Fresh Del Monte Produce - Earnings Call - Q3 2020

Transcript

Speaker 0

Good day, everyone, and welcome to Fresh Del Monte Produce's Third Quarter twenty twenty Earnings Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. For opening remarks and introductions, I would like to turn today's call over to the Vice President, Investor Relations with Fresh Del Monte Produce, Christine Canela.

Please go ahead, Ms. Canela.

Speaker 1

Thank you, Lindsay. Good morning, everyone, and thank you for joining our third quarter twenty twenty conference call. As Lindsay mentioned, I'm Christine Canela, Vice President, Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu Ghazali, Chairman and Chief Executive Officer and Eduardo Bezera, Senior Vice President and Chief Financial Officer. I hope that you had a chance to review the press release that was issued earlier this morning via Business Wire.

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 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 includes reconciliations of any non GAAP financial measures we mention today to their corresponding GAAP measures. 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 Safe Harbor laws. We ask that you review the forward looking statements information included in the press release we issued this morning and in the company's most recent filings with the SEC.

With that, I am pleased to turn today's call over to Mohammad.

Speaker 2

Thank you, Christine. Good morning, everyone. 2020 is shaping up to be one of the most challenging periods ever for our industry and Fresh Del Monte produce. The difficulties we experienced in the 2020 were driven by the continuing impact of the COVID-nineteen pandemic, which continued to hinder our performance with decreased demand as a result of mandatory government shutdowns, including schools, restaurants, food service and business closures being our biggest headwind. These challenges continue to hamper our ability to achieve our financial targets for the third quarter.

Net sales for the quarter were $990,000,000 compared with $1,100,000,000 in the third quarter of twenty nineteen. We reported adjusted gross profit of $69,000,000 compared with $76,000,000 in the third quarter of twenty nineteen, with gross profit margin improvements in our fresh and value added products segments. Due to the early actions we took by adjusting our business in response to these challenges, we reported adjusted EPS of $0.35 compared with adjusted EPS of $0.38 in the third quarter of twenty nineteen. I'm pleased to report that during the quarter, we completed our move to our new Gonzales, California facility. Facility.

Today, our three man packing facilities and Fresno fresh cut facility are now operating under one roof, which we anticipate will enable us to improve gross profit in our fresh and value added products segment by approximately $10,000,000 on an annual basis, a benefit which we expect to achieve over the next twelve months. We also made progress with the optimization plan we announced in the second quarter of twenty twenty, reducing underutilized facilities and land assets. We believe this will allow us to shift assets that better serve the long term growth of the company. We identified assets across all of our regions that we plan to sell over the next twelve months to eighteen months for the total anticipated cash proceeds of approximately $100,000,000 Since we last spoke, we added two new containerized vessels to our new fleet, the Del Monte Rose and the Del Monte Harvesters, replacing vessels we have previously chartered. This important sustainability initiative reduces our carbon footprint and brings us closer to our 2025 commitment to reduce emissions by 10%.

Also during the quarter, we continued our efforts to diversify our product line and the channels we market our products in. With the launch of our newest product, the Pink Glow Del Monte Pineapple, the variety is produced on our farms in Costa Rica. In October, we published an update to our twenty eighteen-twenty nineteen corporate social responsibility report that includes progress towards our 2025 commitments. I encourage you to visit the sustainability section of our website to learn more about our progress, including our recently announced partnership between our Del Monte Kenia operations and the United Nations Foundation to promote the health and empowerment of women employees and community members, along with the announcement from PR Daily that we were named to receive the Best Green and Environmental Stewardship Award, which we were honored to accept. Today, I'm confident that the decisions made in 2020 will be a driving force behind our future performance.

In the third quarter, we demonstrated the value of our business model and generated improved cash flow and continued to reduce our debt in order to better position us to weather this pandemic and emerge stronger. Now I will turn the call to Eduardo to talk about the third quarter financial results. Eduardo, please?

