Fresh Del Monte Produce Inc. (FDP) Q1 2023 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Fresh Del Monte Produce's First Quarter 2023 Earnings 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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions] For opening remarks and introductions, I would like to turn today's call over to Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Pou. Please go ahead, Ms. Pou.

Thank you, Christie. Good morning, everyone, and thank you for joining our first quarter 2023 conference call. As Christie 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 have 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 investor relations.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, includes 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, May 3rd, and 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 first quarter 2023 financial results, followed by a question-and-answer session. With that, I am pleased to turn today's call over to Mohammad.

Thank you, Claudia. Good morning, everyone, and thank you for joining our first quarter '23 conference call. As mentioned -- thank you, Claudia. Good morning, everyone. Overall, our first quarter results were positive, reflecting our unwavering commitment to profitability through efficiency and optimization of resources. During the first quarter, our gross profit was $97 million, and gross margin of 8.6% were stronger than the prior year period, which is reflective of our ongoing strategic efforts to further increase our profitability despite the continued impact of inflation. We are starting to see more stability in the market by the high inflation is moderating, we are still operating in an inflationary environment. Given our global footprint, foreign exchange rates pose significant headwinds for us this quarter, as did the continuing increase in interest rates. We were able to achieve strong results despite the headwinds by remaining focused on optimizing our assets and unwavering commitment to improve profitability. This past quarter, we finalized the sale of three underutilized properties as part of our focused optimize all corners of our business. We also recently upgraded the cargo capacity of six of our container ships by 10%, allowing us to expand our cargo services to fulfill new and existing customer needs. Additionally, we have solidified several new inland transportation and warehousing partnerships for our Tricont Trucking and Logistics companies. We are committed to expanding our third-party logistics business by land and sea as we further leverage our asset footprint in Latin America and the United States. Our continued focus on innovation and value added products has led to a positive outlook and feedback from our customers. Particularly our fresh cut business. Consumers are looking for the convenience and value added quality that Fresh Del Monte provides. We continue to work one-on-one with our top customers in North America to generate mutually beneficial opportunities. We have seen an uptick in orders for bulk cut produce a new form of fresh cut for us and it is fulfilling a need for major retailers. We continue to innovate fresh cut fruit and vegetables offering in collaboration with our customers to create a win-win revenue scenarios and provide value added products that meet our customers and consumers' expectations. And finally, we have been recognized by Newsweek as one of America's most trusted companies of '23 for the second year in a row. We were rated on customer trust, investor trust and employee trust. We are honored to be recognized once again for our honesty and transparency. As we look to the rest of '23, we will continue to identify places where we can innovate and push the produce industry forward. We will work towards leveraging our strength in agriculture and supply chain to become a technology traded sustainable company. Now I will turn the call to Monica to talk about the financial results. Monica?

