Earnings Call Transcript - FDP Q2 2021

Christine Cannella, Vice President, Investor Relations

Thank you, Bryan. Good morning everyone. And thank you for joining our second quarter 2021 conference call. As Bryan mentioned, I’m Christine Cannella, Vice President, Investor Relations at Fresh Del Monte Produce. Joining me in today’s discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Eduardo Bezerra, 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. You may also visit the company's website at freshdelmonte.com for a copy of today's release, as well as 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 to these non-GAAP financial measures are set forth in the press release we issued today and on the company's website at freshdelmonte.com under the Investor Relations tab. I would like to remind you that much of the information we will be speaking to you today, including the answers we give and their response to your questions, may include forward-looking statements within the provision of the federal securities Safe Harbor laws. 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, August the 4, and we have no obligation to update any forward-looking statement we may make. With that, I am pleased to turn today’s call over to Mohammad.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Christine. Good morning, everyone. During the second quarter of 2021, we delivered strong financial results with growth through several key areas of our business, which will be highlighted by Eduardo. However, as it was reported this morning, our gross profit for the quarter increased 40% from last year, and gross margin increased from 7.2% in the prior year period to 9.6% in the second quarter of 2021. Gross margin is an important component of our strategic transformation to a value-added global food company, and this is reflected in our strong year-over-year operating income and net income. Like many other companies, we are facing unprecedented disruptions in global supply chains and shortages of labor, resulting in significant cost increases. During the second quarter, we experienced inflation in labor, fuel, inland freight, packaging production, and procurement costs. We anticipate these inflationary pressures will remain for the near-term and have taken proactive measures to counter the impacts on our results, including a comprehensive review of our pricing strategy and sourcing plans for the remainder of the year. We made additional progress with our global operational initiatives as well during the quarter. For example, in Europe, we restructured our fresh operations in France, which led to increased efficiencies and cost savings. We entered into a licensing agreement with a UK retailer to brand frozen fruit and chili juices, which offers a new revenue opportunity for us in Europe that can be expanded to other markets in the Middle East and Africa. As you might have seen in our press release this morning, as a result of our strong cash position, our Board of Directors approved an increase in our quarterly cash dividend to $0.15 per share. As you know, the second half of the year is historically a tougher market for our industry, and this year in particular, as we don’t see inflationary and cost pressures ending in the near future. Before I turn the call over to Eduardo, I am pleased to share that we will soon publish Fresh Del Monte’s annual corporate responsibility and sustainability report detailing our guiding principles and continued progress since our last sustainability update. We look forward to sharing the report with you. At this point, I will turn the call to Eduardo to talk about the second quarter financial results.

