data. Selling, general, and administrative expenses were $44.5 million, compared with $54 million in the previous year. The decrease was driven by lower provision for credit losses and lower promotional and administrative expenses. Net interest expense was lower due to lower interest rates and a lower average debt balance. Income tax benefits were approximately $7 million during the quarter compared to benefits of $4 million in the prior-year period, primarily due to the release of revenue allowances as it was determined deferred tax assets will be utilized. Now, turning to our full-year 2021 results. For the full-year 2021, net sales increased by $50 million or 1% compared with the prior-year period. In both periods, the increase in net sales was driven by higher net sales across our other products and services segments, which includes third-party freight services and fresh and value-added product segments. The additional week in the prior-year period contributed an estimated $72 million in net sales. On a comparable basis, net sales for 2021 increased $122 million or 3%. Adjusted gross profit was $307 million compared to $284 million in the prior-year period. As previously mentioned by Mohammad, in the first half of 2021, even with normal cost pressures, gross profit benefited from strong performance across all of our segments as we aligned higher per unit prices. The higher pricing helped offset incremental production costs following the hurricanes in Central America in the fourth quarter of 2020. In the second half of 2021, inflationary and other cost pressures intensified, coupled with seasonality, negatively impacting gross profit. In terms of exchange rates, gross profit was favorably impacted by fluctuations versus the Euro, Costa Rican colon, and British pound, partially offset by a stronger Mexican peso. For the fiscal year, adjusted operating net income was $112 million compared with $89 million in the prior-year periods. The increase was primarily driven by higher gross profit and a decrease in selling, general, and administrative expenses. Adjusted net income was $81 million compared with $55 million in the prior-year period. Diluted earnings per share was $1.68 compared with $1.03 in the prior-year period, while adjusted diluted earnings per share was $1.69 compared with $1.15 in the prior-year period, marking a 47% improvement year-over-year. Moving onto cash flow for the year, we generated $129 million in cash flow from operating activities compared to $181 million in 2020. The decrease was primarily attributable to higher levels of inventories, as we proactively increased inventory of key raw materials to secure costs and availability. Inventory was also impacted by increasing costs largely related to current cost pressures. Partially offsetting the decrease were higher net income and higher balances of accounts payable and accrued expenses. In the second half of 2020, we announced our optimization program, which involves selling non-strategic and underutilized assets, including land and facilities. Since the program was announced, we generated $67 million in cash proceeds, of which $17 million came in 2021. We expect progress toward achieving our target of $100 million in cash proceeds to continue in 2022. In terms of capital spending, we invested $99 million in capital expenditures in 2021, compared with $150 million in 2020. The share of the spend relates to the last two new container vessels added to our fleet, investments in Asia, North America, and Europe, and improvements to our banana and pineapple operations in Central America. As mentioned by Mohammad, our CapEx investments are heavily focused on automation. Turning to long-term debt, we've repaid approximately $23 million, bringing our balance down from $542 million at the end of 2020 to $519 million in 2021. Based on a trailing 12-month period, our total debt stands at 2.5 times adjusted EBITDA. As announced this morning in our financial results press release, we declared a quarterly cash dividend of $0.15 per share payable on April 4th, 2022, to shareholders of record on March 9th, 2022. Over the full fiscal year 2021, we declared four quarterly cash dividends totaling $0.50 per share. This concludes our financial review; we can now turn the call over for Q&A.

Operator, Operator

At this time, I'd like to remind everyone that in order to ask a question, we will pause for just a moment to compile the Q&A roster. Again, at this time, I'll turn the call back over to you.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you very much. I appreciate the attendance of our investors and others on the call and look forward to speaking to you on our next quarterly call. Thank you very much. Have a good day.

Operator, Operator

This concludes today's conference call; you may now disconnect.