Fresh Del Monte Produce Inc. (NYSE:FDP) Q2 2023 Earnings Call Transcript

Fresh Del Monte Produce Inc. (NYSE:FDP) Q2 2023 Earnings Call Transcript August 2, 2023

Fresh Del Monte Produce Inc. misses on earnings expectations. Reported EPS is $0.43 EPS, expectations were $0.59.

Operator: Good day, everyone, and welcome to Fresh Del Monte Produce’s Second Quarter 2023 Earnings Conference Call. Today’s conference call is being broadcast live over the Internet and is also being recorded for playback purposes. [Operator Instructions] 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: Thank you, Rob. Good morning, everyone, and thank you for joining our second quarter 2023 conference call. As Rob 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 will 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, August 2, 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 second quarter 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: Thank you, Claudia, and good morning, everyone. We are truly pleased with our performance for the second quarter of ‘23. Net income more than doubled compared with the prior-year period. Gross profit and gross margin increased substantially when compared with the same period last year, and we further reduced our debt. In the second quarter, we sold our plastic business in Chile as well as idle lands in South and Central America as part of our commitment to optimize our asset base. We are continuously looking for areas of opportunity within our portfolio to maximize our return on investment. Our core products, banana and pineapple, performed very well in the second quarter, and we continue to see strong demand for our Honeyglow and Pinkglow pineapple varieties, which contributed to the margin improvement in the fresh and value-added product segment.

Our avocado program is also growing. We have expanded our customer base and increased sales volume, and we have also diversified our sourcing origins to include Colombia and Dominican Republic and Peru. We continue to refine our pricing and sourcing technology for avocados. We believe this technology is the missing link that will help further elevate our avocado business. As you know, avocado pricing has been historically hard to predict because of the ever-changing market and weather conditions in Mexico. In recent months, we have all witnessed record heat and changing weather patterns. These climate issues are not going to end, and we are seeing these typical weather patterns at the farm level as well. We have embarked on an all-out effort to find solutions for some of these challenges as part of our continuous focus on our Del Monte brand commitment of quality, freshness and reliability.

We have several climate-related projects in the works that get to the root of these new challenges. Our scientists and researchers are working diligently to improve and uncover farming methods to help optimize our yields while preserving and protecting our growing lands. We are focused on ways in which we can leverage technology like drones and smart farming to continue to move towards a circular economy on our farms. As a global agricultural company, we understand the importance of focusing on the basics, water, air, trees and soil, and protecting the environment wherever we can. It is essential for human survival. It is essential to our survival. And as an industry leader, we believe it is our duty to set an example. We believe we are making progress for our vision for brighter tomorrow.

Recently, Fresh Del Monte was recognized for its work in sustainability by two different leading sustainability organizations. We were awarded a 2023 SEAL Business Sustainability Award for our reduction of greenhouse gas emissions across the agricultural value chain. And we have been shortlisted for World Sustainability Award in the new launch category for the Del Monte Zero pineapple, which is our certified carbon-neutral pineapple that offsets emissions from farm to market. The Del Monte Zero pineapple is just one of several examples of how innovation within our pineapple segment is creating value for our consumers and our business while operating sustainably. Demand for our Pinkglow pineapple has been outpacing supply, with sales more than doubling versus the same period last year.

After years of research and development, we were able to create a big pineapple that only we can produce. Similarly, the Honeyglow pineapple, our premium product that has a unique golden color and extra sweet taste, continues to increase in demand sales. In North America alone, sales were up more than 50% in the second quarter. Both Pinkglow and Honeyglow are Fresh Del Monte’s innovations, and their market acceptance and interest show how crucial innovation is in the pineapple category. As everybody knows, we are leaders in this space, and our successful innovations are paying off. Sustainability and innovation go hand-in-hand with our clearly defined 5-year roadmap. Our vision is to become a technology-driven sustainable company by leveraging our strength in agriculture and supply chain.

We plan on doing this through innovation, exceptional customer service, asset optimization, strategic partnerships and research and development, coupled with our extensive industry knowledge and deep data library. We understand that achieving this transformational vision will take time. We, out of all companies, know very well that the day you plant the seed is not the day you eat the fruit. We are making the groundwork for our transformational vision as we speak. Lastly, before I pass the call over to Monica, this week, we announced a new partnership with Lunchables and Kraft Heinz launching Lunchables with fresh fruit, which will feature the multi-fruit prominently in select Lunchables meal kits. We are currently in the early testing stages of Lunchables with fresh fruit, selling to retailers in the south, central regions of the U.S., with the goal of further expansion into the U.S. market.

