Earnings Call Transcript - FDP Q3 2023

Operator, Operator

Good day, everyone and welcome to Fresh Del Monte Produce Third Quarter 2023 Earnings Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. Ladies and gentlemen, I want to thank you for standing by. My name is Sheryl, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. For opening remarks and introductions, I would like to turn today's call over to the Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Pou. Please go ahead, Ms. Pou.

Claudia Pou, Vice President, Corporate Communications

Thank you, Sheryl. Good morning, everyone and thank you for joining our third quarter 2023 conference call. As Sheryl 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'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 1, and we have no obligation to update any forward-looking statements we may make. During the call, we will provide a business update, along with an overview of our third quarter and our nine-month 2023 financial results, followed by a question-and-answer session. With that, I am pleased to turn today's call over to Mr. Abu-Ghazaleh.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Claudia. Good morning, everyone. We are pleased with our nine-month 2023 results, marked by more than 140 basis points improvement in adjusted gross margins, solid adjusted EBITDA, and year-over-year adjusted EPS growth. Our results were driven by our focus on operational excellence, leading logistical infrastructure, and continued improvements in efficiencies and sustainability practices. For the nine months, our adjusted EBITDA increased 14% to $201 million. And our adjusted diluted EPS increased 23% to $1.87. We achieved these strong nine-month results despite facing macroeconomic challenges such as inflationary pressures and escalating weather events such as the floods in Greece, demonstrating our ability to run a profitable global enterprise in the face of large-scale challenges. The third quarter is seasonally our softest quarter. The headwinds this quarter were as follows: the September floods in Greece impacted our seasonal non-tropical product scanning facility, which resulted in $8.4 million of inventory write-offs and cleanup costs. Global demand for our third-party ocean freight business softened, which caused a decrease in our other products and services segments. As a reminder, in the prior year, this segment benefited from elevated shipping rates and demand due to market logistical conditions. Now for the highlights in the third quarter that partially offset these headwinds. Gross margin in the Banana segment during the third quarter was up 250 basis points. Avocados turnaround this quarter were meaningful contributors, thanks to increases in sales volumes, selling prices, and gross profit. Our continued solid adjusted EBITDA enabled us to have numerous options for strong asset allocations. We continue to use our healthy cash flow to return value to shareholders through activities such as improving efficiencies, paying down debt, and continuing to deliver innovation-led new-to-market products. We also continue to look for ways to optimize our asset base to maximize our shareholder values. All these actions enabled us to accomplish our mission of meeting the worldwide demand of getting consumers to eat healthier fresh products. We strive daily to achieve the mission by providing our offerings to consumers when and where they shop. And by partnering with other leading CPG companies that are looking to improve their healthy offerings and are looking to enter the fresh space, two areas where we're undisputed leaders. Our Lunchables with Fresh Fruit partnership with Kraft Heinz continued to test in the market. We announced a partnership with the global restaurant chain P.F. Chang's. We unveiled two salad kits that allowed consumers to enjoy the restaurant's most popular salad dishes in the comfort of their homes. The kits are available in select retailers across the U.S. with the potential to expand to Canada and Europe. Tricont, our inland logistics solution, underwent a rebrand this year, which was made public in September. The new website and branding will help the third-party logistics provider enhance its customer experience and broaden its customer base on the heels of multiyear growth. We also became a part of the Upcycled Food Association, the organization that helps companies such as Fresh Del Monte find ways to maximize the use of our food waste. It is exciting to partner with the Upcycled Food Association and find ways to upcycle our waste, which plays a role in Fresh Del Monte's long-term R&D and sustainability plans. We also launched our latest sustainability report two weeks ago. A few highlights include, we reduced our Scope 1 and Scope 2 emissions by 26% compared to 2019 levels, bringing us 94% of the way towards our 2030 goal. We reduced our food loss and organic waste by 41% in 2022, bringing us 82% of the way towards our 2030 goal. And we donated approximately 53,000 metric tons of food to organizations that assist those in need and either composted also eligible waste to third parties to convert it into animal feed and biofuel. We are truly one of the world's leading vertically integrated producers, distributors, and marketers of fresh produce. We leave sustainability into all facets of our business while making fresh, healthy produce accessible worldwide. We have several initiatives in different stages would drive CPG brand, similar to Kraft and P.F. Chang's. In addition, we'll continue to push innovation forward, creating value for our consumers and our business. Quality programs for our popular Honeyglow and Pinkglow pineapples are being activated, and we are close to launching a new pineapple variety that will be unique to Fresh Del Monte as we further cement our reputation as the leader of pineapple irrigation. As always, our management team will continue to focus on enhancing long-term shareholder value by evaluating how to best leverage our experience in smart farming logistics, sustainability, and marketing combined with our valuable portfolio of agricultural labs. With that, I would like to turn the call over to Monica, our CFO.

