Earnings Call Transcript - FDP Q1 2022

Operator, Operator

Good day, everyone and welcome to Fresh Del Monte Produce's First Quarter 2022 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. If you would like to ask a question during this time, please press * followed by 1 on your telephone keypad. If you would like to withdraw your question again, press * followed by 2. For opening remarks and introductions, I would 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, Global FP&A and Investor Relations

Good morning, everyone. And thank you for joining our First Quarter 2022 Conference Call. As mentioned, I'm Ana Miranda, Vice President of 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 Monica Vicente, Senior Vice President and Chief Financial Officer. I hope you've had a chance to review the press release that was issued earlier this morning. You may also visit the newly updated company's IR website 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'll be discussing 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 filing, we detailed material risks that may cause our future results to differ from these forward-looking statements. Our statements are as of today, and we have no obligation to update any forward-looking statements. During the call, we will provide a business update along with an overview of our first-quarter 2022 financial results, followed by a question-and-answer session. With that, I'm pleased to turn today's call over to Mohammad.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Thank you, Ana, and good morning, everyone. During the first quarter, our net sales increased by $49 million compared with the prior-year period. This is a direct benefit from leading the industry and the implementation of inflation-justified pricing actions. However, our cost of products sold increased by $64 million due to broad inflationary pressures, resulting in lower operating income. We have two very distinct narratives in our performance. First, we delivered healthy net sales. In fact, our fiscal quarter net sales are near the same level realized in the first quarter of 2019 before COVID. Second, the increase in cost is truly unprecedented, negatively impacting flow-through. Despite this, our strong adjusted EBITDA margin of 5.5% is a testament to our management style. We remain focused on driving incremental operating leverage through product innovation and operational efficiencies, as reflected in the significant growth of our third-party freight services. We made progress on our strategic initiatives, effectively managing the business for the long term despite supply chain constraints and higher inflation compounded by the war in Ukraine. In keeping with our shareholder value accretion approach, our capital deployment in the first quarter concentrated on operational investments in data-driven technology and smart farming, strategic investments, and paying a higher dividend. Last quarter, I updated you on our two exciting strategic investments with Purely Elizabeth and Good Culture. Our investment in Good Culture closed in the first quarter, while our investment in Purely Elizabeth closed at the end of last year. We are in the initial phases with Purely Elizabeth to develop unique and innovative products, and we look forward to incremental performance as the collaboration continues to evolve. Additionally, the team is hard at work with our new product pipeline. So far this year, we launched our honey glow pineapple, differentiated by its remarkable sweetness and small size in North America. Later this year, a new packaging format is expected to debut. Additionally, we plan to supplement our avocado category with an exciting new offering. Last month, we were recognized by Newsweek as one of America's Most Trusted Companies of 2022, after being acknowledged for customer trust, investor trust, and employee trust. We are honored to be among the companies recognized for this award and remain committed to maintaining the honesty and transparency that Fresh Del Monte is known for. Since our last sustainability update, we've received high scores in water security, climate change, and forest categories by CDP and won a 2021 Seal Business Sustainability Award for our approach to farming while preserving biodiversity. Currently, two of our largest farming operations are certified carbon neutral, and we are actively working on amplifying those efforts elsewhere. Our sustainability efforts are core to what we do as we work to build a food system where agricultural production and biodiversity thrive together. The war in Ukraine has created secondary effects, adding to already unprecedented macroeconomic challenges, including pressure on fertilizers, fuel, and shipping disruptions. Additionally, fluctuations in exchange rates are expected to affect us in key selling markets. Given analysts' forecasts for a stronger U.S. dollar, we proactively hedged against movements in the euro and Japanese yen to minimize the impact. Lastly, we do not yet see an environment of gross normalization in the near future. Having said that, I'm confident in our team's ability to drive growth as they focus on our multi-faceted approach grounded in organic and new product expansion, implementation of pricing actions, and operational efficiencies. Our vertical integration serves as a key differentiator, making us relatively shielded from elevated shipping rates in certain key markets. Our vast network has allowed us to optimize sourcing and distribution, and our fleet has enabled us to expand our commercial cargo services in North America, benefiting from elevated demand due to current ocean freight conditions. Now, I will turn the call over to Monica to talk about the first quarter financial results. This is Monica's first time presenting on our earnings call. She has been an integral part of our finance organization for 25 years. I'm excited to have her in her new role as CFO, and I'm certain she will continue to make significant contributions to our financial discipline as we continue to evolve. Monica?

