Earnings Call Transcript - FDP Q2 2025

Operator, Operator

Good day, everyone, and welcome to Fresh Del Monte Produce's Second Quarter 2025 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, Ms. Christine Cannella. Please go ahead, Ms. Cannella.

Christine Cannella, Vice President, Investor Relations

Thank you, Deseray. Good day, everyone, and thank you for joining our second quarter 2025 conference call. Joining me in today's discussion are Mr. Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Ms. Monica Vicente, Senior Vice President and Chief Financial Officer. I hope that you had a chance to review the press release that was issued earlier. You may also visit the company's IR website to access today's earnings material 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 will be speaking to today, including the answers we give in response to your questions, may include forward-looking statements within the safe harbor provisions of the federal securities laws. In today's press release and in our SEC filings, we detail risks that may cause our future results to differ materially from these forward-looking statements. Our statements are as of today, July 30, 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 second quarter 2025 financial results, followed by a question-and-answer session. With that, I will turn today's call over to Mr. Mohammad Abu-Ghazaleh. Please go ahead.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Christine, and thank you for joining us for our second quarter 2025 earnings call. The second quarter of 2025 delivered another period of strong performance for Fresh Del Monte, continuing the momentum we have built through consistent execution and strategic discipline. This quarter, historically our strongest of the year, saw growth across key financial metrics. Net sales increased by 4%. Gross profit rose 6% compared with the prior year period, and gross margin expanded to 10.2% from 9.9% compared to the same period last year. This quarter's positive results reflect the power of consistency and continuous improvement across our fresh-cut business and ongoing demand for our pineapple portfolio. Much of this growth reflects a long-term shift in the pineapple category, one that we helped lead. In the 1970s, Americans consumed less than a pound of pineapple per day per person. Today, that number is nearly 8 times higher according to the USDA. This transformation began with our 1996 launch of Del Monte Gold, the first widely available sweet pineapple, and continues through the strength of our proprietary offerings and value-added formats. We know that consumers are engaging more with pineapples. According to a leading provider of insights, consumer spend on tropical fruit has risen 58% since 2017, outpacing overall produce growth and signaling the rising relevance of the category itself. As a pioneer in this space, we are well positioned to lead. Demand for our pineapple portfolio remains strong and continues to outpace supply, driven by trusted brands like Honeyglow and Pinkglow, which is the result of agronomic leadership and targeted investments. We are managing global supply carefully, strengthening continuity and taking steps to ensure consistent availability for our customers. We also launched Pinkglow in the United Arab Emirates during the quarter, marking our first sustained market entry for a variety in the Middle East. While still early in scale, it reflects a strategic step in expanding our high-value portfolio into new international markets where brand distinction and potential alike. We also know that when it comes to pineapples, convenience matters. Demand accelerates when the product is fresh-cut, prepared, and ready to enjoy. As more consumers around the world prioritize health, flavor, and ease, our ability to meet that demand with the right product mix and the operational agility to deliver it is driving meaningful growth across our fresh-cut business. We are also continuing to advance our efforts in high-margin, value-added business ventures, particularly those focused on residues and specialty ingredients. These projects are still in their early stages, but we believe they represent real long-term opportunities. Like many in the industry, we are managing disruptions at the Port of Caldera in Costa Rica. Unusually strong ocean swells, the worst that we have seen in decades, have severely limited vessel access. With minimal structural protection, the port has become a choke point, leading to wait times of 3 to 5 days and increased congestion. The result is higher cost and broader logistical impact across the industry. While the situation remains difficult, our teams are responding with urgency, adjusting schedules, reallocating shipments, and doing everything possible to maintain continuity for our customers. Before I go, I believe it's important to discuss an industry-wide situation regarding bananas, one that I have been predicting and warning about for years. There is a global shortage in banana production. The causes are clear; shifting climate patterns, particularly warmer temperatures combined with humidity, are accelerating the spread of disease in key growing regions, primarily Black Sigatoka. On top of that, the continued spread of Fusarium wilt known as Tropical Race 4 is adding further pressure. These diseases are having a direct impact on supply. Black Sigatoka is affecting crops across Central America, while other countries are facing the compounded impact of both diseases. As we have shared previously, our R&D teams have been working to address the global threat posed by Fusarium wilt and we are pleased to report that field testing of TR4 resistant gene additive banana lines is expected to begin in the coming months, a meaningful step toward long-term category resilience. Meanwhile, global demand for bananas remains strong as they continue to be one of the most affordable and accessible fruits in the grocery aisle. We are already seeing a clear imbalance between supply and demand, and we anticipate this would remain a key industry dynamic in the quarters ahead. With that, I will turn it over to Monica to discuss our second quarter 2025 results in detail. Monica?