Monica Vicente, CFO

Thank you, Mohammad. Good morning, everyone, and thank you for joining us on the call today. I want to begin by offering some insights into the seasonality of our business before discussing the results. We believe that our business should be evaluated on an annual basis rather than quarterly. Traditionally, the first and second quarters are our strongest, while the third and fourth quarters tend to be weaker. The prices of fresh produce fluctuate throughout the year due to supply and demand for specific items and the availability of other seasonal produce, such as fruits during the summer months. Last year was unusual for us regarding seasonality because of the high inflation we experienced and a delay in price adjustments, leading to a particularly weak first half and a stronger second half. So far this year, our results reflect historical trends, with a larger portion of our net sales and gross profit achieved in the first two fiscal quarters. Now, let's move on to our third quarter 2023 results followed by our nine-month performance. For the third quarter of 2023, net sales were $1 billion, down from $1.54 billion in the previous year. For the first nine months of 2023, net sales totaled $3.3 billion compared to $3.4 billion in the same period of 2022. The changes in net sales were primarily due to decreased sales volume in the fresh and value-added products segment and declines in our other products and services segment because of reduced global demand for our third-party ocean freight business. In the third quarter, banana net sales were lower mainly due to selling prices in North America, but for the first nine months, banana net sales rose due to increased pricing and volumes. Gross profit for the third quarter of 2023 was $74 million, down from $88 million the previous year, affected by lower sales volume across most products, a stronger Costa Rican colon, a Mexican peso, and an inventory write-off associated with flooding at our seasonal prepared product facility in Greece, though partially offset by reduced distribution and ocean freight costs. Excluding the inventory write-off and cleanup costs in Greece, adjusted gross profit for the third quarter of 2023 was $83 million, compared to $88 million the previous year. Gross profit for the first nine months of 2023 rose by 11% to $288 million from $259 million the prior year, driven mainly by higher sales volume and sales prices of bananas, partly offset by lower sales of fresh and value-added products and our third-party ocean freight services. Adjusted gross profit for the first nine months increased 15% to $298 million from $259 million the prior year. Operating income was $25 million compared to $51 million the previous year, and adjusted operating income was $34 million, down from $41 million. The decline in adjusted operating income was mainly due to reduced gross profit and higher selling, general and administrative expenses. For the first nine months, operating income rose by 38% to $172 million from $125 million the previous year, while adjusted operating income increased by 33% to $153 million from $115 million in 2022. FDP net income for the third quarter of 2023 was $8 million, down from $33 million the previous year, with adjusted FDP net income at $17 million compared to $26 million in 2022. FDP net income for the first nine months increased by 19% to $95 million from $80 million the prior year, and adjusted FDP net income rose 23% to $90 million from $73 million the previous year. Our diluted earnings per share in the third quarter of 2023 was $0.17 compared to $0.69 in the previous year. Adjusted diluted earnings per share was $0.35 compared to $0.54 the previous year. The difference between GAAP and adjusted diluted EPS in the third quarter of 2023 was mainly related to product-related charges due to the floods affecting our Greek production facility. For the first nine months of 2023, diluted EPS increased by 17% to $1.97 per share from $1.68 per share. In the prior year period, adjusted diluted EPS rose by 23% to $1.87 per share from $1.52 per share the previous year. Adjusted EBITDA for the third quarter of 2023 was $50 million, down from $58 million the previous year. For the first nine months, adjusted EBITDA grew by 14% to $201 million from $176 million the prior year, with the adjusted EBITDA margin increasing by 90 basis points to 6.1% from 5.2%. Now let’s discuss segment results. In the fresh and value-added segments, net sales for the third quarter of 2023 were $574 million compared to $600 million the prior year, mainly due to reduced sales volumes of non-tropical fruits, pineapple, fresh-cut fruits, fresh-cut vegetables, and prepared products, which was partially offset by increased per unit selling prices and higher sales volumes of avocados. Gross profit for the third quarter of 2023 was $36 million compared to $55 million in the prior year, with the variance attributed to higher production and procurement costs for most products, impacted by a stronger Costa Rican colon and Mexican peso, along with lower net sales volume. This was somewhat offset by increased selling prices and reduced ocean freight costs. The gross profit for the third quarter of 2023 included $8 million of product-related charges, mainly due to inventory write-offs and cleanup costs from flooding at our seasonal production facility in Greece. Consequently, gross margin fell to 6.3% from 9.2% the prior year. Turning to our banana segment, net sales for the third quarter were $385 million compared to $388 million the previous year, mainly due to lower per unit selling prices and sales volume in North America, offset by higher sales volumes and per unit selling prices in Europe. Banana gross profit for the third quarter was $32 million compared to $23 million in the prior year, representing a 41% increase due to lower distribution, ocean freight, and product costs, partially countered by a stronger Costa Rican colon. As a result, gross margin increased to 8.3% from 5.8% in the prior year. Lastly, net sales in our other products and services segment for the third quarter were $44 million compared to $65 million in the prior year, due to reduced net sales of third-party freight services amid softened global demand. Gross profit was $6 million compared to $10 million in the prior year, reflecting the lower net sales. Gross margin decreased to 14.2% from 15.7% in the prior year. Now, regarding notable financial data, selling, general, and administrative expenses for the third quarter were $48 million, slightly up from $47 million the prior year, mainly due to increased employee compensation expenses. Interest expense remained steady at $6 million for the third quarter of 2023 despite a lower average debt balance as a result of higher interest rates. Other expenses for the third quarter of 2023 were $7 million compared to $9 million the prior year, reflecting lower foreign currency-related losses. The income tax provision was $4 million compared to $3 million in the prior year, with the increase mainly stemming from higher earnings in specific jurisdictions with elevated tax rates. Net cash from operating activities for the first nine months of 2023 was $180 million, up from $106 million the previous year, largely due to lower working capital related to diminished levels of raw materials and packaging supplies, alongside higher net income. Long-term debt remained stable at about $401 million at the end of the third quarter of 2023, down 26% from $540 million at the end of fiscal year 2022. Our adjusted leverage ratio is now 1.34, compared to 1.42 in the previous quarter. In terms of capital spending, we invested $41 million in capital expenditures during the first nine months of 2023, compared to $36 million in the prior year. As announced this morning in our financial results press release, we declared a quarterly cash dividend of $0.20 per share, payable on December 8, 2023, to shareholders of record on November 15, 2023. This concludes our financial review, and we can now proceed to our Q&A.