Monica Vicente, Senior Vice President and Chief Financial Officer

Thank you, Mohammad. It is great to partner with you in my new role. Good morning, everyone. Let's turn to our first quarter of 2022 financial results. As noted by Mohammad, net sales for the first quarter of 2022 increased by $49 million, or approximately 5% compared with the prior-year period. Net sales primarily benefited from inflation-justified pricing actions and key product categories, including bananas, pineapples, and fresh-cut. Conversely, sales were negatively impacted by fluctuations in exchange rates, mainly versus the euro and Japanese yen compared to the prior-year period. Importantly, the lack of availability of third-party shipping capacity on certain routes substantially limited the sales of various products. Adjusted gross profit for the first quarter of 2022 was $90 million compared with $107 million in the prior-year period. Despite higher sales, gross profit was negatively impacted by worsening inflationary and other cost pressures. Specifically, higher costs of key inputs, including packaging material, fertilizer, ocean and inland freight, fuel, and labor impacted our performance. Additionally, fluctuations in exchange rates were also unfavorable. Adjusted operating income was $40 million compared to $58 million in the prior-year period. The decrease was primarily due to lower gross profit and the net impact of the disposal of property, plant, and equipment, partially offset by lower administrative expenses. Adjusted net income was $26 million compared with $42 million in the prior-year period. Our adjusted diluted earnings per share were $0.55 compared with adjusted diluted earnings per share of $0.88 in the prior-year period. Adjusted diluted earnings per share was relatively in line with our GAAP performance as both periods had minimal non-operational or non-recurring items. Adjusted EBITDA for the first quarter was $63 million compared with $82 million in the prior-year period, and the corresponding adjusted EBITDA margin was 5.5% compared with 7.6% in the prior-year period. Let me now turn to the segment results. Beginning with our Fresh and Value-Added Products, net sales for the first quarter of 2022 increased by $42 million, or approximately 7%, compared with the prior-year period, as a result of increased net sales across most product categories, mainly related to higher pricing. The gross profit for the Fresh and Value-Added Product segment for the first quarter of 2022 was $44 million compared with $52 million in the prior-year period. Despite higher sales, gross profit in the segment continued to be impacted by inflationary and other cost pressures, which resulted in higher per unit product and distribution costs. As noted earlier, the increase in costs was widespread due to substantial surges in key input materials and third-party shipping rates. For example, crude oil prices have increased over 60% compared to last year, container board was up approximately 50%, while the cost of certain key fertilizers more than doubled compared to the prior-year period. Additionally, lower gross profit on melons, a seasonal product, had a negative impact on segment performance. Lastly, the Fresh and Value-Added Product segment had $3 million of one-time charges in the first quarter of 2021 related to damage caused by severe rainstorms in Chile, which impacted our non-tropical fruit category. There were no one-time charges in the first quarter of 2022. Moving to our Banana segment, net sales for the first quarter of 2022 decreased by $12 million compared to the prior-year period due to lower sales volume in North America, partially offset by higher pricing. The gross profit for the Banana segment for the first quarter of 2022 was $38 million compared with $50 million in the prior-year period. Similar to the Fresh and Value-Added Product segment, higher input costs impacted gross profit. One-time charges in the Banana segment in the prior-year period included $1.5 million net insurance recovery related to damage caused by hurricanes in Central America. There were no one-time charges in the first quarter of 2022. Lastly, net sales in our Other Products and Services segment increased by $19 million, or 49%, mainly due to higher net sales of third-party freight services in North America. Our fleet of vessels has enabled the expansion of our commercial cargo services, benefiting from elevated shipping rates and demand due to the current supply chain environment. Gross profit increased by $5 million as a result of the higher net sales. Now moving to the selected financial data: Selling, general and administrative expenses were $45 million compared to $49 million in the prior-year period. The decrease was primarily due to lower administrative costs. Net interest expense was relatively in line in both periods at $5 million. Income tax expense was $6 million for the first quarter of 2022 compared with $11 million in the prior-year period, primarily due to decreased income in certain higher tax jurisdictions. Year-to-date, we utilized net cash from operating activities of $300,000 compared with net cash provided by operating activities of $47 million in the prior-year period. The decrease was primarily attributable to lower net income, higher levels of accounts receivable, mainly due to higher net sales and timing of collections, and higher levels of finished goods inventory driven by inflationary cost pressures. We continue to make progress on our optimization program announced in the second half of 2020, which involves selling non-strategic and underutilized assets. Since the program was announced, we have generated $59 million in cash, out of which $2 million was realized in the first quarter of 2022. We expect progress towards our target of a $100 million in cash proceeds to continue in 2022. As for capital spending, we invested $11 million in the first quarter of 2022 compared with $34 million in the prior-year period. This spending mostly consisted of improvements to our production facilities in North America, including investments in automation and technology, along with improvements to our pineapple and banana operations. Our 2022 CapEx will return to more normal levels and is expected to be under $100 million. However, lead times on machinery and equipment have nearly doubled, which may impact our spending rate. Long-term debt increased to $554 million at the end of the first quarter of 2022 from $534 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 $0.50 per share payable on June 10, 2022, to shareholders of record on May 18, compared with $0.10 per share in the prior-year period. This concludes our financial review. We can now turn the call over to Q&A.