Monica Vicente, Senior Vice President and CFO

Thank you, Mr. Abu-Ghazaleh, and good morning, everyone, and thank you for joining us on today's call. I'll begin with our second quarter financial results, followed by our outlook for the rest of the year. As Christine mentioned, 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. The second quarter is historically our strongest period. Having said that, this quarter reflects our continued efforts to expand our margins by focusing on improving our product mix. Now let's go through the financial results. Net sales were $1.183 billion compared with $1.14 billion in the prior year, an increase of 4%. The increase was driven by higher net sales in our fresh and value-added products and banana segments due to higher per unit selling prices and favorable impact of fluctuations in exchange rates primarily related to the euro, Japanese yen, and British pound. The increase also reflects tariff-related price adjustments in North America. Gross profit for the second quarter was $120 million compared with $113 million in the prior year. The increase was driven by higher net sales in our fresh and value-added products segment, partially offset by higher per unit production and procurement costs as well as increased distribution costs, including tariff charges in North America. Gross margin was 10.2% compared with 9.9% in the prior year. This also includes a sequential increase from 8.4% in the first quarter. Operating income for the second quarter was $68 million, roughly in line with the prior year. The slight increase was primarily driven by higher gross profit, partially offset by lower gain on disposal of property, plant, and equipment in the current year. Adjusted operating income was $69 million compared with $65 million last year. Other income for the second quarter was a gain of $6 million compared with a gain of $2 million in the prior year. The change was due to equity earnings from unconsolidated companies within the food and nutrition sector. Net income attributable to Fresh Del Monte for the second quarter was $57 million compared with $54 million in the prior year, and adjusted FDP net income was $59 million compared with $51 million last year. Our diluted earnings per share for the second quarter was $1.18 compared with $1.12 in the prior year. And adjusted diluted earnings per share was $1.23 compared with $1.06 in the prior year. Adjusted EBITDA for the second quarter was $95 million, up from $89 million in the prior year. Both quarters reflected an 8% margin as a percentage of net sales. Let's take a closer look at the financial performance for the second quarter across our business segments beginning with our fresh and value-added product segment. Net sales for the second quarter were $723 million compared with $694 million last year, an increase of 4%. The increase was primarily driven by higher per unit selling prices in our pineapple product line as well as higher sales volume and per unit selling prices in our fresh-cut fruit product line, both supported by continued strong market demand. Additional contributions came from the favorable impact of fluctuations in exchange rates as well as tariff-related price adjustments in North America. The gains were partially offset by lower net sales in our fresh-cut vegetable and vegetable product lines, reflecting strategic operational reductions implemented in the fourth quarter of 2024, which included the sale of certain assets of Fresh Leaf Farms. Gross profit was $85 million compared with $78 million in the prior year. The increase was driven by higher net sales, partially offset by higher per unit production and procurement costs as well as increased distribution costs, including the impact of tariffs in North America. Gross margin was 11.7% in the second quarter compared with 11.2% in the prior year. We are continuing to build on this momentum as we work toward our goal of sustaining double-digit gross margins in the long teens for this segment, supported by ongoing improvements in product mix, including growth in our premium pineapple varieties such as Honeyglow and Jet Fresh. Moving on to the Banana segment. Net sales for the second quarter were $410 million compared with $394 million in the prior year, an increase of 4%. The increase was primarily driven by higher per unit selling prices across each of our regions, combined with favorable impact of fluctuations in exchange rates, along with tariff-related price adjustments in North America. We also saw higher sales volume in the Middle East as last year was impacted by shipment disruptions related to the Red Sea conflict. The increase was partially offset by lower sales volume in Asia where an oversupply of local seasonal fruit weakened demand, and persistent crop disease reduced available supply. In North America, sales volume was also impacted by crop disease, specifically the continued spread