Fresh Del Monte Produce - Q2 2023

Transcript

Operator (participant)

Good day, everyone, welcome to Fresh Del Monte Produce's Q2 2023 earnings conference call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press the star 1. 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 (VP of Corporate Communications)

Thank you, Rob. Good morning, everyone, Thank you for joining our Q2 2023 conference call. As Rob mentioned, I am 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 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 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 Q2 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, and good morning, everyone. We are truly pleased with our performance for the Q2 of 2023. 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 Q2, 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 Q2, 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. We have also diversified our sourcing origins to include Colombia, 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. We are seeing these atypical 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 forward, brighter tomorrow, world 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. We have been shortlisted for a 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 pink 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 Q2. 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 five-year roadmap. Our vision is to become a technology-driven, sustainable company by leveraging our strengths and 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 laying 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 Del Monte 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 region of the US, with the goal of further expansion into the US markets. 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' meal 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 lifestyles and provide wholesome and convenient products to everyone. At this point, I will turn the call to Monica to talk about the Q2 financial results. Monica?

Monica Vicente (SVP and CFO)

Thank you, Mohammad, and thank you for joining us on today's call. Let's turn to our Q2 of 2023 financial results. Net sales for the Q2 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 product segment, specifically lower per-unit pricing of avocados due to market conditions, as Mohammad mentioned, and lower sales volume of non-tropical fruit. This was partially offset by increased net sales of bananas, driven by higher pricing and volume. Gross profit for the Q2 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. 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 Q2 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 Q2 of 2023 was related to the gain on sale of underutilized assets.

Adjusted EBITDA for the Q2 of 2023 was $85 million, compared with $56 million in the prior year. 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 Q2 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 non-tropical 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 Q2 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 the 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 continued to be impacted by lingering inflationary pressures, as well as the impact of a stronger Costa Rican colón.

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 Q2 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 Q2 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 Rican colón.

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 Q2 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 Q2 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 Q2 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. Moving to our cash flows. Net cash provided by operating activities for the six 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 Q2 of 2023, compared with $473 million at the end of the Q1 of this year. By lowering our debt, our adjusted leverage ratio has also decreased to 1.34, compared to 1.84 last quarter. As it relates to capital spending, we invested $19 million in capital expenditures in the first six 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?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mitch Pinheiro from Stifel, Nicolaus & Company. Your line is open.

Mitchell B. Pinheiro (Analyst)

Hi, good morning.

Mohammad Abu-Ghazaleh (Chairman and CEO)

Good morning, Mitch.

Monica Vicente (SVP and CFO)

Good morning.

Mitchell B. Pinheiro (Analyst)

Hey, 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, I wanted to get some of the detail. Pineapple sales were up, correct?

Monica Vicente (SVP and CFO)

Yeah. Overall, the, the segment was down because of avocados, because of the selling price, and the volume of non-tropicals. All the other products had higher selling prices, and that's what caused the fresh and value-added segment to be lower.

Mitchell B. Pinheiro (Analyst)

Okay.

Monica Vicente (SVP and CFO)

It was still a strong, a strong performance.

Mitchell B. Pinheiro (Analyst)

Okay, just, I mean, $55 million, you know, down year-over-year. avocados couldn't have... avocados were down, what, maybe 50% in the quarter? Is that about right?

Monica Vicente (SVP and CFO)

What happened with avocados, I don't know if, if you recall last year, the pricing on avocados was extraordinarily high. This year, avocado sell prices are approximately half of what they were last year. The impact of avocado selling prices is significant.

Mitchell B. Pinheiro (Analyst)

Okay.

Monica Vicente (SVP and CFO)

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 (Chairman and CEO)

Yeah.

Mitchell B. Pinheiro (Analyst)

Okay. Okay. In, in terms of, fresh-cut fruit and the fresh-cut veggie business, that was-- they were up in the quarter?

Monica Vicente (SVP and CFO)

The fresh cut. Yeah, I'm not sure we're giving all those details at the, you know. We're talking the Fresh and value-added segment includes all the, all those products, yes.

Mitchell B. Pinheiro (Analyst)

Yeah. Was fresh cut fruit and fresh cut vegetables up year-over-year?

Monica Vicente (SVP and CFO)

Fresh cut fruit and fresh cut vegetables were basically flat.

Mitchell B. Pinheiro (Analyst)

Okay. Are you seeing any, I mean, is it flat because, on the retail side or flat, you know, due to food service?

Mohammad Abu-Ghazaleh (Chairman and CEO)

In the case of fruit, we have capacity issues, you know, 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 vegetable volumes and revenue.

Mitchell B. Pinheiro (Analyst)

Is that, I mean, is that in, is it, is it a food service issue or is it a, you know, is it a channel issue or is it across all channels? Is really what I would like-

Mohammad Abu-Ghazaleh (Chairman and CEO)

Across all channels, Mitch.