Operator, Operator

Your first question is from Mitch Pinheiro of Sturdivant & Company. Please go ahead. Your line is open.

Mitchell Pinheiro, Analyst

Yeah. Hi, good morning.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Good morning.

Mitchell Pinheiro, Analyst

So I guess my first question is a big one. You've mentioned that you've adjusted pricing, but how much do you really control it? A lot of it seems to be influenced by the market, right? The supply and demand of various fruits and other products. Is this pricing similar to a fuel surcharge, or is it more like a permanent pricing strategy?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

No. We have two types of, let's say, enforceable clauses in our contracts. One actually is the ocean freight, or our ocean fuel, and this usually is done every quarter. We worked out what is the average current fuel cost or per barrel of oil. Oil today is $106, for instance, at the end of the quarter or beginning of the second quarter. We worked out a new rate which would reflect the current gross of fuel that we charge to our customers on a three-month rolling period. By the end of the second quarter, we will have to go back and look at the price of oil in the market, whether it has gone down or up, and we will adjust our ocean freight accordingly. As far as inland trade, which relates to the fuel cost, we have been talking to our customers and we have taken action to adjust the inland trade as well in this regard with the same kind of formula.

Mitchell Pinheiro, Analyst

Well, I guess my question, like in your banana business, your gross margin was kind of normal for the big range that you can have. But your banana margins were decent, and your other margins are increasing because you're getting nice margins on your commercial freight revenue. But it's on the fresh and value-added products, that's where it continues to struggle. Is that where most of the inflationary pressures are in the fresh and value-added segment, more on a percentage basis, perhaps?

Monica Vicente, Senior Vice President and Chief Financial Officer

So, hi, this is Monica. On that segment, we actually had a couple of other things going on. We did have lower margins on our melons. We had overproduction, and we did have lower margins on that. Our deciduous products suffered from the lack of shipping, and we were unable to ship some of our products out of Chile, which impacted our fresh and value-added segment. We do have higher pricing in pineapple and fresh-cut fruit, which definitely helped that segment.

Mitchell Pinheiro, Analyst

As you consider that same segment for the remainder of the year, especially with the potential reduction in melons, do you expect fresh and value-added to possibly reach double-digit margins as it once aimed for? Are you still on track for that, and can we anticipate margin improvements in the last three quarters?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Absolutely. That's what we're working toward, and all the loopholes or task mistakes have been taken care of. Hopefully, we will reach the double-digit range for value-added products.

Mitchell Pinheiro, Analyst

A couple of things. Specifically to bananas, what's the outlook for supply and demand for the next couple of months as far as you can see? How has the Ukraine-Russia situation hurt either pricing or affected European pricing?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Actually, the situation this year was very particular. Ecuador was hit very severely in terms of supply, mainly because Ecuador's primary markets were Russia and Ukraine. With the deterioration in those markets, so much volume was cut off, despite the abundance of fruit in Ecuador. So, for argument's sake, prices in Ecuador at this time of the year have ranged between $8 to $10 per box, but for the last six to seven weeks, it has been around $2 per box. So you can see the impact on exports from there. The European market, however, has maintained strong pricing since the beginning of the year. So we are optimistic about the open market, and in fact, I think the war in Ukraine has been a positive factor for the European market regarding shipping scarcity. I believe that this situation is not sustainable for Ecuadorian small and mid-sized growers, as not only has pricing eroded substantially, but costs for fertilizers and other inputs have increased significantly. Ultimately, we will see substantial structural changes in the Ecuadorian supply chain for bananas. We'll just have to wait and see. We are being cautious as we navigate these challenges, and I believe this will have a positive impact on the industry overall.