We believe there is a significant potential in partnering with a brand like Kraft Heinz. With more than 30 years in the market, Kraft Heinz is a leader in the kids meals combos category. On the consumer front, we see this as a great opportunity to change children’s perspective around fruits and vegetables, ideally helping to make fruit and vegetable consumption second nature to younger generations by showing up front and center in a product they already know and enjoy. This partnership aligns closely with our mission to inspire healthy lifestyle and provide wholesome and convenient products to everyone. At this point, I will turn the call to Monica to talk about the second quarter financial results. Monica?

A – Monica Vicente: Thank you, Mohammad, and thank you for joining us on today’s call. Let’s turn to our second quarter of 2023 financial results. Net sales for the second quarter of 2023 were $1.18 billion compared with $1.21 billion in the prior year. The net sales variance was primarily driven by the fresh and value-added products segment, specifically lower per unit pricing of avocados due to market conditions, as Mohammad mentioned, and lower sales volume of nontropical fruit. This was partially offset by increased net sales of bananas, driven by higher pricing and volume. Gross profit for the second quarter of 2023 was higher by $36 million, an increase of 45% compared with the prior-year period. Gross profit benefited from lower product and distribution costs in the fresh and value-added product segment, combined with higher banana profitability.

Operating income was $72 million compared with $34 million in the prior year, and adjusted operating income was $68 million compared with $33 million. The increase in adjusted operating income was primarily due to the higher gross profit. FDP net income for the second quarter of 2023 was $48 million compared with $21 million in the prior year, and adjusted FDP net income was $46 million compared with $21 million. Our diluted earnings per share was $0.99 compared with $0.44 in the prior year. Adjusted diluted earnings per share was $0.96 compared with $0.43. The difference of $0.03 per share between GAAP and adjusted diluted EPS during the second quarter of 2023 was related to the gain on sale of underutilized assets. Adjusted EBITDA for the second quarter of 2023 was $85 million compared with $56 million in the prior year, and corresponding adjusted EBITDA margin was 7.2% compared with 4.6% in the prior year.

Let’s now turn to the segment results, beginning with our fresh and value-added product segment. As we said, net sales for the second quarter were $678 million compared with $732 million in the prior year, primarily a result of our lower per unit prices of avocados due to market conditions, combined with lower volumes of nontropical fruit, Partially offsetting the decrease were higher net sales of pineapple, fresh-cut fruit, vegetables and melons due to higher per unit selling prices as well as higher avocado sales volume. Gross profit for the second quarter of 2023 was $62 million compared with $49 million in the prior year, an increase of 26%. The increase in gross profit was positively impacted by higher per unit selling prices for most products in this segment and lower distribution and ocean freight costs.

We also saw higher gross profit of avocados due to lower per unit product costs and higher volume. As Mohammad mentioned, strong demand for our Honeyglow and Pinkglow pineapple varieties also contributed to the higher gross profit. Partially offsetting these cost reductions were higher production and procurement costs of most products, which continue to be impacted by lingering inflationary pressures as well as the impact of a stronger Costa Rica Colon. As a result of these factors, gross margin increased to 9.2% compared with 6.7% in the prior year. Moving to our banana segment, net sales for the second quarter of 2023 increased by $27 million or 6% compared with our prior year, primarily as a result of higher per unit selling prices in Europe and North America and higher sales volume in Asia, Europe and North America.

Banana gross profit in the second quarter of 2023 was $51 million compared with $22 million in the prior year, an increase of 120%. The increase in gross profit was driven by higher net sales and lower distribution and ocean freight costs, partially offset by higher production and procurement costs due to the continuing impact of the inflation, combined with the impact of a stronger Costa Rica Colon. As a result of these factors, gross margin increased to 11.3% compared with 5.3% in the prior year. Lastly, net sales of our other products and services segment for the second quarter were $54 million compared with $58 million in the prior year as a result of lower net sales of third-party freight services due to softened global demand. Gross profit for this segment was $4 million compared with $9 million in the prior year as a result of the lower net sales.