Eduardo Bezerra, Senior Vice President and CFO

Thank you, Mohammed. And good morning, everyone. We delivered strong results in the second quarter of 2021 compared to the prior year period, despite the inflationary and cost pressures and other favorable economic conditions including labor shortage. Now let's review our second quarter of 2021 results. Net sales increased $49 million or 5% to $1.142 billion, compared to the prior year period, primarily driven by our fresh and value-added business segment with favorable exchange rates benefiting net sales by $17 million. Adjusted gross profit increased $23 million or 25% to $112 million, and our adjusted gross profit margin increased 160 basis points from 8.2% in the prior period to 9.8% in the second quarter of 2021. The increase was driven by higher gross profit in all of our segments. Adjusted operating income increased $17 million or 39% to $61 million compared to the prior year period, mostly driven by increased gross profit. And adjusted net income increased $21 million or 82% to $47 million compared with the prior period. We achieved diluted earnings per share of $0.99 compared to diluted earnings per share of $0.38 in the prior period. Excluding nonoperational and nonrecurring items, we delivered adjusted diluted earnings per share of $0.98 compared with adjusted diluted earnings per share of $0.54 in the prior year period. Adjusted EBITDA increased 32%, and adjusted EBITDA margin increased 150 basis points from 5.8% in the prior year period to 7.3% in the second quarter of 2021. Let me now turn to segment results, beginning with our fresh and value-added products segment. Net sales in our fresh and value-added products segment increased $38 million or 6% compared with the prior year period. The primary drivers of the variance were increased demand in our pineapple, fresh-cut fruit, and fresh-cut vegetables product line as several countries began to release COVID-19 restrictions. As announced, we were impacted by the severe rainstorms in Chile in the first quarter of 2021 that resulted in lower volumes in our non-tropical fruit crops and lower sales volume and per unit sales prices for avocados as a result of excess supply in North America. For the quarter, adjusted gross profit in our fresh and value-added product segment increased 28% to $59 million. The primary drivers of the variance were in pineapple, increased sales volumes, and higher prices in all of our regions, along with lower per unit ocean freight costs compared to the prior year period due to our new fleet and containerships. In fresh-cut fruit and prepared products, gross profit margins achieved low and high teens respectively. Fresh-cut vegetables in our manufacturing business were impacted by higher per unit product and distribution costs, partially offset by higher per unit sales prices, and avocado gross profit decreased as a result of lower sales volume and prices due to increased supply in the markets. Net sales in our banana segment decreased $3 million to $427 million, while adjusted gross profit increased 16% or $7 million during the quarter. The primary drivers of the variance were lower net sales in the Middle East and, to a lesser extent, North America, partially offset by higher net sales in Europe and Asia. Higher per unit sales prices and lower per unit ocean freight costs in North America and Europe drove the increase in gross profits. These improvements were partially offset by higher fuel, labor, inland freight, packaging, production, and procurement costs. Now moving to selected financial data. Selling, general, and administrative expenses increased $6 million to $51 million compared to $46 million in the prior year period. The increase was primarily due to higher administrative expenses. The foreign currency impact at the gross profit level for the second quarter was favorable by $11 million, compared with an unfavorable effect of $1 million in the prior year period. Interest expense net for the second quarter was $5 million compared with $6 million in the prior year period, mainly due to lower interest rates and lower average debt balances. The provision for income tax was $5 million during the quarter, compared with $4 million in the prior year period primarily due to increased earnings in certain jurisdictions. During the quarter, we generated $140 million in cash flow from operating activities compared to $111 million in the prior year period. The increase was primarily attributable to higher net income and lower cash outflows associated with accounts payable and accrued expenses. As it relates to capital spending, we invested $70 million in capital expenditures in the first six months of 2021 compared with $36 million in the prior year period. Our investments were mainly related to the final two new container vessels we received during the first six months of 2021, along with the expansion and improvements to our facilities in North America and Asia. As of the end of the quarter, we have received the cash proceeds of $51 million in connection with our asset sales under the asset optimization program, of which approximately $40 million was received in 2020. The cash proceeds during the second quarter of 2021 primarily related to the sale of surplus land in the Middle East and the vessel. Total debt decreased from $542 million at the end of 2020 to $474 million at the end of the second quarter of 2021. Based on a trailing 12-month period, our total debt stands below two times adjusted EBITDA. As announced this morning in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.15 per share, payable on September 10, 2021, to shareholders of record on August 18, 2021. This is an increase of $0.05 per share from the dividend we paid to shareholders in June 2021. This concludes our financial review. We can now turn the call over for Q&A.

Operator, Operator

Okay. And we now have our first question coming from the line of Jonathan Feeney with Consumer Edge.