Operator, Operator

Our first question comes from Mitch Pinheiro. Your line is now open.

Mitchell Pinheiro, Analyst

Yes, hey, good morning.

Mohammad Abu-Ghazaleh, Chairman and CEO

Good morning, Mitch.

Mitchell Pinheiro, Analyst

I wanted to talk first question about bananas. So we're in the same quarter. And here, we had North America, we had lower prices and lower volume. And in Europe, we have higher prices and higher volume, which really is counter-tally normal elasticity expectations. So could you just talk about why these two markets behave differently in the quarter? And related to that, what we should expect here in the fourth quarter?

Mohammad Abu-Ghazaleh, Chairman and CEO

In Europe, we have fixed contracts for most of the volume that regularly goes there, resulting in stable margins and prices. In the U.S., while a significant portion of our supply is under contract with retailers and buyers, some volume also goes into the spot market. Recently, there has been a softness in the U.S. market, and banana consumption is unfortunately declining, which has negatively impacted prices. However, it's important to focus on annual performance instead of short-term fluctuations, as it provides a clearer picture of how operations are performing over the year. Being in the produce sector and as consumer goods manufacturers, we are subject to market and climate influences. Regarding the situation in Greece, while we incurred a write-off of over $8 million due to floods, we expect to recover around €10 million through insurance in the coming months. Therefore, the current losses will be mitigated. We have plans in place to address these challenges, including insurance coverage and support from the Greek government for other losses like machinery and materials. Overall, I'm optimistic about our outlook, and the quarter itself looks decent given the surrounding conditions, and I have high confidence in our future performance.