Speaker 3

Thank you, Mohamed, and good morning. Despite the COVID-nineteen disruption during the third quarter of twenty twenty, we achieved a net income per diluted share of 37¢, versus net income per diluted share of 38¢ in the third quarter of twenty nineteen. Excluding among other things, the effect of other product related charges, which resulted in a $2,300,000 gross profit impact related to inventory write offs, we delivered adjusted net income per diluted share of $0.35 compared with adjusted net income per diluted share of $0.38 in the third quarter of twenty nineteen. However, I would like to point out that if you apply the adjusted gross profit margin of seven percent to the $73,000,000 of net sales impacted by COVID-nineteen, we estimate that we would have delivered an additional $5,800,000 in adjusted gross profit. Additionally, despite the headwinds of the COVID-nineteen pandemic, we generated $63,000,000 in cash flow from operating activities during the third quarter.

We reduced our long term debt by $76,000,000 since the end of twenty nineteen. And we reduced our long term debt by $24,000,000 compared with the end of the second quarter of twenty twenty. As Mohammed mentioned, we announced $100,000,000 asset sale program to be completed over the next twelve to eighteen months to strengthen our cash flow position, reduce our debt, and continue to invest in key areas of growth in our business. Our focus on our value added business is also progressing well. Measures we have taken over the past year demonstrate the significance of our goals to increase sales revenue, enhance margins, and maintain our track record of improved cash flow generation.

We believe we are on track to realize most of our cost savings actions planned for 2021. With that, I'll now get into the results for the third quarter of twenty twenty. Net sales were $990,000,000 compared with $1,100,000,000 in 2019 with unfavorable exchange rates negatively impacting net sales by $2,000,000 Adjusted gross profit for the quarter was $69,000,000 compared to $76,000,000 in the third quarter of twenty nineteen. Adjusted operating income for the quarter was $25,000,000 in line with the prior year period. And adjusted net income was $60,000,000 compared with $18,000,000 in the third quarter of twenty nineteen.

In regards to our business segment performance in the third quarter of twenty twenty, in our fresh and value added product segment, net sales decreased $52,000,000 to $6.00 $1,000,000 compared with $653,000,000 in the prior year period. The decrease was primarily due to lower net sales in our fresh cut vegetable, avocado, fresh cut fruit, vegetable, and prepared product lines, partially offset by an increase in sales of our pineapple and non tropical product lines. As compared with our 2019 performance for the segment, the COVID-nineteen pandemic affected our net sales of fresh and value added products by an estimated $56,000,000 during the quarter, driven by reduced demand in our food service channel and shifting demand at retail due to the pandemic. Also, the continuing effect of the November 2019 Manpack voluntary product recall affected our net sales in the third quarter of twenty twenty. Gross profit increased to $54,000,000 compared with $53,000,000 in the third quarter of twenty nineteen.

And other product related charges represented $2,000,000 for the segment, primarily related to inventory write offs of pineapples due to volatile supply and demand conditions, as well as additional cleaning and social distancing protocols associated with the pandemic. In our pineapple product line, net sales were $116,000,000 compared with $102,000,000 in the prior year period, primarily due to higher sales volume in all of our regions, mainly as a result of lower production in the prior year period due to adverse weather conditions in our growing regions. Overall volume increased 15%, unit pricing decreased 1%, and unit cost decreased 1% compared with the prior year period. In our fresh cut fruit product line, net sales were $130,000,000 compared with $145,000,000 in the third quarter of twenty nineteen. The decrease in net sales was primarily due to lower sales volume in North America as a result of the continued impact of the COVID-nineteen pandemic and a shortage of certain raw materials.

Overall volume decreased 11%, unit price increased 1%, and unit cost increased 3% compared with the prior year period. In our fresh cut vegetable product line, sales were $96,000,000 compared with $122,000,000 in the third quarter of twenty nineteen. The decrease in net sales were primarily due to the effect of the COVID-nineteen pandemic, which resulted in a significant reduction of most of our global food service business during the quarter, mainly in our man packing subsidiary. Volume decreased 27%, unit pricing increased 7%, and unit cost increased 15% compared with the prior year period. In our avocado product line, net sales were $77,000,000 compared with $98,000,000 in the third quarter of twenty nineteen, primarily due to lower selling price as a result of normalized industry supply in the market when compared with the prior year period.

