Fresh Del Monte Produce - Q4 2022

Transcript

Operator (participant)

Welcome to Fresh Del Monte Produce's Q4 and Full Fiscal Year 2022 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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during the Q&A session, simply press star then one on your telephone keypad. To withdraw your question, press star one again. For opening remarks and introductions, I would like to turn today's call over to the Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Pou. Please go ahead, Ms. Pou.

Claudia Pou (VP of Corporate Communications)

Thank you, Regina. Good morning, everyone, and thank you for joining our Q4 and Full Fiscal Year 2022 Conference Call. As Regina 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 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 material and 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 and the other required disclosures 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 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, February 22nd. We have no obligation to update any forward-looking statement we may make. During the call, we will provide a business update along with an overview of our Q4 and full year 2022 financial results, followed by a question-and-answer session.

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

Mohammad Abu-Ghazaleh (Chairman and CEO)

Thank you, Claudia. Good morning, everyone. Q4 of 2022 has been our best performing Q4 in recent history, led by strong net sales and strong margins. Our net sales for the Q4 were the strongest since Q4 of 2018. In Q4 2022, we had our best margins in the past ten Q4s, now at 8% versus 4% in 2021. Our gross profit for the quarter was the best since Q4 of 2016. Overall, for the year, we closed out 2022 in a much stronger position than 2021. We believe this reflects our commitment to remaining flexible and agile, controlling our costs, leveraging our assets, and optimizing new and existing partnerships.

It was a challenging macroeconomic environment for our business as costs for packaging, materials, fertilizers, transportation, and labor remained elevated throughout the year. We focused our efforts on being flexible and mitigating the risks associated where we can. During the year, we sought to control costs and implemented inflation-justified price increase to offset some of the increased costs. While Fresh Del Monte is most notably known for being a global produce marketer and distributor, it's important to note that we are also a logistics provider. In 2022, we made a conscious effort to leverage our assets wherever we can within our vertically integrated network. Net sales in our Other Products and Services segment, which includes third-party ocean freight services, increased 24% for the quarter and 45% for the year compared with 2021.

We are extremely proud of the expanded partnership between Network Shipping and sister companies, Tricont Trucking and Tricont Logistics, and the work we are doing at various ports. We are helping to further extend the ocean service that Network Shipping has perfected into the inland marketplace. This allows us to offer customers a one-stop shop for their logistics needs within Latin America and the United States. Our customer relationships are also assets to us. In 2022, we focused on optimizing our relationships. We optimized by innovating based on customer needs. We found new ways to work with our top volume customers to make these relationships more efficient yet profitable. We continue to innovate with our products, focusing on creating more value-added products that meet our customers' and consumers' expectations.

While we are confident in our capabilities and services, we are continuously improving and investing in technology, processes, and people to keep our edge. The release of our Transportation Management Systems, TMS, in 2023 for our inland logistic arm is just the next step in a multi-year plan for continued growth as a technology-driven company. We have dedicated numerous years, including a large part of 2022 working to perfect avocado predictability using artificial intelligence and our rich data library. We have reached almost 95% predictability on pricing, and we are close to perfecting the technology with supply and demand for avocados. We see this technology as a big step forward for the produce industry and are proud to be the pioneers on this front. We expect to eventually expand this use of AI to our other products.

Our focus for 2023 will be continued technology focus, innovation and leadership in the produce industry. We want to stay flexible and agile as we continue to pursue partnerships that will allow us to optimize our assets, which include logistics, warehousing and distribution. Now I will turn the call to Monica to talk about the financial results. Monica.

Monica Vicente (SVP and CFO)

Thank you, Mohammad. Thank you for joining us on the today's call. Let's first turn to our Q4 2022 financial results. Net sales for the Q4 of 2022 increased by approximately $23 million or 2% compared with the prior year period. The increase in net sales was driven by inflation justified per unit price increases, partially offset by lower sales volume and the negative impact of fluctuations in exchange rates, primarily in Europe and Asia. The negative impact of exchange rates was partially mitigated by our foreign currency hedges. Gross profit for the Q4 of 2022 was $82 million, compared with $40 million in the prior year period. The increase was a result of higher per unit selling prices across all segments.

