Fresh Del Monte Produce Inc. (FDP) Q1 2021 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Fresh Del Monte Produce First Quarter 2021 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 the Vice President, Investor Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

Thank you, Katrina. Good morning, everyone, and thank you for joining our first quarter 2021 conference call. As Katrina mentioned, I'm Christine Cannella, Vice President, Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Eduardo Bezerra, Senior Vice President and Chief Financial Officer. I hope that you 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 and our call today include non-GAAP measures. Reconciliations of these non-GAAP financial measures are set forth in the press release we issued today and on the company's website at freshdelmonte.com under the Investor Relations tab. I would like to remind you that some 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. In today's press release and in our SEC filings, we detail our material items. With that, I'd like to turn the call over to Mohammad.

Thank you, Christine. Good morning, everyone. In the first quarter of 2021, we delivered strong profits across all of our business segments, while net sales were slightly lower year-over-year. Gross profit increased 53% from last year's first quarter. Net income increased 228% to $43 million or diluted EPS of $0.90 compared with net income of $30 million or diluted EPS of $0.27 a year ago. We believe that these results reflect the resilience of our company and are a demonstration of the initiatives we implemented in 2020 to further strengthen our operating model and improve working capital. Thanks to our sales, marketing and operations teams, reorganization in North America. We have further optimized the way we work and our overall organization has done an excellent job despite the market challenges. I assume you all know what is happening in the global markets. The structure of the economy has changed. We recognize the new economic reality and market challenges we face. Specifically, the inflationary pressure we are facing on all fronts which is forcing us to increase our prices. We intend to continue to proactively manage and anticipate these challenges as we have done in the past by taking decisive actions to counterbalance any adverse conditions to our business. As we move forward, we intend to continue to operate with agility so that we can quickly respond to market changes as they come. What you see today is only the beginning of our potential. Now I will turn the call to Eduardo to talk about the first quarter financial results. Eduardo, please?

Thank you, Mohammad, and good morning, everyone. As you may have seen from our press release this morning, we had a strong first quarter, and we are pleased with how well we performed against the backdrop of the persistent global COVID-19 pandemic and impact on fruit supply due to the 2 hurricanes in Guatemala in the fourth quarter of 2020. We also dealt with rising inflationary pressures during the first quarter. Now let's review our first quarter of 2021 results. Net sales decreased $29.7 million or 3% to $1.88 billion compared with the prior year period, with favorable exchange rates benefiting net sales by $16 million. The decrease was primarily attributable to lower net sales in our fresh and value-added and banana business segments. Adjusted gross profit increased 39% to $107 million, and our adjusted gross profit margin increased to 10% compared with 7% in the prior year period. We benefited from increased profitability in our fresh and value-added business segment, partially offset by higher food production, procurement and distribution costs. However, I would like to point out that if you apply the adjusted gross profit margin for the fresh and value-added products segment of 8.7% to the $19 million of net sales impacted by COVID-19 in this segment, we estimate we would have delivered an additional $1.7 million in adjusted gross profit. Adjusted operating income increased 140% to $58 million compared with the prior year period, mostly driven by increased gross profit. And adjusted net income increased 154% to $42 million compared with the prior year period. We achieved a diluted earnings per share of $0.90 compared to diluted earnings per share of $0.27 in the prior year period. Excluding nonoperational and nonrecurring items, we delivered adjusted diluted earnings per share of $0.88 compared with adjusted diluted earnings per share of $0.34 in the prior year period. Adjusted EBITDA increased 61%, and adjusted EBITDA margin increased 300 basis points when compared with the prior year period. Let me now turn to segment results, beginning with our fresh and value-added product segment. For the first quarter of 2021, net sales decreased $30 million or 5% compared with the prior year period. The primary drivers of the variance were lower sales volumes of melons as a result of the hurricanes in Guatemala. The impact of COVID-19 to net sales in January and February in our fresh-cut vegetable and vegetable product lines, an increase in avocado volume, which was offset by lower per unit sales price that impacted the industry, an increase in pineapple volume in most of our regions and an increase in net sales in our prepared food products line due to higher per unit sales prices. For the quarter, adjusted gross profit in our fresh and value-added product segment increased 9% to $55 million, and adjusted gross profit margin increased 100 basis points. During the quarter, we began to benefit from the actions we took in 2020 to optimize our operations, primarily in the following product lines: fresh-cut fruit, melon, avocados and our prepared food products. Fresh-cut fruit margins recovered back to double digits. Rationalization in our domestic melon operations and higher per unit sale prices helped offset the damage from the hurricanes. Avocado gross profit margin doubled during the quarter and achieved the double digits. Prepared food products margins achieved the high teens. We also pursued volume expansion during the quarter in the following product lines. Pineapple volume increased 22%, and avocado volume increased 12%. Gross profit in our non-tropical product line decreased primarily in rates as a result of damage caused by severe rainstorms to some of our farms in Chile, which resulted in a $3.1 million inventory write-off. Our Mann Packing business was impacted by lower sales volume in our food service distribution channels, which drove higher per unit product costs. Net sales in our banana segment decreased $9 million to $418 million while adjusted gross profit increased 93% or $23 million during the quarter, primarily driven by lower net sales in North America and the Middle East, mainly as a result of decreased sales volume, partially offset by strong demand in Asia. Overall volume decreased 8%. Pricing increased 7%, which offset an increase in production and procurement costs due to the impact of hurricanes Eta and Iota in Guatemala as well as inflationary pressure on cost of goods sold. Now moving to selected financial data. Selling, general and administrative expenses decreased $4 million to $49 million compared with $53 million in the prior year period. The decrease was primarily due to cost-saving initiatives in our North America region that resulted in reduced promotional expenses and lower selling and marketing costs. The foreign currency impact at the gross profit level for the first quarter was favorable by $13 million compared with an unfavorable effect of $6 million in the prior year period. Interest expense net for the first quarter at $5 million was in line with the prior year period. The provision for income taxes was $11 million during the quarter compared with income tax of $300,000 in the prior year period. The increase in the provision was due to -- sorry, the increase in the provision for income tax of $10.7 million is primarily due to increased earnings in certain jurisdictions. During the quarter, we generated $47 million in cash flow from operating activities compared to $2 million in the prior year period. The increase was primarily attributable to higher net income and higher balances of accounts payable and accrued expenses, principally due to our optimization efforts associated with the working capital. As it relates to capital spending, we invested $34 million in the first quarter compared with $17 million in the prior year period. Our investments were mainly related to our new refrigerated container ships, one of which was received during the first quarter and expansion and improvements to facilities in North America and Asia. As of the end of the quarter, we received cash proceeds of $42.4 million in connection with our asset sales under the asset optimization program of which approximately $40 million was received in 2020. The gain during the first quarter of 2021 primarily related to a gain on the sale of a refrigerated vessel. We believe we are on track to achieve the $100 million program by the first quarter of 2022. We paid down our long-term debt by $8 million, resulting in a total debt balance of $534 million. And based on a trailing 12 months, our total debt to adjusted EBITDA ratio stands at 2.4x. 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 June 11, 2021, to shareholders of record on May 19, 2021. This concludes our financial review. We can now turn the call over for Q&A.