Mitchell Pinheiro, Analyst

Why do you think volumes are down in the U.S.? And they've been soft for a little bit, is there something going on, just generally speaking, with the consumer?

Mohammad Abu-Ghazaleh, Chairman and CEO

We got about 2% decline in volumes or in consumption. And we don't know really the reasons for that, except that either the people are spending on other items or focusing on other types of fruits during this period. But this has been a pattern that we have witnessed over the last couple of years.

Mitchell Pinheiro, Analyst

Okay. So if we look at the business annually, particularly the banana segment, I've covered you for a long time and always assumed that gross margins would be in the 4% to 6% range, generally around 6%. However, in the last couple of years, you've been at the higher end of that spectrum. Last year, your banana business had a gross margin of 7.4%, and this year looks promising, potentially the same or better. What do you think is driving the banana margins above the historical range? Is there anything you're doing internally, like purchasing more of your own fruit instead of buying from others? Are there efficiencies in the field that contribute to this? Please elaborate.

Mohammad Abu-Ghazaleh, Chairman and CEO

Yes. To begin with, we are focusing on increasing efficiencies in the field, which is a significant factor. Additionally, we are streamlining our operations for better alignment of supply and demand. In previous years, particularly in the latter half of the year, we often faced an oversupply of bananas due to inadequate planning and a misalignment between supply and demand. However, over the past couple of years, we have improved our management of the supply and demand dynamics. This has led to a notable enhancement in our margins, primarily due to our efficiency in aligning production with actual demand rather than allowing an oversupply. We are also addressing logistics and other cost-related issues. We believe this positive trend will continue as we move forward.

Mitchell Pinheiro, Analyst

Okay. So you think it's sustainable, like the higher end of the range kind of level from year to year?

Mohammad Abu-Ghazaleh, Chairman and CEO

Yes, yes.

Mitchell Pinheiro, Analyst

Okay. Can you discuss how the situation in the Middle East is expected to impact your business in the near term?

Mohammad Abu-Ghazaleh, Chairman and CEO

It's really marginal. Our major markets are in the Gulf and Turkey, along with other regions that are not affected by the current situation. We do not anticipate any significant or material impact on our business in this part of the world at this time.

Mitchell Pinheiro, Analyst

Okay, and for my last question, I'll return to the queue. Regarding the Fresh and value-added business, while the margins have decreased year-over-year and sequentially, you are making progress in getting back to the desired levels for the business. Are there any challenges for that segment in the fourth quarter? Additionally, can you provide insight into how the margins are expected to shape up next year? Will we see continued improvement, or are there other challenges we should be aware of?

Mohammad Abu-Ghazaleh, Chairman and CEO

Not really. I think that we are doing well. We are going into new, as I speak, new kind of transactions and joint ventures as we go into the new year, that will improve our margin and improve our kind of utilization of our assets, and that's the most important thing, resources and assets. And I think that for '24, we are very confident about the future. We are definitely going in the right direction.

Mitchell Pinheiro, Analyst

And where do you think, by the way, that's this thing, but where do you think margins can go longer term in the Fresh and value-added business?

Mohammad Abu-Ghazaleh, Chairman and CEO

I would go for about our target and our objective is to reach about 12% of the gross margins.

Mitchell Pinheiro, Analyst

Okay. So still a lot of upside left there?

Mohammad Abu-Ghazaleh, Chairman and CEO

Yes.

Mitchell Pinheiro, Analyst

Okay, thank you. I'll get back into queue.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Mitch.

Operator, Operator

I will now turn the call back over to Mr. Abu-Ghazaleh for closing remarks.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you very much, everyone, and it was a pleasure to talk with you today. Hopefully, we can join again on our next call. Thank you and have a good day.

Operator, Operator

You may now disconnect.