The increase in selling prices helped offset some of the continuing inflationary cost pressures, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland and ocean freight, labor and fuel. Adjusted operating income for the Q4 of 2022 was $34 million, compared with a loss of $7 million in the prior year period. The increase in adjusted operating income was primarily due to higher gross profit, partially offset by higher SG&A. Adjusted FDP net income for the Q4 of 2022 was $22 million, compared with a loss of $9 million in the prior year. Our diluted earnings per share for the Q4 of 2022 was $0.38, compared with a loss of $0.24 in the prior year. Adjusted diluted earnings per share was $0.45, compared with a loss of $0.18 in the prior year.

The difference between GAAP and Adjusted diluted earnings per share during the Q4 of 2022 was a $3.3 million or $0.07 per share asset impairment charge primarily related to flooding in our Philippine Banana operations. Adjusted EBITDA for the Q4 of 2022 was $59 million, compared with $15 million in the prior year, and corresponding Adjusted EBITDA margin increased to 5.6% from 1.5% in the prior year. Let me now turn to the segment results, beginning with our Fresh and Value-Added Products segment. Net sales for the Q4 of 2022 decreased by $22 million or 4% when compared with the prior year, primarily driven by lower net sales of avocados due to lower selling prices, also lower net sales of non-tropical fruit as a result of lower selling prices and lower volume.

The decrease was partially offset by higher net sales of prepared food products, primarily sales of canned non-tropical food and industrial pineapple products, driven by higher selling prices and volume. For the quarter, adjusted gross profit in the Fresh and Value-Added Products segment was $34 million, compared with $28 million in the prior year. The increase was primarily driven by higher per unit selling prices and product mix of higher margin categories. The increase in gross profit was partially offset by higher cost of packaging materials, fertilizers, and ocean freight, which negatively impacted per unit production and distribution costs. Gross margin increased to 5.9% from 4.7%. Moving to our Banana segment, for the Q4 of 2022, net sales increased by $33 million or 9% compared with the prior year period, primarily driven by Europe and North America.

The increase in net sales was predominantly from higher per unit selling prices resulting from inflation justified price increases and the absence of excess volume as a result of our strategic sourcing in response to market conditions. The increase was partially offset by fluctuations in exchange rates in Europe and Asia. Adjusted gross profit for the Q4 of 2022 was $38 million compared with $9 million in the prior year period, primarily driven by higher net sales, partially offset by higher costs of packaging material, fertilizer, and distribution costs, including ocean and inland freight. Gross margin increased to 9.4% from 2.5% in the prior year period.

Lastly, for the Q4 of 2022, net sales for our Other Products and Services segment increased by $12 million or 24% compared with the prior year, mainly due to higher net sales of third-party ocean freight services. Our fleet of vessels has enabled us to expand these services, which benefited from elevated shipping rates and demand due to market conditions. Adjusted gross profit increased by $7 million as a result of higher volume and shipping rates. Now moving to selected financial data. Selling, General and Administrative Expenses was $48 million compared with $45 million in the prior year period. The increase was driven by higher promotional and administrative expenses. Net interest expense was higher by approximately $2 million in the Q4 of 2022, related to higher interest rates and have higher average debt balances.

Income tax expense was $6 million during the quarter, compared with a benefit of $7 million in the prior year, primarily due to the effect of a valuation allowance reversal in 2021. Turning to our full fiscal year 2022 results. For the full fiscal year 2022, net sales increased $190 million or 4% compared with the prior year period. The increase was driven by inflation-justified per unit price increases, which was partially offset by lower sales volume and the negative impact of fluctuations in exchange rates, primarily in Europe and Asia. The negative impact of fluctuations in exchange rates was partially mitigated by our foreign currency hedges. Gross profit for the full fiscal year 2022 was $340 million compared with $304 million in 2021.