of Black Sigatoka, which has intensified by adverse weather conditions in our growing regions. Gross profit was $30 million, in line with the prior year. The benefit of higher net sales was mostly offset by higher per unit production and procurement costs resulting from the adverse weather conditions already mentioned, along with higher distribution costs, including the impact of tariff-related charges in North America and ongoing industry-wide port congestion and logistical disruptions across our Central American ports. Gross margin was 7.3% in the second quarter of 2025 compared with 7.6% in the prior year. Lastly, our Other Products and Service segment. Net sales for the second quarter were $50 million compared with $51 million in the prior year. The slight decrease was primarily due to lower per unit selling prices in our poultry and meats business. Gross profit was $5 million compared with $6 million in the prior year as a result of the lower net sales. Gross margin was 10.4% in the second quarter compared with 10.7% last year. Now moving to selected financial results. Our income tax provision for the second quarter was $14 million compared with $12 million in the prior year. The increase was primarily due to increased earnings in certain higher tax jurisdictions. Our effective tax rate for the second quarter was 20%. Net cash provided by operating activities for the 6 months was $159 million compared with $144 million in the prior year. The increase was primarily due to higher net income and working capital fluctuations, mainly driven by higher levels of accounts payable and accrued expenses, partially offset by higher levels of inventory when compared to the prior year. We ended the second quarter with $201 million of long-term debt, an $84 million or 29% reduction compared with the prior year and an 18% reduction compared with fiscal year-end 2024. Our adjusted leverage ratio remains at less than 1x EBITDA. Our CapEx investment for the first 6 months was $22 million compared with $21 million in the prior year. As announced in our press release, we declared a quarterly cash dividend of $0.30 per share payable on September 5, 2025, to shareholders of record on August 13, 2025. On an annualized basis, this equates to $1.20 per share, representing a dividend yield of 3.3% based on our current share price. With that, let's turn to our full year outlook and strategic priorities. As we look ahead, we continue to expect full-year 2025 to be broadly in line with the outlook we shared during our first quarter call. Our outlook reflects our expectation for stable demand across our core products, ongoing operational efficiencies, and disciplined execution on our strategic initiatives. As part of that execution, we're currently transitioning from legacy break bulk shipping vessels to container vessels in the Asia Pacific region and we plan to sell two older vessels later this year. This shift enhances operational efficiency and better aligns with our evolving logistic needs. As I mentioned earlier, historically, the second quarter has been one of our strongest, and this year was no exception. We are confident about our full-year trajectory while we remain mindful of evolving external factors beyond our control. We believe our underlying business fundamentals are strong, and we are confident in our ability to deliver on our full-year 2025 objectives. We reiterate our expectation for the full year as follows: We expect to see net sales growth of 2% year-over-year. And as far as gross margins by business segment, in our fresh and value-added products segment, gross margin is expected to be in the range of 10% to 11%. In our Banana segment, gross margin is expected to be in the lower end of the historical range of 5% to 7%. For our Other Products and Service segment, gross margin is expected to be in the range of 12% to 14%. Our selling, general and administrative expense is expected to be in the range of $205 million to $210 million. As it relates to CapEx, we now expect our full-year spend to be in the range of $70 million to $80 million, down from $80 million to $90 million previously communicated. This revision reflects updated project execution timelines. We remain committed to funding initiatives that drive long-term value. We expect cash provided by operating activities to be in the range of $180 million to $190 million. In closing, the second quarter delivered solid net sales and net income, consistent with our expectations and reflective of the seasonal strength we typically see this time of year. As we enter the second half, we're mindful of typical third-quarter dynamics including increased availability of seasonal fruit and softer demand during the summer months. We remain focused on executing our strategy, delivering value, and positioning Fresh Del Monte for long-term success. This concludes our financial review. We can now turn the call over to Q&A.