[Operator Instructions] Your first question or comment comes from the line of Jonathan Feeney with Consumer Edge.

Some very nice results, obviously. My first question is on -- it strikes me that banana volumes are down, avocado volumes are down, major product categories. Did you just do a better job -- but yet gross margins are up despite all that de-leverage even on an item basis. Did you do a better job just -- was it just a case that this time last year, you got caught along with a lot of stuff and do a better job procuring more carefully? Did you have better pricing power? How did all that work? Because ordinarily when volumes are down, there's fixed costs in the business and you see margins get hit. And I realize it's an easy compare. But even if you go to 2 years ago, this was some good execution. So I'd love your comments on that and maybe how that might continue or not continue into the second quarter?

So Jonathan, just to clarify one thing. In your question, you asked about bananas and avocados. So banana volume went down, but avocado volume went up. Yes, net sales was impacted mainly because of overall industry prices in avocado went down, and this was a continuing trend as compared to last year.

Oh right. I'm sorry. I misspoke. Sales are down, but volumes were up. Okay. Got you. Okay.

Yes. And I will follow up on Eduardo's answer is that this is not a hiccup or it's just a sheer luck. This is a very, very concentrated work by our team to achieve these results through better efficiencies, through better optimization of our assets, through better planning and execution. So this is an exercise that is ongoing and improving as we go forward.

Ordinarily, Mali currency plays a pretty decent role in your profitability, particularly this time of the year, as it starts to relate to Europe. Was currency a factor in your ability to achieve pricing in Europe or just broadly in bananas, naturally where you got seeing -- you almost doubled profitability there?

No. But I mean, we have -- the euro was quite low for several years, as you know and the sterling as well as -- all the foreign currencies really have strengthened against the dollars starting end of or beginning this year. So I don't believe that this is going to change for the next foreseeable future, I believe that the currencies will stay more or less at this level going forward. And we do monitor this on a very, very close -- so always, we like to take advantage of such situations.

Got you. Yes, that makes a lot of sense. So where -- absolutely, where are you in terms of just focusing in on the pineapple business. Volumes are up, obviously recovered off a low -- can you give us a sense of how much of your -- are you growing all your pineapples internally now? Is there any external sourcing you had to do? And where are you on that, just pineapples percent outsourced versus in-sourced?