The increase in gross profit was primarily driven by higher gross profit in our Other Products and Services segments as a result of higher net sales of third-party ocean freight services, along with the favorable impact of higher per unit sale prices across all segments. For the full fiscal year 2022, Adjusted operating income was $149 million, compared with $112 million in the prior year period. The increase was primarily driven by higher gross profit and lower Selling, General and Administrative expenses. Adjusted FDP net income for 2022 was $94 million compared with $81 million in the prior year.In 2022, diluted earnings per share was $2.06 compared with $1.68 in the prior year. Adjusted diluted earnings per share was $1.97 compared with $1.69 in the prior year period.

A 17% year-over-year improvement. Adjusted EBITDA for 2022 was $235 million compared with $207 million in the prior year. A corresponding Adjusted EBITDA margin increased to 5.3% from 4.9% in the prior year. Moving on to selected financial data for the full fiscal year 2022. For the year, we generated $62 million in cash flow from operating activities compared with $129 million in 2021. Net cash provided by operating activities was impacted by an increase in inventory during the current year, largely due to inflationary cost increases and a strategic increase in levels of key raw materials and packaging supplies in order to secure cost and availability. Higher levels of accounts receivable as a result of higher net sales impacted net cash provided by operating activities.

Long-term debt at the end of 2022 increased by $22 million to $540 million from $519 million at the end of 2021. On a trailing 12-month basis, our leverage ratio stands at 2.22 times Adjusted EBITDA. Capital expenditures, we invested $48 million in capital expenditures in 2022 compared with $99 million in 2021. The $99 million from last year included the final payments on the delivery of two of our refrigerated container ships. The spend this year has focused on improvements to our Banana and pineapple operations in Central America and enhancements to improve our efficiency in production facilities across our operations. As announced this morning, financial results press release, we declared a quarterly dividend of $0.15 per share payable on March 31, 2023 to shareholders of record on March 8, 2023.

For the full fiscal year 2022, we declared four quarterly cash dividends totaling $0.60 per share. This concludes our financial review. We can now turn the call to Q&A. Regina?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, simply press star then the number one on your telephone keypad. Our first question will come from the line of Mitch Pinheiro with Sturdivant. Please go ahead.

Mitch Pinheiro (Research Analyst)

Hey. Good morning.

Mohammad Abu-Ghazaleh (Chairman and CEO)

Good morning, Mitch.

Mitch Pinheiro (Research Analyst)

Good morning. Mohammad, you know, that was a surprisingly strong gross margin performance in your Banana segment. I was wondering if you could take us through the puts and takes, those that are sort of gonna be sustainable and those that the benefits that are sustainable and some of the benefits that go away for 2023.

Mohammad Abu-Ghazaleh (Chairman and CEO)

No, I think our business has turned around. Mitch, I don't want you to keep focusing on bananas, you know, because bananas is a true part of our business. Bananas is not going to be the turning point for our business. I keep, you know, focusing on certain. You could see that in our results that when we are optimizing our assets, you know, in logistics, distribution, warehousing, and we have many new projects in the pipeline that will add a lot of value to our business aside from banana, you know. I'm very confident in general, you know, about bananas because we are managing our banana volumes in a much better and more rational way than it used to be in the past.

We are using more technology and more predictability in our operations going forward. This, in my opinion, will make a big change, going forward in our business.

Mitch Pinheiro (Research Analyst)

Yeah. I mean, I appreciate that, Mohammed. You know, the Banana segment is like the big swing in profitability from quarter to quarter. I was wondering if I know it's not where your focus is and it's still a meaningful part of the business that it'd be helpful to have a little visibility into the Q1 and maybe what you're seeing for the year. Does the Banana business hold on to these margins or do some of the price increases start to get whittled away? Do you see any headwinds with regard to sort of some of, you know, whether it's fruit costs or ocean freight costs? You know, what could be some headwinds in the Banana segment?