Operator, Operator

We have a question from Mitch Pinheiro with Sturdivant & Company.

Mitchell Brad Pinheiro, Analyst

I want to start with a bunch of questions. First on the pineapple business. Pineapple supply has struggled a bit, possibly due to weather issues, but I was wondering, Mohammad, if you could update us on the new pineapple growth and how you anticipate that will unfold over the next six months. Additionally, what does the supply outlook for your pineapples look like into 2026? Should we expect an increase, or are we not quite there in the cycle?

Mohammad Abu-Ghazaleh, Chairman and CEO

We expect that, as we move toward the end of this year and into next year, there will likely be a shortage of supply, similar to or slightly more than this year. From our perspective, we see a robust pineapple market ahead, particularly with our premium varieties that stand out in the market. Our expertise and our seeds are superior to anything else available. Therefore, I don't anticipate any changes in the current market dynamics through 2026. Additionally, in a couple of years, we will begin our production in Brazil, which I believe we haven't announced yet. This will provide another source of production, primarily for the Brazilian market.

Mitchell Brad Pinheiro, Analyst

So once you get through 2026, I guess, like what type of growth rate would you expect to see in your own business supply? Like are we talking new planting and things like that would be mid-single digit? I mean, is it stronger...

Mohammad Abu-Ghazaleh, Chairman and CEO

I would say in Costa Rica, we will have expansion. As we see, we are expanding our production. Areas that have not been planted before are already under plantation. And as I said, we are expanding also in other parts of the world and in Africa, Brazil, as well as in the Philippines. So we are having, I mean, not concentrated in one location, but really across the world, but we will be having over the next 2 to 3 years. I cannot give you figures exactly, but I'm telling you that we are already expanding our production capacity, and we expect there will be. And I would say it will not be like 20 million boxes additional, but there will be a meaningful increase in our production in the next 2 to 3 years.

Monica Vicente, Senior Vice President and CFO

And Mitch, on the Costa Rica expansion, specifically, a little bit higher than the mid-single digits, and you know this is a long-term crop. So definitely '27 from today compared to '27 a little bit higher than the mid-single digits, just Costa Rica.

Mitchell Brad Pinheiro, Analyst

Okay. Regarding Pinkglow, I'm noticing more distribution. Can you provide an update on your presence in the U.S. market or North America? What is the current annual contract value, and how constrained is your supply? Additionally, what are your projections for distribution growth for Pinkglow over the next one to two years?

Mohammad Abu-Ghazaleh, Chairman and CEO

We have faced limitations in supply recently due to restrictions from Costa Rican authorities, who were not permitting us to plant more large pineapple due to concerns about GMOs and contamination risks. However, we have now received approval to expand our acreage, and we plan to move forward with that soon. We anticipate that it will take approximately 18 months for the additional supplies to begin arriving. By the end of 2026 or early 2027, we expect to see more supply entering the market, particularly as demand is strong. Currently, we don't have enough supply, especially for regions outside of North America. For instance, we've begun shipping pink pineapples to the Emirates by air, although they're not yet available in supermarkets. These are sold online for around $30 to $33 each. All shipments are pre-booked and preserved. We are also looking to enter the Saudi Arabian market and several other countries in the region. However, supply remains a limitation, and we will focus on markets that offer the best financial returns.

Mitchell Brad Pinheiro, Analyst

It's quite an accomplishment. This Pinkglow sells out everywhere I go. When I talk to the produce manager, they sell every one they can get and would like more. So it's a good situation for you guys, and they're selling at double-digit prices per pineapple, which is incredible.

Mohammad Abu-Ghazaleh, Chairman and CEO

Yes, in addition to that, we previously had a lot of byproducts from the pink pineapple that we couldn't export as export quality. We didn't have the authorization from the Costa Rican authorities to process them into juice or frozen products. Thankfully, over the last two months, we've received permission to freeze these byproducts, and we are currently processing them. This is a great addition to our product lineup. The pink pineapples are also being used in ice cream and juices through our food service industrial segment.

Mitchell Brad Pinheiro, Analyst

Changing the subject, moving to fresh-cut fruit. You're doing very well on fresh-cut fruit, obviously. Where specifically is the demand coming from? Is it retail versus food service? Is it equal across the board? Is there any one geography that's growing particularly strong for you guys? Can you talk a little bit about where that growth and demand is coming from and where you see it going?

Mohammad Abu-Ghazaleh, Chairman and CEO

We are primarily observing demand in the retail sector, with significant growth and expansion occurring there as well as in convenience stores. This trend is evident not just in North America, but also in the U.K. and the Middle East. Our expansion and growth efforts are truly global. Currently, we are assessing new countries to launch fresh-cut operations based on feasibility and potential returns on investment. This is part of our strategy for moving forward. Our global reach means that we're not limited to North America. With our expertise and a vertically integrated supply chain, we are positioned to supply various regions efficiently, leveraging our ability to provide fresh fruit closer to the markets. For instance, while we produce pineapples, a key product in the fresh-cut line, in Costa Rica, we also produce in several other continents. This logistical advantage allows us to get our products to markets like Japan or Europe more efficiently, using closer regions such as Africa to optimize our logistics beyond just sourcing.

Mitchell Brad Pinheiro, Analyst

Okay. Your margins continue to improve as you take advantage of your capacity investments. What do you think is the upper limit for this?

Mohammad Abu-Ghazaleh, Chairman and CEO

You mean on the fresh cut?

Mitchell Brad Pinheiro, Analyst

Yes.