No, don't forget that we are -- we produce pineapples in 3 continents. We produce pineapple in Costa Rica. We produce pineapples in Kenya as well as in the Philippines. So we cover 3 different continents for different markets. And as of almost last year, beginning of last year, Kenya was mainly producing for our canning operations. And we took a decision -- we took the decisions about 2 years ago to start diversifying our operations in Kenya from being just a canned operation into being a can as well as fresh exports, fresh. And we have been doing an extremely good job there for our fresh pineapples from Kenya into the -- especially into the Middle East and Europe because of the logistics proximity and the quality differentiation between the other locations. So we have been doing very well from Costa Rica, from Kenya and from the Philippines to the different markets. And at the same time, we have also developed new kind of categories in the pineapple itself. So that has improved the margins drastically. And don't forget as well, we are getting into the pink honey growth now, which is still in the very early stages in terms of volumes, but with very, very high margins in this category, which is exclusive, of course to Fresh Del Monte.

But you were able to -- I guess, what I'm asking is you were able to support all of that outsized growth year-over-year with your own volume? Or did you have to -- because of all the demand, have to buy externally?

No, we have our growers that have been with us for so many years, and these are still there. I would say, I mean, in Kenya, it's 100% of production. In the Philippines, it's 100% of production. In Costa Rica, we have over 20% outside growers. These have been long term, have been there with us for almost 20 years or so. So this is where we stand.

Got you. Okay. So it sounds like you have a handle on that. What about your -- I mean, with these license operations, the Cafes, the foodservice like where -- obviously, you're thinking about, you put some money into and had some plans to expand in foodservice in North America a little bit, and that timing there is tough, you're probably on hold though, but where do we stand on that? Are we going to push forward with that in the next year or so?

That's what we are hoping for. First, the flagship is actually in our headquarters in Coral Gables, and we are seeing very, very promising results. We're not going to go any further until we consolidate and test the model, the concept in a way that will give us confidence and assurance that this will be a successful concept, and then we will roll it over different -- in Florida and different parts of the country.

Now how about more broadly with the -- I guess, it's 3 joint ventures you have, right, with other Del Monte license holders for different categories of products in particularly North America. I mean where do we stand with the development of some of those beverages and other value-added products? Is this something we're going to move forward with? Can you -- where do we stand with that?

Not really. I mean we are focusing on our -- between us and Del Monte Food that we have had an agreement, kind of settlement in 2017, which is working very well for both parties, and we have come to an agreement where we will -- each will focus and concentrate on his areas of expertise and knowledge. So that's where we are focusing, on value-added products for ourselves in the fresh sphere and the healthy and wellness area.

I see. So -- okay. So no real -- I wouldn't anticipate any big product change, product mix change in North America, although you do technically have the right to do that now, correct?

Yes. And we are actually in the midst of new product developments and new offerings to the market. And so we will be coming with new products in the next few months and new offerings to our customers.

I got you. Let me wrap up with an old favorite. When I look at the last 5 years' average at the year ended 2020, EBITDA is something like $216 million, adjusted EBITDA. That's the average over 5 years. I'm pretty sure the 10-year average -- I'm not in front of a machine right now, but I'm pretty sure that's higher. Do you -- should I mean, we've been spending a lot on CapEx. We've had a lot more opportunities. I mean should the next 5 years average EBITDA be same, higher, significantly higher? Like how would you think about that? Because I've always been under the understanding that everything you spend above maintenance CapEx is something that was going to drive that number forward. And it's tricky. I realize because there's a $100 million window there above volatility, and COVID made that worse. But now that you're back on the upswing, I guess I'm just trying to think about what would be a -- what's the average EBITDA for this company? I mean, is it higher than the last 5 years, do we think same, lower? I mean, how what comments could you make?

What do you want me to say? Of course, I'd like to be high. I mean, I would better go low.

What would I like you to say? I don't know.

I like to be double where I am today. What do you want me to say?

Let me phrase it this way then, based on the investments you've made and where you stand right now, if nothing changed, is this company a higher average EBITDA company for the next 5 years than the last 5 years?

I believe so for one reason because with the new container ships that we have built, that has given us a very, very tremendous leverage in terms of our logistics and future operating income. And that's as far as I can go.

Okay. That's helpful. And certainly, I mean, probably -- you were making the plans before all this happened, but that certainly seems extraordinarily well timed from the time when you said about these plants to what the value of those kind of logistics are today. So well done. I'll leave it there.

[Operator Instructions] And there are no further questions at this time. I will now turn the call over to Mr. Mohammad Abu-Ghazaleh for closing remarks.

Thank you. I would like to thank everybody whoever is on this call, and I wish you well for today and stay safe and hope to talk to you on our next second quarter call, sometime end of July. Thank you very much. Have a good day.

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