Volume increased 13%. Pricing decreased 31%. And unit cost decreased 37 compared with the prior year period, primarily due to the improved capacity utilization at our new packing facility in Mexico, which opened in December 2019. In our vegetable product line, net sales were $42,000,000 compared with $46,000,000 in the third quarter of twenty nineteen, primarily due to lower sales volume as a result of the COVID-nineteen. Volume decreased 13%, unit pricing increased 5%, and unit cost increased 26% compared with the prior year period.

In our non tropical product line, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry, and kiwi product line, net sales were $38,000,000 compared with $32,000,000 in the third quarter of twenty nineteen, primarily due to higher sales volume in Europe as a result of increased demand, along with higher sales volume in The Middle East in developing markets. Also contributing to the increase in net sales was higher selling prices in The Middle East. Volume increased 13%, unit price increased 4%, and unit cost increased 7%. In our prepared food product line, which includes the company's prepared traditional products and meals and snacks product line, The decrease in net sales was primarily due to lower sales in the company's meals and snacks product line, principally due to the impact of COVID-nineteen pandemic, the continuing impact of the 2019 product recall, and product rationalization efforts in our man packing operations in North America. The decrease was partially offset by higher per unit selling prices of pineapple concentrate due to lower industry supply, and increased per unit selling prices of canned pineapple products due to increased customer demand.

In our banana segment, net sales decreased $24,000,000 to $362,000,000 compared with $386,000,000 in the third quarter of twenty nineteen, primarily due to lower net sales in North America, Europe and The Middle East as a result of decreased sales volume and lower demand due to COVID-nineteen. The decrease was partially offset by higher net sales in Asia. The COVID-nineteen pandemic affected banana net sales by an estimated $17,000,000 during the quarter versus our 2019 performance for this segment. Overall volume decreased 4%. Worldwide pricing decreased 3% over the prior year period.

Total worldwide banana unit cost decreased 1%, and gross profit decreased to $11,000,000 compared to in the third quarter of twenty nineteen, primarily due to lower selling prices in North America as a result increased demand, partially offset by lower cost, mainly lower ocean freight costs. Other product related charges represented $400,000 for the segment incurred as a result of the COVID-nineteen pandemic. Now moving to selected financial data. Selling, general and administrative expenses decreased $7,000,000 to $44,000,000 compared with $51,000,000 in the third quarter of twenty nineteen. The decrease was primarily due to lower selling and marketing expenses in The Middle East and cost savings initiatives in North America.

The foreign currency impact at the gross profit level for the third quarter was unfavorable by $3,000,000 compared with an unfavorable effect of $2,000,000 in the third quarter of twenty nineteen. Interest expense net for the third quarter was $5,000,000 compared with $6,000,000 in the 2019 due to lower average loan balances and lower interest rates. The provision for income tax was $5,000,000 during the quarter compared with income tax expense of $3,000,000 in the prior year period. The increase in the provision for income taxes was primarily due to increased earnings in certain higher taxable jurisdictions. For the first nine months of twenty twenty, our net cash provided by operating activities was $174,000,000 compared with net cash provided by operating activities of $130,000,000 in the same period of 2019.

The increase was primarily attributable to lower payments of accounts payable and accrued expenses and lower levels of inventory due to our optimization efforts on working capital. The increase was partially offset by lower net income and higher levels of prepaid expenses and other current assets. Total debt decreased from $587,000,000 at the 2019 to $511,000,000 at the end of the third quarter of twenty twenty. As it relates to capital spending, we invested $57,000,000 in capital expenditures in the 2020 compared with $23,000,000 in the third quarter of twenty nineteen. For the first nine months of twenty twenty, we invested $93,000,000 compared with $94,000,000 in the same period in 2019.

Our investments in the 2020 included the delivery of two new container vessels, the Del Monte Gold and the Monte Rose. We also completed the consolidation of four different facilities into our man packing operations into our new Gonzales, California facility during the quarter. As announced this morning in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.10 per share payable on 12/04/2020 to shareholders of record on 11/11/2020. This is an increase of $05 per share from our quarterly cash dividend paid on 09/04/2020. This concludes our financial review.

I'll now turn the call

Speaker 0

Our first question comes from the line of Jonathan Pee with Consumer Edge. Your line is now open.