Thank you, Mohammad, and thank you for joining us on today's call. Let's first talk about our '23 -- our first quarter of 2023 financial results. Net sales for the first quarter of '23 were slightly lower by $8 million or 1% compared with the prior year. The decrease in net sales was due to lower per unit selling prices of avocados and negative fluctuations in exchange rates, primarily in Europe and Asia, combined with lower volumes in the fresh and value-added products segment. However, most of the decrease was offset by higher per unit selling prices across most other products and higher banana sales volume. As Mohammad mentioned, we had a strong quarter. Gross profit for the first quarter of '23 was higher by approximately $7 million compared with the prior year. The increase in gross profit primarily relates to the higher per unit selling prices across most product categories. Partially offsetting the increase in gross profits were higher production and procurement costs as well as higher ocean freight costs due to continued inflation. Adjusted gross profit for the first quarter of 2023 was $99 million compared with $90 million in the prior year. Adjusted gross margin was 8.8% compared with 7.9% in the prior year. Adjusted operating income was $51 million compared with $40 million in the prior year. The increase in adjusted operating income was primarily due to higher gross profit. Adjusted FDP net income was $27 million compared with $26 million in the prior year. Our diluted earnings per share was $0.81 compared with $0.54 in the prior year. Adjusted diluted earnings per share remained the same as the prior year at $0.55. The difference between GAAP and adjusted diluted earnings per share during the first quarter of '23 was $0.26, primarily related to the gain on sale of underutilized assets. Adjusted EBITDA for the first quarter of 2023 was $65 million compared with $63 million in the prior year period, and corresponding adjusted EBITDA margin was 5.8% compared with 5.5% in the prior year. Let's now turn to the segment results beginning with our fresh and value-added product segment. Net sales for the first quarter of 2023 decreased by approximately $29 million to $643 million when compared to the prior year period. The decrease was primarily due to lower per unit selling prices of avocados due to market volatility, combined with a decrease in total sales volume for the segment. Most of the lower sales volume relates to fresh-cut vegetables, prepared foods and vegetables. The lower sales volume for fresh-cut vegetables and vegetables was primarily a result of proactive steps we took to improve profitability. We expect these conditions to persist as we continue to focus on profitability and continue to experience avocado pricing volatility as compared to the prior year. The decrease in sales was primarily offset -- was partially offset by higher per unit prices across most other product categories and higher pineapple sales volume. Adjusted gross profit for the fresh and value-added product segment for the first quarter of '23 was $49 million compared with $44 million in the prior year. Despite lower net sales, gross profit was positively impacted by higher per unit sale prices for most categories. The segment continued to be negatively impacted by cost pressures of raw materials such as packaging, fertilizers and also higher ocean freight costs. Gross profit for the fresh and value-added products segment includes a $1.7 million inventory write-off primarily due to the sale of two distribution centers in the Middle East. Adjusted gross margin for this segment increased to 7.6% compared with 6.6% in the prior year. Moving to our banana segment. Net sales for the first quarter of 2023 increased by $19 million or 5% compared with the prior year. The increase in net sales was primarily related to higher per unit selling prices in most regions and higher sales volume in North America and Europe. Net sales of bananas were negatively impacted by fluctuations in exchange rates, primarily in Europe and Asia. Banana segment adjusted gross profit for the first quarter of '23 was $43 million compared with $38 million in the prior year. The increase in adjusted gross profit was primarily driven by higher net sales partially offset by higher procurement and production costs such as packaging material and labor as well as higher ocean freight costs. Adjusted gross margin for the segment increased to 10.2%, compared with 9.3% in the prior year. Lastly, net sales in our Other Products & Services segment increased by $2 million or 3% mainly due to higher net sales of third-party ocean freight services. Adjusted gross profit for our Other Products & Services segment decreased by $1 million as a result of higher costs. Now moving to selected financial data. Selling, general and administrative expenses was $48 million compared with $45 million in the prior year. The increase was primarily driven by higher employee compensation costs, higher professional fees and higher advertising and promotional expenses. Net interest expense was $8 million compared with $5 million in the prior year, driven by higher interest rates. Other expense net for the first quarter of 2023 was $9 million compared with $4 million in the prior year period. The increase primarily relates to higher foreign currency-related losses of the foreign currency losses in the first quarter of '23, $6 million represented unrealized losses from our balance sheet position in certain foreign jurisdictions. Income tax provision was $10 million compared with $6 million in the prior year period. The increase in income tax provision was primarily due to increased earnings and certain higher tax jurisdictions. Let's move now to our cash flow. Net cash provided by operating activities for the first quarter of '23, was $16 million compared with net cash used in operating activities of $300,000 in the prior year period. The increase was due to working capital reductions mainly related to levels of accounts receivable and raw materials and packaging supplies inventory. Long-term debt decreased by $81 million to $473 million at the end of the first quarter of 2023 compared with $554 million at the end of the same quarter last year. As it relates to capital spending, we invested $10 million in the first quarter of 2023 compared with $11 million in the prior year period. As announced this morning in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on June 9, 2023, to shareholders of record on May 17, 2023. This is an increase from our previous quarterly dividend of $0.15 per share. This concludes our financial review. We can now turn the call over to Q&A. Christie?

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

Yes, hi.

Good morning.