Jonathan Feeney, Analyst

Hello. Thank you very much. Obviously, terrific results and otherwise mixed earning season. I guess a couple of questions. It seems like we're in a sweet spot where supply shortages, at least for bananas, have eased, and yet there's still a reasonable amount of pricing power and volume around. Can you give us any outlook on supply for the second half? Because usually the cash flow and profit dynamics of that business are radically different lower in the second half than the first half. I wonder, as we model, if that's still going to be the case this year, given the extraordinarily good dynamics that seem to be out there today. That'd be my first question. Secondly, do you think—Mohammad, you mentioned in your prepared remarks these unprecedented supply chain pressures that everyone is feeling, and will that flow through to pricing in all tropical fruit in your opinion? This is a very different kind of industry; it's an agricultural industry that moves a lot more with cycles of agricultural success and quality fruit than it does with global inflation. So any perspective you have on your pricing power in light of those cost pressures, I'd appreciate it.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you, Jonathan, and good morning. As far as the banana is concerned, during the first half of the year, we were impacted mainly by the hurricane, which affected our production in Guatemala and, to a lesser extent, Costa Rica, as well as the competition. This situation required us to buy extra fruit from Ecuador and necessitated our first price increase during the first half of the year. It wasn’t a big supply shortage; we had some tightness in the market in the first few months, with the main issue being the huge damages to the farms and infrastructure. Supply of bananas is constant and available in the market. As we speak, we know that there is pressure on banana pricing due to supply and retailer leverage within the industry, and it's unfortunate that we cannot find a mutual way to survive as producers and marketers in this environment. Regarding other tropical fruits, the cost pressures affect the industry across the board—not just for bananas, but in packaging, shipping, materials, fertilizers, and everything we rely on as inputs in our production processes. We have taken several steps, including increasing our fresh-cut prices, to counteract some of these cost increases, which has helped us somewhat. Moving forward, we are looking at different solutions to mitigate these costs and hoping to find ways to collaboratively increase prices with our customers.

Jonathan Feeney, Analyst

So it sounds like it affects everyone in the industry, and you're confident that, since it affects everybody, pricing will get through generally speaking?

Mohammad Abu-Ghazaleh, Chairman and CEO

Well, we hope so; we are doing our best that…

Jonathan Feeney, Analyst

Let me ask you one follow-up, please, Mohammad, and then I’ll pass it on. The retail environment has changed quite a bit. You mentioned, having been around a long time, that it's had ups and downs regarding how you go-to-market. Certain places are more spot-based, and retailers are more amenable to price increases because they don't have other choices. Have COVID, with the new volume, and the sudden success a lot of these retailers have had, changed things? I've heard from many consumer staples companies that grocers have become much more collaborative in assuring inventory because they left millions—probably billions—on the table by being out of stock when customers rushed into stores. Have retailers become more friendly in general, or is it unchanged?

Mohammad Abu-Ghazaleh, Chairman and CEO

Unfortunately, I have to say that it has been unchanged. Even though we have maximized our supply to retailers consistently every single day of the year, last year during April, May, and June, we had to dump fruit in the region of $30 million to $40 million, which was not due to slow supermarket sales. Initially, there was a huge rush from supermarkets, but then there was a sudden drop in demand, leaving us with a large volume of product, mainly bananas and pineapples. Although we have contextual relationships, retailers often tell us that sales cannot occur if there is no buyer. We had to absorb about $40 million in losses last year. Moving forward, we are shifting towards more food items in our markets, where we own the Del Monte brand in Europe, the Middle East, and Africa, and we have seen quite a bit of success during the last seven or eight months. We are committed to leveraging this brand and truly bringing back our focus on the food side of the business, which I believe is a bright spot for us going forward.

Jonathan Feeney, Analyst

For what it's worth, I completely agree. It's been a long time, but you've made a lot of progress too. So, congrats on that, and thanks for the time. And a nice quarter again.

Mohammad Abu-Ghazaleh, Chairman and CEO

Thank you very much.

Operator, Operator

I see that there are no further questions. I'll turn the call over to Mohammad Abu-Ghazaleh.

Mohammad Abu-Ghazaleh, Chairman and CEO

I would like to thank everyone for attending this call. I wish you a good day, and hope to speak to you soon. Thank you very much, everyone.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.