Speaker 4

Thanks so much and good morning. I guess my first question is a pretty detailed one, guess, but of the announced non strategic divestitures, I'm sorry if you already mentioned this, but is there any general growth profit or operating profit or cash cost to the losses of those assets that are presumably associated with business? I guess that would be my first question. And my second question would be, just an update on how much of the struggles in the banana businesses where you do business? It looks like a lot of the problem was concentrated in North America.

It's due to competitive activity and how much of this is due to just dynamics of demand in the category of food away from home and different purchasing patterns? Thank

Speaker 2

Thank you. You, Jonathan. Good morning. Regarding the assets issue, these assets actually that we want to dispose off or sell are actually assets that are sitting underutilized or lands that we have had for so many years that we never used in terms of agriculture. Just to give you an example, for instance, have a piece of land in Chile, which we acquired sometime in the late 1980s, 1990s for about $250,000 Today, are selling this land for over $11,000,000 that piece of same land, which is in the Northern part of Chile.

This actually I bought many, many years ago for an agricultural project that we never used for and then sat there for a long time. The same thing applies for many other lands that we have in different parts of the world and particularly in Chile and Uruguay. Some of these assets are really underutilized or not utilized at all. Some facilities that we have vacated because we consolidated the operation rather in than two or three facilities under one roof, like we are doing for instance right now in California by putting like three, four different facilities under one roof in Gonzales, California, which means that we have so much assets that we can sell. And if you look across the world over the years, we have had so many assets that we have accumulated and I believe that they are very valuable assets that we really don't need and that doesn't affect our business in any way whatsoever.

On the contrary, it might leverage our business in a better way. As far as the banana is concerned, the banana, it's really it's a very big mess, let me put it that way. Banana production and oversupply is coming to an extreme in the world and especially from Ecuador. There is so much bananas around that nobody knows what to do with it, not only in North America, but all over the world. And other countries are producing new countries that have not been on the map like in Vietnam, Laos, Cambodia, all these countries are newcomers to the market.

They are exporting mainly to China. China used to buy more food from Ecuador and Central America. Now they have more food coming from these new countries. So all in all, I don't see the banana to be to come back to where it used to be a few years back where demand and supply used to be more or less in line. I believe today, banana will be a business that we need to continue with.

The margins will be small, but with the proper planning and proper management of this segment, I believe we are the best really to manage and we are very confident about our future banana business because we are taking a different model in approaching the markets and the sourcing of this fruit. So bottom line that it's a difficult business, it's not easy and I see many people will be really suffering and probably getting out of the business in the next few months or years. But as far as the Monte is concerned, I'm very confident and I have big confidence that we will override this crisis and will come out better in better shape than what it used to be even two or three years ago.

Speaker 3

And Jonathan, just to complement what the Chairman mentioned, it's very important to highlight that although the prices are very unstable in the market, all the investments that we have done in the recent years and the important one being the new vessels, it's really to drive our longer cost position that we can really navigate strongly through these, let's say, oversupply in the marketplace, so that we can really have, let's say, a better cost position in all of the geographies to be able to face that. And once these move on, we expect that to be accretive to our margin going forward.

Speaker 4

Thank you both as always.

Speaker 2

Thank you, Johnson.

Speaker 0

Our next question comes from Mitch with Sturdivant. Your line is now open.

Speaker 5

Good morning. Good morning. Just to follow-up on John's question regarding the banana business.

Speaker 3

I mean, know, Mohammad you

Speaker 5

said it's a difficult business. I mean it's always been a difficult business. And there always seems to be oversupply and demand has been relatively stable. So you always have these bouts with, you know, the ups and downs in this business. What, you know, is there anything different today just in terms of your comments saying it's difficult?

Anything different than the usually, you know, difficult business historically?

Speaker 2

No, nothing difficult except that as we see now in the last, I would say, twelve months or ten months, there is a lot more supply than what it used to be. Coupled with the present market conditions because of the pandemic, less consumption, food services almost dead, schools, all these convenience stores, everything is disrupted. So on top of the additional volume that Ecuador has produced and the optimum conditions for production in the other countries as well. We didn't have any kind of climatic, let's say, disorders or disasters during this year, thanks God. But that means that there is more supply and the trees are giving at optimum level.