So I guess I was -- a couple of questions. First, I want to start on the banana business, just to get that out of the way. You had a good quarter there. What's the -- as you look -- you don't have a long-term view, but as we look into this quarter, do we see stability in the market still? Is supply and demand in balance? And what's the -- will margins be reasonably strong? Do you still keep the pricing that you've been able to implement?

Yes. As we speak right now, Mitch, we see the market stable, of course, the summer months usually is a little bit soft compared to the rest of the year. But surprisingly, Europe was very kind of stable and solid throughout the winter season. And we don't see much fluctuations. Actually, because of the financial situation over the last two, three years, we have seen several -- many operators tightening operations and other traders in bananas have gone out of the market. So the market has become more kind of stable, less volatile especially in Europe. North America is normal. It's stable. Far East, Philippine is coming down in production because of the disease. So volumes are coming down from the Philippines to the Asian markets, which gives room for Central America, Ecuador, to have more outlets. So I see all-in-all, I think the kind of banana market stabilized and with better cost of supply and demand planning, I see things going forward in a much more normal way than the previous years.

And are you increasing as you did in the fourth quarter, do we expect to see more of your own fruit sold rather than third-party purchased fruit?

No, we do actually -- we are more opportunistic, let's say, management of our volumes. We have our own volumes, which we are not planning to increase. Increasing our own volume means heavy investments, which we are not planning to do rather than working on third party, but leveraging that with opportunistic, let's say, management of the volume or the purchases.

Okay. And then moving on to fresh and value-added. In the fresh-cut business, specifically, I think you said -- I haven't seen your queue yet, but I think fresh-cut volumes were they up?

The volumes were a little bit down, but marginally really, I mean, it's because of either availability of certain fruits during the season like strawberries, mangoes, which are very volatile in terms of volumes throughout different seasons. And that's why one of the reasons as well as shortage of pineapples during -- sometime during this quarter. So that really helped. But it was marginal. And we -- during the next few months, we will be having hopefully a major kind of entry into the market in a new, let's say, value-added product with a partnership. So I can't disclose this at this time, but hopefully, by sometime during the next few months, we will be announcing it.

Okay. And then when -- when it comes to margins, I mean they've improved nicely. Are these margins sustainable? Or does it depend on your product mix?

No, they are sustainable in my opinion. It's just a matter of better, let's say, supply kind of management and making sure your supply chain is more planned forward. And this is what really our team is doing right now is that, as I mentioned, all the time that we are using technology a lot more now in our business and which we are leveraging more and more as we go forward. And this will give us a kind of an edge of how to manage our supply chain and better planning going forward.

Okay. And then my last question just is on sort of your balance sheet and CapEx. I mean you've -- your balance sheet leverage has come down nicely with the recent asset sales. What are your thoughts on the balance sheet? Do you -- obviously, you raised the dividend, so you feel pretty good about sort of your financial position, but do you intend to look at share repurchases? Do you intend to look at acquisitions? Or do you want to just continue to keep a low debt profile?

No, I think we are not planning to purchase shares, I mean, buyback right now. I think we will probably focus more on returning value to our shareholders as well as looking and consolidating our business and expanding it from within actually organically, which we have many areas where we are in the pipeline, which will come up probably by towards the end of the year, there will be projects that will start kicking in and there will be -- everything that we are working now is on added value. I mean, value-added products or value-added activities, let's say, relates to our business in general.

Okay. Thank you for taking the questions. I'll get back in the queue.

Thank you.

Your next question comes from the line of Jonathan Feeney with Consumer Edge.

Good morning. Thank you very much Mohammad and company. My first question is about the pricing environment and attitude retailers have towards your product and pricing. We're hearing a lot across the industry concern about stressed consumers and bananas tend to be a place where it's very visible price for consumers, and you had a good quarter there. It's also the least expensive and probably best value thing in the entire grocery store. So where a lot of -- the big debate of the space is how is pricing -- how are all these companies able to price and hold on to margin at a time when consumers are stressed. How do you feel about that for your businesses, both fresh and value-added?