Mitchell B. Pinheiro (Analyst)

Okay. Okay. 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 (Chairman and CEO)

Listen, you need to have into consideration that we are not only in North America with Honeyglow. Honeyglow is global. You know, we produce in Costa Rica, we produce in Kenya, and we produce in the Philippines. We have Honeyglow, all these three sourcing areas, and it's about ranging between 25%-30% of our total volume. We have a very strong position in this. I know that competition has tried to imitate and copy, you know, what we have been doing for the Honeyglow.

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, and have the technology to produce this in a much more efficient way, as well as higher percentage. 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 Kenya and the Philippines. We haven't seen the potential yet of an optimization in North American market. We just starting actually a few quarters ago. I believe going forward, that will become more impactful.

Mitchell B. Pinheiro (Analyst)

Okay. Then, on the banana side, I guess, I guess, you know, this is one of the strongest margin quarters I've seen in, in quite a while. I think I went back to 2017, was the last time your banana business had this margin in the Q2. You know, I mean, what drove that, and is any of this, sort of sustainable into the Q3?

Mohammad Abu-Ghazaleh (Chairman and CEO)

Well, you know, Q3, you know, as you know, historically that the Q3 and Q4, the second half of the year, is usually much softer on bananas than the first half because, you know, of the summer fruits and competing other items.

Mitchell B. Pinheiro (Analyst)

Right.

Mohammad Abu-Ghazaleh (Chairman and CEO)

The heat and, you know, vacations and, as you say, out of school. 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, you know, peaks in supply where demand wasn't there. That has helped a lot in terms of maintaining, you know, kind of equilibrium, as well as, as, you know, not eroding our margins by having a lot of waste and, and rejects. That's number one. Number two, I think that the cost in terms of the freight and, 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, you know, in the same, more or less in the same range. However, it's, it's more rationalization, more optimization of our assets. Like I said, you know, it's, it's many other factors that have helped, you know, the, the banana in general to improve the margins and, and, and maintain cost at, at a reasonable level. So even though we have been impacted negatively, you know, with the, with the foreign exchange in Costa Rica in particular, you know, last year, for instance, was around 650, or 500... No, I think it was around 600-

Monica Vicente (SVP and CFO)

Six hundred and-

Mohammad Abu-Ghazaleh (Chairman and CEO)

Yeah, 600-something Colón per dollar. Today, we are talking about 450, 445. You can see the impact of that kind of strength of the Colón that has impacted our cost tremendously.

Monica Vicente (SVP and CFO)

Mitch, you know, I think we also need to remember that last year's Q2 was actually a lower than normal Q2. Usually, our Q2 is our strongest quarter, because of the inflation, and we hadn't caught up with our pricing, et cetera. That really, the comparison is also a little bit, it's impacted because of that, too.

Mitchell B. Pinheiro (Analyst)

Okay. This is still a part of your, your efforts to continue to focus on profitable volume. You, you're no longer, you know, just taking any volume at any cost. That's all part of this, correct?

Mohammad Abu-Ghazaleh (Chairman and CEO)

That is correct.

Mitchell B. Pinheiro (Analyst)

Okay. Right now, is the supply and demand balanced? How would you describe that for the upcoming quarter in the global market?

Mohammad Abu-Ghazaleh (Chairman and CEO)

It's, it's a normal. I would, I would say that the, what we see right now in the Q3, as we started, you know, this is a, we're just starting in the second month of the Q3. We, we see a pattern like the historical patterns, you know, that the, the market, and, and the banana market, and the consumption has gone down, quite, you know, not drastically, but definitely in the same kind of mode of historical numbers and statistics.

Mitchell B. Pinheiro (Analyst)

Got it.

Mohammad Abu-Ghazaleh (Chairman and CEO)

I, I believe that, you know, it's not the, it's, it's not a total collapse, but it's definitely softer, much softer than the Q2 and the Q1.

Mitchell B. Pinheiro (Analyst)

Sure. Last question, it was nice to see the asset sales in the quarter. Are there any anything left in terms of asset sales of significance?

Mohammad Abu-Ghazaleh (Chairman and CEO)

You know, I would like to tell you one thing, that Fresh Del Monte is so rich with assets across the world, you know? 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 are... We do have other assets, you know, that we may sell, but not in the same kind of pace that we have done during the last couple of years.

Mitchell B. Pinheiro (Analyst)

You'll, you'll still optimize your portfolio, you know, your asset portfolio, but it's gonna slow down a little bit in the.

Mohammad Abu-Ghazaleh (Chairman and CEO)

Yeah, for sure. Like I said, there are other things that are mitigating this. You know, I mean, as I 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, you know, kind of give details, but there is so much in the pipeline that will transform our business from what you see today to, to the future.

Mitchell B. Pinheiro (Analyst)

Okay. Well, thank you for the questions.

Mohammad Abu-Ghazaleh (Chairman and CEO)

Thank you.

Operator (participant)

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 (Chairman and CEO)

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 (participant)

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