Mitchell Pinheiro, Analyst

Thank you. I'll get back in the queue.

Operator, Operator

Your next question is from Jonathan Feeney of Consumer Edge. Please go ahead. Your line is open.

Jonathan Feeney, Analyst

Thank you so much, and thank you so much, Mitch, for thinking of me. How are you, Mohammad? A couple of questions. First, could you quantify the revenue or profit impact from sales lost due to the supply shortages that were referenced in the prepared remarks?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

We can give you this information if you don't mind after the call.

Monica Vicente, Senior Vice President and Chief Financial Officer

Yeah. We haven't quantified that, Jonathan. We just know there was definitely volume that we had the opportunity to ship, not just from our tropical products in Chile, but also out of Ecuador, which we were unable to do due to space constraints.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

We can give you a rough figure. We believe we lost about a thousand containers of sales during the first few months this year, especially in the first quarter, due to insufficient equipment and shipping space, primarily to European, Asian, and Middle Eastern markets.

Jonathan Feeney, Analyst

What's the total container usage in a quarter? Fascinating in its own right. Or is this a thousand out of a hundred thousand million?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

I can provide this information later on, Jonathan, but as I mentioned, we missed about a thousand containers.

Monica Vicente, Senior Vice President and Chief Financial Officer

Yes, usually, Jonathan, we don't provide that level of detail on a regular basis.

Jonathan Feeney, Analyst

Okay. I just wanted to try to kind of gauge that. I'll follow-up after the call. Thank you. Second, I want to follow-up on this Ecuador situation because I had heard that before, and that sounds distressing. If there's a lot of inexpensive crude out there marginally because there's been a demand shock and logistics are constrained, does that mean there is a big overhang for the second quarter? Are there many people looking to get rid of fruit on different markets? As soon as they can get it to North America or elsewhere, how should I think about that? That sounds like historically distressing numbers, doesn't it?

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Yeah, but listen, North America in particular, most of the fruit is contracted. The majority of everything that we import and our competitors import is almost on a contractual basis, so we do not usually speculate in the market. The volume from Ecuador, as I can see right now, I don't see that there will be extra volumes coming into North America in the coming months. Usually, where the markets are on a spot and speculative basis, it's often Europe, the Middle East, and the East and West Mediterranean. However, due to shipping constraints and lack of containers and availability, we've also seen stabilization in these markets in a very positive way. I don't believe that the situation will change much from what we see right now.

Jonathan Feeney, Analyst

Yeah, that makes a lot of sense, and I wasn't thinking from the perspective that you would be active speculating with trading fruit in North America. I'm more concerned that fruit from others who source directly can weigh on contract pricing, putting pressure on retail prices, but who knows. In this environment, maybe that's not even something retailers think about as the prices vary. Thank you. Lastly, I always ask you about this, and I know it takes a while, but regarding the JVs, specifically the products and value-added products broadly, anything that you own or license through a partnership, A, how is the progress going with that right now? Is there any prospects for a different mix of more branded, higher-margin products in things like beverages and cafes? Can we be more ambitious about that now that COVID is easing? Any perspective would help.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

That is exactly what we are currently initiating. However, we are still in the initial stages, but this is certainly our objective: to add value to our products and optimize our assets while leveraging what we have in terms of transportation and asset utilization. We've been fortunate to work with partners to maximize our brand and distribution capabilities. Our distribution network has been a crucial part of why we've been able to survive these challenging times. This has also been important for many other companies looking to collaborate with us due to our distribution network and capabilities. We're currently capitalizing on this, and we have many promising initiatives underway for both the near and long-term future.

Jonathan Feeney, Analyst

Very helpful as always. Thank you.

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

My pleasure.

Operator, Operator

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

Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer

Thank you very much. I appreciate your attendance to the call today, and I hope we can come back with better news in the next quarter and for the rest of the year. Have a good day. Thank you.

Operator, Operator

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