Mohammad Abu-Ghazaleh (Chairman and CEO)

Well, the headwinds in the banana is the would be the oversupply. As we have seen during the last seven, eight months, especially after the pandemic, I think Ecuador have gone down drastically in terms of supplies. This has helped the market to be more balanced, let's say. From our side, we are just matching supply and demand more rationally. Let's put it that way. As a company, we are not planning to sell under cost or to sell with low margins. That is a policy that we have taken. I believe, you know, that margins will be more or less consistent with fluctuations from quarter to quarter, depending on the time of the year.

I think margins will somehow be maintained, more or less around the same line that we are taking right now. I am going to repeat myself again, Mitch, that other businesses will really make up a lot for the Banana business itself.

Mitch Pinheiro (Research Analyst)

Okay. On the ocean freight services, it's been doing quite well. You talked about you're taking from the ocean freight, and you're gonna take that same sort of model and move it inland. For 2023, you had a nice growth in 2022. Do you see the growth in that segment sustainable and margins in that segment sustainable?

Mohammad Abu-Ghazaleh (Chairman and CEO)

I believe so, yes. As I believe I don't know if it will be the same percentage of growth, but definitely there will be growth on this segment in 2023.

Mitch Pinheiro (Research Analyst)

Yeah, it's a nice, you know, high margin business there for you. On the Fresh and Value-Added, margins were down versus a year ago in the quarter, and which you explained. What do you expect for 2023 in this business? Is it gonna be dependent upon product mix, or do you see some in, you know, fixed cost leverage and some things that you're doing that you can sort of outrun some of those headwinds?

Mohammad Abu-Ghazaleh (Chairman and CEO)

Well, the headwinds were the packaging material, you know, and the transportation. We are seeing this to be now easing, you know, kind of, to mitigate some of this additional costs that we faced during 2022. Also the product mix, Mitch. You know, I mean, sometimes you will have shortage on certain items which increases your cost. I believe all in all, we should be able to maintain our historical, you know, kind of margins on the value added, like, products, which is fresh cut in particular.

Mitch Pinheiro (Research Analyst)

You were talking, another question. You were talking about within that segment, the avocado business. With avocado prices down, do you expect margins to stabilize in the early part of 2023? To really get back to, again, more normalized margin level.

Mohammad Abu-Ghazaleh (Chairman and CEO)

Well, you know, what has happened during the last, I would say four or five months, is that the avocado pricing was more very consistent and very stable. Unlike, you know, 2021 and 2022 first half where that was crazy. You know, the kind of cost increases, price increases in Mexico. What we have seen from in the last few months is that the prices were more stable, no volatility, which helped the industry in general, you know, to be able to predict better. As I mentioned, we are using now artificial intelligence, which we have been working on for several years now. We have come to almost 95% predictability, and we're going to roll that as well for supply and demand as well.

We're going to be using technology as well in terms of predictability for avocado, which is the most difficult act. That's actually why we chose avocado to be the first commodity to apply, you know, AI, is because it's the most difficult. Once we do that, and once we did that, actually, we are going to roll it out to all other the SKUs or commodities that we handle. This will help us going forward in the future.

Mitch Pinheiro (Research Analyst)

That's terrific. I'll get back in the queue. Thanks for your time.

Mohammad Abu-Ghazaleh (Chairman and CEO)

Thank you, Mitch.

Operator (participant)

As a reminder, to ask a question, simply press star one on your telephone keypad. There are no further questions at this time. I'll turn the conference back over to management for any closing remarks.

Mohammad Abu-Ghazaleh (Chairman and CEO)

I would like to thank everyone for joining us on this call today, and hope to talk to you on our next call in May, I hope. Thank you, have a good day.

Operator (participant)

Ladies and gentlemen, that will conclude today's meeting. We thank you all for joining. You may now disconnect.