Gross margin was 7.8% compared with 15.6% in the prior year. Now moving to selected financial data. Selling, general and administrative expenses for the second quarter of 2023 remained relatively in line at $47 million compared with the prior year. Net interest expense slightly increased compared to the prior year, driven by higher interest rates, partially offset by lower debt balance. Other expense net for the second quarter of 2023 was $6 million compared with $3 million in the prior year. The increase relates to higher foreign currency-related losses, primarily due to unrealized losses on balance sheet remeasurement. Income tax provision was $11 million compared with $5 million in the prior year. The increase in the income tax provision was due to increased earnings in certain higher tax jurisdictions, combined with the tax effect related to the sale of our plastic business subsidiary.

Now moving to our cash flows. Net cash provided by operating activities for the 6 months of 2023 was $133 million compared with $95 million in the prior year. The increase was primarily attributed to lower levels of raw materials and packaging supplies inventory, combined with higher net income. Long-term debt decreased to $400 million at the end of the second quarter of 2023 compared with $473 million at the end of the fourth quarter of this year. By lowering our debt, our adjusted leverage ratio has also decreased to 1.34x compared to 1.84x last quarter. As it relates to capital spending, we invested $19 million in capital expenditures in the first 6 months of 2023 compared with $23 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 September 8, 2023 to shareholders of record on August 16, 2023.

This concludes our financial review. We can now turn the call over for Q&A. Rob?

Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Mitch Pinheiro from Sturdivant & Co. Your line is open.

Mitch Pinheiro: Hi, good morning.

Mohammad Abu-Ghazaleh: Good morning, Mitch.

Monica Vicente: Good morning.

Mitch Pinheiro: So first, I want to talk about the fresh and value-added. Sales were down. I’m just trying to – I don’t see the queue yet. So I wanted to get some of the detail, but – so pineapple sales were up, correct?

Monica Vicente: Yes. Overall, the segment was down because of avocados, because of the selling price and the volume of non-tropicals. But all the other products had higher selling prices, and that’s what caused the fresh and value-added segment to be lower, but it was still a strong performance.

Mitch Pinheiro: Okay. I guess $55 million down year-over-year, avocados couldn’t have been – so avocados were down, what, maybe 50% in the quarter. Is that a…

Monica Vicente: So what happened with avocados, I don’t know if – if you recall last year, the pricing on avocados was extraordinarily high. This year, avocados sell prices are approximately half of what they were last year. So the impact of avocado selling prices is significant. It doesn’t really impact our profitability on the avocado because the cost goes down as well. But the pricing definitely had a huge impact.

Mohammad Abu-Ghazaleh: On revenue.

Mitch Pinheiro: Okay. And in terms of fresh fruit and the fresh-cut veggie business, that was – they were up in the quarter?

Monica Vicente: The fresh cut – yes, I’m not sure we’re giving all those details at – we’re talking the fresh and value-added segment, includes all those products, yes.

Mitch Pinheiro: Yes. So was fresh-cut fruit and fresh-cut vegetables up year-over-year?

Monica Vicente: Fresh-cut fruit and fresh-cut vegetable were basically flat.

Mitch Pinheiro: Okay. And are you seeing any – I mean is it flat because on the retail side or flat due to food service?

Mohammad Abu-Ghazaleh: In the case of fruit, we have capacity issues in terms of processing more fruit, which we are addressing as we speak. In case of vegetables, there has been a decline in terms of vegetal volumes and revenue.

Mitch Pinheiro: Is that – I mean, is that – is it a food service issue? Or is it a channel issue? Or is it across all channels is really…

Mohammad Abu-Ghazaleh: Across all channels, Mitch.

Mitch Pinheiro: Okay. And when you look at Honeyglow and the Pinkglow, how big is that within your pineapple business? I mean I know it’s small, but it’s growing. And I’m just curious where we are now.

Mohammad Abu-Ghazaleh: Listen, you need to have into consideration that we are not only a North America with Honeyglow. Honeyglow is global. We produce in Costa Rica, we produce in Kenya, and we produce in the Philippines. So we have Honeyglow on these three sourcing areas. And it’s about ranging between 25% to 30% of our total volume. So we have a very strong position in this. I know that competition has tried to imitate and copy what we have been doing for the Honeyglow. But I believe that, Fresh Del Monte has the technology and knowledge because we have started this several years back. And we have, I believe, kind of fine-tuned and have the technologies to produce this in a much more efficient way as well as a higher percentage.