But it hasn't the business hasn't changed except that there is more supply and we have the pandemic issues that surround this business. I believe going forward in the year ahead, hopefully once that pandemic we are over with what we are facing today, Banana will become better. But like Eduardo just mentioned, we are taking so many actions to really bring the business into a kind of a different path by we're having new vessels, which will be the best I mean, it is the state of the art of any vessel on that route and this will be only for North America. This will be not only cost effective, but also logistically will be the best that you can find. At the same time, we are optimizing and rationalizing our supply and demand in terms of not taking additional risks that we shouldn't take.

And that's why I'm very hopeful, I'm very confident that we will be able to achieve even better results than what we are seeing today even though we have so much challenges and so much headwind with the banana oversupply worldwide. And that's a fact. And one of the unfortunate which I discussed before is that our business has been contaminated with other businesses that using bananas as a means to transport. And unfortunately, this has also added to our to the challenges in this business.

Speaker 5

Yes. And so when I watch the European banana prices, they've been awfully weak. Imagine that's where a lot of the excess supply is also heading into. But when I look at the USDA, the prices for bananas in North America, you know, they were the retail price was actually up 10% in the third quarter. Is are you seeing you're not seeing any of that benefit because you contracted prices earlier in the year, is that correct?

Speaker 2

No. Look, North America is a contract 90% of our volumes in North America and that applies to us and applies to competition as well. 90% of our volumes are contracted to the buyers, to retailers and others. So we have we don't have that kind of volatility on the prices during the year except for the spot market. What really helps us is that when the markets are soft, like we have been seeing for the last three, four months during the summer months and even as we speak today, that the retailers are not being able to absorb the contractual volumes that they have contracted for.

So what happens is that they come back to you and say, please reduce my volumes by, let's say, instead of 100 loads give me only 90 or 85 or 80 loads. So you end up with additional fruit that there is no home for it except the spot market. And that's really what helps. See, this is something that nobody I mean, you cannot stuff it down the throat of the retailer on one side. At the same time, we have to live with it and go to the either the spot market or going to other markets, which really underpays and suffers a lot more than selling it in North America.

That's actually what is happening right now.

Speaker 3

Then just I'm sorry, go ahead. To complement a little bit, so if you look to the export prices from Ecuador, they are at historical low level currently. And so that's a very important element on the equation that shows exactly what Mohammad mentioned about the oversupply and the let's say the concentration of the demand in the retailer, it caused all of the companies trying to get a stake there. And that's also put pressure on the volumes that get into the retailers.

Speaker 5

Okay, thank you. Just one more banana question. Do you have any update on the Panama disease? Is there any further spread? Do you feel like it's a little bit under control?

Anything any actions that you've been taking in your own facilities?

Speaker 2

No. Panama Disease status quo, we haven't seen anything abnormal in any of our plantations or other plantations. So as far as we speak, it's under control. It doesn't happen overnight. This takes years.

If there is anything to flare up, it doesn't happen overnight, it takes years for it to expand or to go to other areas. As we speak, there is nothing really to mention, Mitch.

Speaker 5

Okay. And then my just final question and I'll get back in the queue. But you've done a nice job on deleveraging here. And, you know, with the asset sales and other things that's going to further delever, that kind of sets you up at least the balance sheet with some dry powder. I mean do you have an appetite for acquisitions at the moment?

What's your feeling there?

Speaker 2

No, I don't think we are looking at acquisitions. We did an acquisition couple of years two, three years back, which is the Mann acquisition, where we are now and we are driving that acquisition to become very profitable and consolidating this business as we spoke earlier. At this moment, our focus will be to reduce our debt and increase dividend.

Speaker 5

Okay. Thank you for your time.

Speaker 2

Thank you.

Speaker 0

And there are no further questions in queue at this time. I'll turn the call back over to Mr. Mohammad Abu Ghazalar for closing comments.

Speaker 2

I would like to thank everyone today for attending this call. I know it is hard for everyone today with the pandemic and the way we are conducting our lives, but we will endure and overcome I hope. Well, I'm assuring you that Fresh Del Monte is on the right track and we will be delivering as we go good results and better results every time we speak God willing. Thank you very much and have a good day. Bye.

Speaker 0

This concludes today's conference call. You may now disconnect.