Earnings Call Transcript - FDP Q1 2023

Operator, Operator

Good day, everyone, and welcome to Fresh Del Monte Produce's First Quarter 2023 Earnings 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 speakers' remarks, there will be a question-and-answer session. For opening remarks and introductions, I would like to turn today's call over to Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Pou. Please go ahead, Ms. Pou.

Claudia Pou, Vice President, Corporate Communications

Thank you, Christie. Good morning, everyone, and thank you for joining our first quarter 2023 conference call. As Christie mentioned, I'm Claudia Pou, Vice President, Corporate Communications 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 that you have 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 investor relations.freshdelmonte.com to access today's earnings materials and 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 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 will be speaking to today, includes the answers we give in response to your questions that 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, May 3rd, and we have no obligation to update any forward-looking statement we may make. During the call, we will provide a business update, along with an overview of our first quarter 2023 financial results, followed by a question-and-answer session. With that, I am pleased to turn today's call over to Mohammad.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Claudia. Good morning, everyone, and thank you for joining our first quarter '23 conference call. Overall, our first quarter results were positive, reflecting our unwavering commitment to profitability through efficiency and optimization of resources. During the first quarter, our gross profit was $97 million, and gross margin of 8.6% were stronger than the prior year period, which is reflective of our ongoing strategic efforts to further increase our profitability despite the continued impact of inflation. We are starting to see more stability in the market as high inflation is moderating, but we are still operating in an inflationary environment. Given our global footprint, foreign exchange rates pose significant headwinds for us this quarter, as did the continuing increase in interest rates. We were able to achieve strong results despite these headwinds by remaining focused on optimizing our assets and our unwavering commitment to improve profitability. This past quarter, we finalized the sale of three underutilized properties as part of our focus to optimize all corners of our business. We also recently upgraded the cargo capacity of six of our container ships by 10%, allowing us to expand our cargo services to fulfill new and existing customer needs. Additionally, we have solidified several new inland transportation and warehousing partnerships for our Tricont Trucking and Logistics companies. We are committed to expanding our third-party logistics business by land and sea as we further leverage our asset footprint in Latin America and the United States. Our continued focus on innovation and value-added products has led to a positive outlook and feedback from our customers, particularly in our fresh cut business. Consumers are looking for the convenience and quality that Fresh Del Monte provides. We continue to work one-on-one with our top customers in North America to generate mutually beneficial opportunities. We have seen an uptick in orders for bulk cut produce, a new form of fresh cut for us, and it is fulfilling a need for major retailers. We continue to innovate fresh cut fruit and vegetable offerings in collaboration with our customers to create win-win revenue scenarios and provide value-added products that meet our customers' and consumers' expectations. Finally, we have been recognized by Newsweek as one of America's most trusted companies of '23 for the second year in a row. We were rated on customer trust, investor trust, and employee trust. We are honored to be recognized once again for our honesty and transparency. As we look to the rest of '23, we will continue to identify places where we can innovate and push the produce industry forward. We will work towards leveraging our strength in agriculture and supply chain to become a technology-driven sustainable company. Now I will turn the call over to Monica to talk about the financial results.