So we have a very strong position in the global market and not only in North America. North America actually was the last one to follow after Guinea and the Philippines. So we haven’t seen the potential yet of optimization in North American market. We’re just starting actually a few quarters ago. So I believe going forward, that will become a more impactful.

Mitch Pinheiro: Okay. And then on the banana side, I guess this is one of the strongest margin quarters I’ve seen in quite a while. I think I went back to 2017 with the last time your banana business had this margin in the second quarter. What – I mean, what drove that? And is any of this sort of sustainable into the third quarter?

Mohammad Abu-Ghazaleh: Well, third quarter, as you know, historically, that the third quarter and fourth quarter and the second half of the year is usually much softer on the bananas than the first half because of the summer fruits and competing other items and the heat and occasions, as you say, out of school. But what really drove this, in my opinion, is that we have kind of rationalized, and kind of demand and supply were more synchronized in a way that we didn’t have peaks in supply where demand wasn’t there. And that has helped a lot in terms of maintaining kind of equilibrium as well as not eroding our margins by having a lot of waste and regions [ph]. That’s number one. Number two, I think that the cost in terms of the freight and other inputs have helped as well.

I don’t believe pricing has increased a lot compared to the previous years. We are more or less on the same – more or less in the same range. However, it’s more rationalization, more optimization of our assets. Like I have said, it’s many other factors that have helped the banana, in general, to improve the margins and maintain cost at a reasonable level. So, even though we have been impacted negatively with the foreign exchange in Costa Rica, in particular, last year, for instance, was around 650 or 550 – no, I think it was around…

Monica Vicente: 600 and…

Mohammad Abu-Ghazaleh: Yes, 600-something. Today, we are talking about 450, 445. So, you can see the impact of that kind of strength of the [indiscernible] that has impacted our costs tremendously.

Monica Vicente: And Mitch, I think we also need to remember that last year’s second quarter was actually a lower than normal second quarter. Usually, our Q2 is our strongest quarter because of the inflation, and we hadn’t caught up with our pricing, etcetera. So, that really – the comparison is also a little bit – it’s impacted because of that, too.

Mitch Pinheiro: Okay. And so is this still a part of your efforts to continue to focus on profitable volume, you are no longer just taking any volume at any cost, that’s all part of this, correct?

Mohammad Abu-Ghazaleh: That is correct.

Mitch Pinheiro: Okay. And right now, is the supply and demand balanced? How would you describe that for the upcoming quarter in the global market?

Mohammad Abu-Ghazaleh: It’s a normal, I would say that what we see right now in the third quarter, as we started – this is a – we are just starting in the second month of the third quarter. So, we see a pattern like the historical patterns that the market – and the banana market and the consumption has gone down quite – not drastically, but definitely in the same kind of mode of historical numbers and statistics. So, I believe that it’s not a total collapse, but it’s definitely softer, much softer than the second quarter and the first quarter.

Mitch Pinheiro: Sure. And last question. It was nice to see the asset sales in the quarter. Are there anything left in terms of asset sales of significance?

Mohammad Abu-Ghazaleh: I would like to tell you one thing that Fresh Del Monte is so rich with assets across the world. It’s not that we are going to sell our assets just for the sake of selling assets, no. We are selling assets that are really underutilized or not even utilized, lands, buildings, businesses that we believe it will – their margins are too little like the plastics, for instance, that’s where we kind of spin it off. This is the kind of assets that we have. We do have other assets that we may sell, but not in the same kind of pace that we have done during the last couple of years.

Mitch Pinheiro: So, you will still optimize your portfolio – your asset portfolio, but it’s going to slow down a little bit?

Mohammad Abu-Ghazaleh: Yes, for sure. But like I said, there are other things that are mitigating this. I mean as I have said on the last call, if you remember, Mitch, I said that we have so many projects and so many initiatives in the pipeline that will change our business, going forward. I can’t kind of give details, but there is so much in the pipeline that will transform our business from what you see today to the future.

Mitch Pinheiro: Okay. Well, thank you for the questions.

Monica Vicente: Thank you.

Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to management for any final closing comments.

Mohammad Abu-Ghazaleh: Thank you so much, everyone. I appreciate your attendance today and hope to talk to you on the next call. Wish you a good day. Thank you. Bye.

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