We're doing our best to -- we have been sustaining -- I mean, as you can see in our results, we have been impacted so heavily by the increased cost and all the materials that be it in raw material, be it in packaging or transportation. So we have been absorbing a lot of this cost ourselves, no matter how much we pass to the retailers or to the buyers. It is a fraction of what we really have incurred in our balance sheet in terms of costs. So I think there is a limit to that. I hope that cost of raw materials start easing up a little bit, which I don't see at this time. But hopefully, within by the next two quarters, hopefully, things will start softening. And this will reflect on our cost and our results as well. We haven't increased our prices in any significant way in the last few months to our buyers. And I think in the case of produce and bananas in particular, I don't think that our prices have increased in relation to the general market, if you look at consumer goods or even QSRs or whatever other sector in the industry, we are probably the least that had increased prices.

Okay. Yes, it's been -- for a company of your competitive set and efficiency and the cost and -- replacement cost, your logistics. It's been remarkable how many costs you have absorbed and it's nice to see that at least working in the banana business right now. Can you -- second question, can you maybe forgive me if you already answered this, but where are we on strategic asset sales? Are we all done selling assets? Or are there more assets to sell?

No, there are more assets. What we are doing is really becoming a live asset operator. And like what we sold in the Middle East, the two distribution centers actually, we have leased back only what we need for our operations. So we did not get out of the business. We just sold the assets leased back some of the space that we need, and that means that we are out of this huge fixed cost and big depreciation ticket. So this is the kind of approach that we are doing. We have a lot of assets. We are a very rich company with assets.

Absolutely.

Balance sheet, I mean, and we have -- and these assets are so much undervalued in our books. So we will keep -- we have several assets that are still earmarked for disposal and sale in the market and the price is right. So there will be some in the next few quarters.

Thank you, Mohammed. Since you mentioned it, can you give -- I know it's a complicated topic. We've been talking about it for 20 years, but -- could you give people a way to dimensionalize. You say assets are undervalued. How can people think about that? Like -- can I look at recent transactions for key strategic assets of yours and say they're undervalued by half, they're undervalued by like how can I -- I know you can't give me a number, but like how can you think about that -- so people can look around and believe that, yes, this is a company that's got assets far in excess of what until they're on the books for.

Well, our assets today, if you look at them, I think they are valued around 6% in terms of EBITDA. And I think that the market -- fair market value is around 14%, in my opinion. And we have other assets in certain countries that are extremely valuable because these assets are almost funds that happen to be very close to the city now urbanization is coming very close. And the value of these properties will become extremely valuable as we go forward in the year. And this is -- from then that turn out to be even or commercial value. So that's why we are very confident about our asset base. I mean if you look at our book value compared to our share price is, I mean, it speaks for itself. Let alone that we haven't talked about the real value of the assets. You're talking about book, we have book value, let alone real value. So we are very comfortable. We are very confident and with all the projects that we are undertaking right now in the pipeline, I believe that Fresh Del Monte will be completely a different company in the next 12 months.

And last question, I guess, you took us there. Our work suggests that Del Monte brand name is extremely well known American households compared to the number of people who are buying your products right now on the value-added side. It suggests -- I know you have these JVs, you have some rights to make different categories of value-added products. I mean, what has been the bottleneck preventing you from having a wider array of more non-fresh value-added products under the well-known Del Monte brand name? And what can we look forward to in the next 12 months in terms of getting more products in consumers' hands?

You will be hearing hopefully in the next few months. And that's why you said it very, very well that Del Monte brand is extremely strong brand and recognizable. And that's why we have been approached by some companies to partner and share in some of the value-added products. So you will be seeing in the next few months, hopefully, as we go forward in the year what we are talking about. And that's part of our kind of a -- a new kind of approach to the market and our focus.

That's awesome. Thank you, Mohammad. Thanks for all the time.

My pleasure.

There are no further questions at this time. Are there any closing remarks?

I would like to thank everyone for having the time to share with us today and I hope to talk to you soon. Thank you very much. Have a good day.

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