Monica Vicente, Senior Vice President and CFO

Thank you, Mohammad, and thank you for joining us on today's call. Let's first talk about our first quarter of 2023 financial results. Net sales for the first quarter of '23 were slightly lower by $8 million or 1% compared with the prior year. The decrease in net sales was due to lower per unit selling prices of avocados and negative fluctuations in exchange rates, primarily in Europe and Asia, combined with lower volumes in the fresh and value-added products segment. However, most of the decrease was offset by higher per unit selling prices across most other products and higher banana sales volume. As Mohammad mentioned, we had a strong quarter. Gross profit for the first quarter of '23 was higher by approximately $7 million compared with the prior year. The increase in gross profit primarily relates to the higher per unit selling prices across most product categories. Partially offsetting the increase in gross profits were higher production and procurement costs as well as higher ocean freight costs due to continued inflation. Adjusted gross profit for the first quarter of 2023 was $99 million compared with $90 million in the prior year. Adjusted gross margin was 8.8% compared with 7.9% in the prior year. Adjusted operating income was $51 million compared with $40 million in the prior year. The increase in adjusted operating income was primarily due to higher gross profit. Adjusted net income was $27 million compared with $26 million in the prior year. Our diluted earnings per share was $0.81 compared with $0.54 in the prior year. Adjusted diluted earnings per share remained the same as the prior year at $0.55. The difference between GAAP and adjusted diluted earnings per share during the first quarter of '23 was $0.26, primarily related to the gain on the sale of underutilized assets. Adjusted EBITDA for the first quarter of 2023 was $65 million compared with $63 million in the prior year period, and the corresponding adjusted EBITDA margin was 5.8% compared with 5.5% in the prior year. Let's now turn to the segment results, beginning with our fresh and value-added product segment. Net sales for the first quarter of 2023 decreased by approximately $29 million to $643 million compared to the prior year period. The decrease was primarily due to lower per unit selling prices of avocados due to market volatility, combined with a decrease in total sales volume for the segment. Most of the lower sales volume relates to fresh-cut vegetables, prepared foods, and vegetables. The lower sales volume for fresh-cut vegetables and vegetables was primarily a result of proactive steps we took to improve profitability. We expect these conditions to persist as we continue to focus on profitability and experience avocado pricing volatility compared to the prior year. The decrease in sales was partially offset by higher per unit prices across most other product categories and higher pineapple sales volume. Adjusted gross profit for the fresh and value-added product segment for the first quarter of '23 was $49 million compared with $44 million in the prior year. Despite lower net sales, gross profit was positively impacted by higher per unit selling prices for most categories. The segment continued to be negatively impacted by cost pressures of raw materials such as packaging, fertilizers, and also higher ocean freight costs. Gross profit for the fresh and value-added products segment includes a $1.7 million inventory write-off primarily due to the sale of two distribution centers in the Middle East. Adjusted gross margin for this segment increased to 7.6% compared with 6.6% in the prior year. Moving to our banana segment. Net sales for the first quarter of 2023 increased by $19 million or 5% compared with the prior year. The increase in net sales was primarily related to higher per unit selling prices in most regions and higher sales volume in North America and Europe. Net sales of bananas were negatively impacted by fluctuations in exchange rates, primarily in Europe and Asia. Banana segment adjusted gross profit for the first quarter of '23 was $43 million compared with $38 million in the prior year. The increase in adjusted gross profit was primarily driven by higher net sales, partially offset by higher procurement and production costs such as packaging material, labor, and higher ocean freight costs. Adjusted gross margin for the segment increased to 10.2%, compared with 9.3% in the prior year. Lastly, net sales in our Other Products & Services segment increased by $2 million or 3% mainly due to higher net sales of third-party ocean freight services. Adjusted gross profit for our Other Products & Services segment decreased by $1 million as a result of higher costs. Now moving to selected financial data... Selling, general, and administrative expenses were $48 million compared with $45 million in the prior year. The increase was primarily driven by higher employee compensation costs, higher professional fees, and higher advertising and promotional expenses. Net interest expense was $8 million compared with $5 million in the prior year, driven by higher interest rates. Other expense net for the first quarter of 2023 was $9 million compared with $4 million in the prior year period. The increase primarily relates to higher foreign currency-related losses. Income tax provision was $10 million compared with $6 million in the prior year period. The increase in the income tax provision was primarily due to increased earnings and certain higher tax jurisdictions. Let's move now to our cash flow. Net cash provided by operating activities for the first quarter of '23 was $16 million compared with net cash used in operating activities of $300,000 in the prior year period. The increase was due to working capital reductions mainly related to levels of accounts receivable and raw materials and packaging supplies inventory. Long-term debt decreased by $81 million to $473 million at the end of the first quarter of 2023 compared with $554 million at the end of the same quarter last year. As it relates to capital spending, we invested $10 million in the first quarter of 2023 compared with $11 million in the prior year period. As announced this morning in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on June 9, 2023, to shareholders of record on May 17, 2023. This is an increase from our previous quarterly dividend of $0.15 per share. This concludes our financial review. We can now turn the call over to Q&A.

Operator, Operator

And your first question comes from the line of Mitch Pinheiro from Sturdivant & Co.

Mitchell Pinheiro, Analyst

Yes, hi.

Mohammad Abu-Ghazaleh, Chairman and CEO

Good morning.

Mitchell Pinheiro, Analyst

I have a couple of questions. First, I want to start with the banana business to get that out of the way. You had a good quarter there. As you look ahead, even without a long-term view, do we see stability in the market this quarter? Is supply and demand in balance? Will margins be reasonably strong? Are you still maintaining the pricing that you have implemented?

Mohammad Abu-Ghazaleh, Chairman and CEO

Yes. As we speak right now, Mitch, we see the market stable. Of course, the summer months usually are a little bit soft compared to the rest of the year. But surprisingly, Europe was very stable and solid throughout the winter season. We don't see much fluctuations. Actually, because of the financial situation over the last two or three years, we have seen several operators tightening operations and other traders in bananas have gone out of the market. So the market has become more stable and less volatile, especially in Europe. North America is normal. It's stable. The Far East and Philippines is coming down in production because of the disease, so volumes are coming down from the Philippines to the Asian markets, which gives room for Central America and Ecuador to have more outlets. So all in all, I think the banana market has stabilized and with better cost of supply and demand planning, I see things going forward in a much more normal way than in previous years.

Mitchell Pinheiro, Analyst

And are you increasing as you did in the fourth quarter, do we expect to see more of your own fruit sold rather than third-party purchased fruit?

Mohammad Abu-Ghazaleh, Chairman and CEO

No, we are actually more opportunistic in our management of our volumes. We have our own volumes, which we are not planning to increase. Increasing our own volume means heavy investments, which we are not planning to do now rather than working on third-party purchases and leveraging that with opportunistic management of the volume.

Mitchell Pinheiro, Analyst

Okay. Moving on to fresh and value-added, specifically in the fresh-cut business, I think you mentioned that fresh-cut volumes were up?

Mohammad Abu-Ghazaleh, Chairman and CEO

The volumes were a little bit down, but marginally really. It's because of either availability of certain fruits during the season, like strawberries and mangoes, which are very volatile in terms of volumes throughout different seasons. That's also one of the reasons for a shortage of pineapples during sometime this quarter. It was marginal, and during the next few months, we will hopefully have a major kind of entry into the market with a new value-added product with a partnership. I can’t disclose this at this time, but hopefully, by sometime during the next few months, we will be announcing it.

Mitchell Pinheiro, Analyst

Okay. And then when it comes to margins, I mean they've improved nicely. Are these margins sustainable? Or does it depend on your product mix?

Mohammad Abu-Ghazaleh, Chairman and CEO

No, they are sustainable in my opinion. It's just a matter of better supply management and making sure your supply chain is more planned forward. This is what our team is doing right now. As I mentioned, we are using technology a lot more now in our business, which we are leveraging more and more as we go forward. This will give us a better edge in managing our supply chain and planning.

Mitchell Pinheiro, Analyst

Okay. My last question is about your balance sheet and capital expenditures. Your balance sheet leverage has decreased nicely with the recent asset sales. What are your thoughts on the balance sheet? You raised the dividend, so you seem confident about your financial position. Do you plan to look at share repurchases or acquisitions, or do you want to maintain a low debt profile?

Mohammad Abu-Ghazaleh, Chairman and CEO

No, I think we are not planning to do share buybacks right now. I think we will focus more on returning value to our shareholders, as well as looking at consolidating our business and expanding it from within organically. We have many areas where we are in the pipeline that will start kicking in towards the end of the year, with projects that relate to value addition to our business.

Mitchell Pinheiro, Analyst

Okay. Thank you for taking the questions. I'll get back in the queue.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you.

Operator, Operator

Your next question comes from the line of Jonathan Feeney with Consumer Edge.

Jonathan Feeney, Analyst

Good morning. Thank you very much, Mohammad and team. My first question is regarding the pricing environment and how retailers view your products and pricing. There are widespread concerns in the industry about consumers facing financial stress, and bananas are particularly affected as they show clear pricing for shoppers. You had a strong quarter in this area, and bananas are generally the most affordable and arguably the best value item in the grocery store. There is considerable debate in the industry about how companies are managing pricing and maintaining their profit margins despite consumer stress. What is your perspective on this for both your fresh and value-added businesses?

Mohammad Abu-Ghazaleh, Chairman and CEO

We're doing our best to sustain. As you can see from our results, we have been impacted heavily by the increased costs of all materials—be it raw materials, packaging, or transportation. We have been absorbing a lot of these costs ourselves, regardless of how much we passed to the retailers or buyers. It is a fraction of what we have incurred in our balance sheet in terms of costs. I think there is a limit to that. I hope that costs of raw materials will start easing up a little bit, which I don't see at this time. However, hopefully, within the next two quarters, things will start softening. This will reflect on our costs and results as well. We haven't increased our prices significantly in the last few months to our buyers. I think in the case of produce and bananas in particular, we probably have the least price increase compared to the general market, consumer goods, or even quick-service restaurants.

Jonathan Feeney, Analyst

It's been impressive how many costs your company has absorbed given its competitive position, efficiency, and logistics related to replacement costs. It's good to see that things are currently favorable in the banana business. Can you tell me where we stand on strategic asset sales? Have we completed all asset sales, or are there additional assets available for sale?

Mohammad Abu-Ghazaleh, Chairman and CEO

No, there are more assets. We are really becoming a live asset operator. For example, we sold the two distribution centers in the Middle East, but we have leased back only what we need for our operations, so we have not exited the business. We've just sold the assets and leased back some of the space we need. This means that we are out of huge fixed costs and big depreciation tickets. We have a lot of assets. We are a very rich company in terms of assets. Our balance sheet, I mean, we have these assets that are undervalued in our books. We will keep several assets earmarked for disposal and sale in the market as the price is right. There will be some in the next few quarters.

Jonathan Feeney, Analyst

Thank you, Mohammad. Since you mentioned it, could you provide a way for people to understand the concept of undervalued assets? We've been discussing this for two decades, but how can individuals conceptualize it? For example, can they look at recent transactions involving your key strategic assets and see that they are undervalued by a significant margin? While I know you can't give a specific number, how can you suggest people view this situation to recognize that this company has assets that greatly exceed their current valuation?

Mohammad Abu-Ghazaleh, Chairman and CEO

Well, our assets today, if you look at them, I think they are valued around 6% in terms of EBITDA. I believe the fair market value is around 14%, in my opinion. We have other assets in certain countries that are extremely valuable due to their proximity to urban areas now that urbanization is accelerating. The value of these properties will become extremely valuable as we move forward. This is about the potential of turning commercial value. From my perspective, we are very confident about our asset base. I mean, if you look at our book value compared to our share price, it speaks for itself, let alone the real value of the assets. We are comfortable and confident, and with all the projects that we are undertaking right now in the pipeline, I believe that Fresh Del Monte will be a completely different company in the next 12 months.

Jonathan Feeney, Analyst

And last question, I guess, you took us there. Our work suggests that Del Monte brand name is extremely well-known in American households compared to the number of people who are buying your products right now on the value-added side. It suggests — I know you have these JVs, and you have some rights to make different categories of value-added products. What has been the bottleneck preventing you from having a wider array of more non-fresh value-added products under the well-known Del Monte brand name? And what can we look forward to in the next 12 months in terms of getting more products in consumers' hands?

Mohammad Abu-Ghazaleh, Chairman and CEO

You will be hearing, hopefully in the next few months. That's why you said it very well — the Del Monte brand is extremely strong and recognizable. We have been approached by some companies to partner on some of these value-added products. So you will hopefully see in the next few months what we are talking about as part of our new approach to the market and our focus.

Jonathan Feeney, Analyst

That's awesome. Thank you, Mohammad. Thanks for all the time.

Mohammad Abu-Ghazaleh, Chairman and CEO

My pleasure.

Operator, Operator

There are no further questions at this time. Are there any closing remarks?

Mohammad Abu-Ghazaleh, Chairman and CEO

I would like to thank everyone for taking the time to share with us today, and I hope to talk to you soon. Thank you very much. Have a good day.

Operator, Operator

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