Mohammad Abu-Ghazaleh, Chairman and CEO

The fresh cut, I think the margins would stay more or less in the same region that we see right now. What would be our niche is that we will be introducing more innovation. I mean, let's take guacamole, for instance, fresh guacamole. I mean, we started this almost probably a year or less than a year ago. And we see more than double-digit growth month-over-month, I mean, in that category. And we are the only one in the market that can produce fresh guacamole to the retail sector. So that gives you an idea where we are going. I mean, that's the type of products and type of SKUs that we would like to introduce and not just depend on the traditional type of fruit offerings or vegetables.

Mitchell Brad Pinheiro, Analyst

Moving to bananas, how has Black Sigatoka affected the banana supply in Costa Rica or Central America? Is it definitively having an impact on supply?

Mohammad Abu-Ghazaleh, Chairman and CEO

No. Costa Rica's export volume is down over 20% this year, primarily due to the Sigatoka disease and other soil and climate issues. I believe the situation is worsening. The disease develops immunity and adapts against the chemicals used for treatment, rendering them less effective over time. There is currently only one global supplier of the necessary product, and escalating costs require more applications, increasing the cost per banana box. In my opinion, I don’t foresee a cure unless something extraordinary occurs. We are actively working on various strategies to address the Sigatoka issue, but I cannot disclose specifics at this moment.

Mitchell Brad Pinheiro, Analyst

Okay. Over time, the negative effects on the banana supply should lead to higher prices. Bananas are typically one of the cheapest items in grocery stores, so there is room for price increases to counteract the supply issues. Would you agree with that?

Mohammad Abu-Ghazaleh, Chairman and CEO

It's not our issue, it's an industry issue. We have actually lowered our volumes over the last two years to maintain profitability and make this business viable. The problem lies with the existing suppliers who do not recognize that they cannot survive with such pricing in the market moving forward.

Mitchell Brad Pinheiro, Analyst

I have a couple of quick questions. I noticed you're selling two of your older vessels as you transition to container ships. Are you considering purchasing two new ones to expand your fleet, or are you satisfied with your current setup and planning to lease vessels as needed to meet your capacity?

Mohammad Abu-Ghazaleh, Chairman and CEO

No. But what Monica mentioned actually is only for Asia. These two vessels were servicing Japan and Korea markets, and that's what we are replacing. We are selling off these ships and using container shipping lines now to replace it. As far as North America, everything is also on the table. I mean, we will do whatever is in the best interest of the company, definitely.

Mitchell Brad Pinheiro, Analyst

Are you satisfied with your purchase of the six vessels? Is that going as you anticipated?

Mohammad Abu-Ghazaleh, Chairman and CEO

You can see our cash generation, I think that speaks for itself, Mitch. You look at our cash, I think.

Mitchell Brad Pinheiro, Analyst

And then a couple of other things. You had a $6 million equity earnings from unconsolidated companies. Which companies are generating that type of profit for you?

Mohammad Abu-Ghazaleh, Chairman and CEO

We have invested in several friendly funds that we have been closely associated with, particularly in the food industry. We believe we made the right choices with our investments, and this is only the beginning. These companies are proving to be very successful and are currently experiencing double-digit growth. We are extremely pleased with our investments.

Mitchell Brad Pinheiro, Analyst

Okay. And then the last question was about the foreign exchange impact on revenue and gross profit. I didn't see the Q yet, but can you provide those amounts you mentioned?

Monica Vicente, Senior Vice President and CFO

Yes. The euro obviously has been getting stronger, which helped us. We do have part of our sales hedged at a little bit lower rate, but it definitely helped. The British pound also was stronger. And the Japanese yen was stronger than last year, even though it's kind of weakened a little bit now, but definitely, those three currencies helped our net sales, but the local selling prices in these markets were also very strong. So it was both scenarios.

Mohammad Abu-Ghazaleh, Chairman and CEO

But to add to what Monica said that you have to think, there is a tailwind on one side, and we have headwinds on the other side. I mean, Costa Rica by itself is a very, very difficult situation. I mean we used to have the Colón exchange rate to the dollar three years ago for CRC 610, CRC 620, and today, we are barely at around CRC 500, CRC 506, CRC 505, which you can say has increased, of course, inflation over the last 2, 3 years, continuous inflation, continuous increasing cost and then the exchange rate is getting stronger, and that's huge headwinds for us. I mean, it added a lot of cost to our production, be it on pineapple, melon, or bananas or whatever we do there. So really, when you look at the tailwind, which is the euro, you also have to look at the headwind, and then one offsets again to each other. I wish the Colón would have been normal as it used to be; then it would have been an even much better picture than what we see today.

Operator, Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Desaray, and I would like to thank everyone for joining us on this call today and hope to talk to you on our next quarter with equally good news. Thank you, and have a good day.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining.