Fresh Del Monte Produce Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 1, 2023

Key Takeaways

  • Strong 9-month results: Adjusted EBITDA rose 14% to $201 million and adjusted diluted EPS increased 23% to $1.87, driven by a 140 basis-point improvement in gross margins despite inflationary pressures.
  • Q3 headwinds: September floods in Greece led to an $8.4 million inventory write-off and cleanup costs, while softening demand in the 3rd-party ocean freight business weighed on Other Products & Services sales.
  • Banana segment strength: Q3 gross margin in the Banana business expanded by 250 basis points thanks to higher sales volumes, improved pricing and lower distribution and freight costs.
  • Innovation and partnerships: Launched Kraft Heinz Lunchables with fresh fruit, P.F. Chang’s salad kits in U.S. retailers and rebranded Tricor inland logistics to broaden its customer base.
  • Sustainability progress: Reduced Scope 1 and 2 emissions by 26% since 2019, cut food loss by 41%, and donated 53,000 metric tons of produce to charitable and upcycling programs.
AI Generated. May Contain Errors.
Earnings Conference Call
Fresh Del Monte Produce Q3 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good day, everyone, and welcome to Fresh Del Monte Produce Third Quarter 2023 Earnings Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. Ladies and gentlemen, I want to thank you for standing by. My name is Sheryl, and I will be your conference operator today. 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

Thank you. 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 Poe. Please go ahead, Ms. Poe.

Speaker 1

Thank you, Sheryl. Good morning, everyone, and thank you for joining our Q3 2023 conference call. As Sheryl mentioned, I am Claudia Poe, Vice President, Corporate Communications with Fresh Cilant Produce. Joining me in today's discussion are Mohammad Abu Ghazali, 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.

Speaker 1

You may also visit the company's IR website at investorrelations. 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'll be speaking to today, including the answers we gave in response to your questions, may include forward looking statements within the provisions of the federal securities laws, Safe Harbor.

Speaker 1

In today's press 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, November 1, 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 Q3 and our 9 month 2023 financial results, followed by a question and answer section. With that, I am pleased to turn today's call over to Mr. Bougazale.

Speaker 2

Thank you, Claudia. Good morning, everyone. We are pleased with our 9 month 2022 results, Marked by more than 140 basis points improvement in adjusted gross margins, solid adjusted EBITDA and year For the 9 months, our adjusted EBITDA increased 14% to $201,000,000 And our adjusted diluted EPS increased 23% to $1.87 We achieved these strong 9 months results despite facing macroeconomic challenges such as inflationary pressures The 3rd quarter is seasonally our softest quarter. The headwinds this quarter were as follows. The September floods in Greece impacted our seasonal non tropical product scanning facility, Which resulted in $8,400,000 of inventory write off and clean up costs.

Speaker 2

Global demand for our 3rd party ocean freight business softened, which caused a decrease in our other products and services segments. As a reminder, in the prior year, this segment benefited from elevated shipping rates and demand due to market logistical conditions. Now for the highlights in the Q3 that partially offset these headwinds. Gross margin in the Banana segment during the Q3 was up 250 basis points. Our current turnaround this quarter were meaningful contributors, thanks to increases in sales volumes, selling prices and gross profit.

Speaker 2

Our continued solid adjusted EBITDA enables us to have numerous options for strong asset allocations. We continue to use our healthy cash flow to return value to shareholders through activities such as improving efficiencies, paying down debt and continuing to deliver innovation led new to market products. We also continue to look for ways to optimize our asset base To maximize our shareholder values. All these actions enable us to accomplish our mission of meeting the worldwide demand We strive daily to achieve the mission by providing our offerings to consumers when and where they shop And by partnering with other leading CPG companies that are looking to improve their healthy offerings and are looking to enter the fresh space, Two areas where we are the recipient leaders. Our Lunchables with fresh fruit, Partnership with Kraft Heinz continued and continues to test in the market.

Speaker 2

We announced a partnership with the global restaurant chain P. F. Chang's. We unveiled 2 salad kits that allow consumers to enjoy the restaurant's most popular salad dishes in the comfort of their homes. The kits are available in select retailers across the U.

Speaker 2

S. With the potential to expand to Canada and beyond. Tricode, our inland logistics solution, underwent a rebrand this year, which was made public in September. The new website and branding will help the 3rd party logistics provider enhance its customer experience and broaden its customer base on the years of multiyear growth. We also became a part of the Upcycle Food The organization that helps companies such as Fresh Del Monte find ways to maximize the use of our food waste.

Speaker 2

It is exciting to partner with the Upcycle Pool Association and find ways to upcycle our waste, which plays a role in Fresh Del Monte's long term R and D and sustainability plans. We also launched our latest report 2 weeks ago, a few highlights include we reduced our Scope 1 and Scope 2 emissions by 26% compared to 20 19 levels, bringing us 94% of the way towards our 2,030 goal. We reduced our food loss and organic waste by 41% in 2022, bringing us 82% on the way towards our 2,030 gold. And we donated approximately 53,000 tons metric tons of food to organizations that assist those in need And either composted also eligible waste to third parties to convert it into animal feed and biofuel. We are truly one of the world's leading vertically integrated producers, distributors and marketers of fresh produce.

Speaker 2

We weave sustainability into all facets of our business while making fresh, healthy produce accessible worldwide. We have several initiatives at different stages with global CBG Brands similar to Crafts and P. F. Sands. In addition, we'll continue to push innovation forward, creating value for our consumers and our business.

Speaker 2

Quality programs for our popular Honey Grove and Pink Grove pineapples are being activated. And we are close to launching new pineapple variety that will be unique to Fresh Del Montea as we further cement our reputation as the leader in pineapple renovation. As always, our management team will continue to focus on enhancing long term shareholder value by Evaluating how to best leverage our experience in small farming, logistics, sustainability and marketing combined with our valuable portfolio of agricultural lands. With that, I would like to turn the call over to Monica, our CFO.

Speaker 3

Thank you, Mohammed. Good morning, everyone, and thank you for joining us on the call today. I would like to start this morning by providing some background on the We believe the best way to view our business is on an annual basis, not quarterly. Historically, our 1st and second quarters are seasonally stronger quarters, while our 3rd and 4th quarters are seasonally softer. The selling price of any fresh produce item fluctuates throughout the year due to supply and demand for that particular item as well as the pricing and availability of other fresh produce items, many of which are seasonal in nature, such as summer months when competing seasonal fruit is abundant.

Speaker 3

Last year was an atypical year for our company In terms of seasonality, due to the high inflationary environment we faced and a lag in price increases, which resulted in an unusually soft first and a stronger second half of the year. So far this year, our results are consistent with historical trends where we have realized a greater portion of our net sales and gross profit during the first two fiscal quarters of the year. With that, let's move on to our Q3 2023 results followed by our 9 month results. Net sales for the Q3 of 2023 were $1,000,000,000 compared with $1,054,000,000 in the prior year. Net sales for the 1st 9 months of 2023 were $3,300,000,000 compared with $3,400,000,000 in the 1st 9 months of 'twenty 2.

Speaker 3

In both periods, the net sales variance was primarily driven by lower sales volume in the fresh and value added product segment and a decrease in sales in the Other Products and Services segment due to the softened global demand of our 3rd party ocean freight business. Banana net sales for the Q3 of 2023 were lower primarily due to selling prices in North America. However, for the 1st 9 months, Banana net sales were higher due to higher pricing and volumes. Gross profit for the Q3 of 2023 was CAD 74,000,000 compared with CAD 88,000,000 in the prior year. Gross profit was impacted by lower sales volume across most products, a stronger Costa Rica colon and a Mexican peso.

Speaker 3

And the inventory write off related to the flooding of our seasonal prepared product facility in Greece, partially offset by lower distribution and ocean freight costs. Excluding the impact from the inventory write off and cleanup costs in Greece, Adjusted gross profit for the Q3 of 2020 was CAD83 1,000,000 compared with CAD88 1,000,000 in the prior year. Gross profit for the 1st 9 months of 2023 increased by 11% to $288,000,000 from $259,000,000 in prior year. The increase was primarily driven by higher sales volume, selling prices of bananas, partially offset by lower sales of fresh and value added products and our 3rd party ocean freight services. Adjusted gross profit for the 1st 9 months increased 15% to $298,000,000 from $259,000,000 prior year.

Speaker 3

Operating income was CAD25 1,000,000 compared with CAD51 1,000,000 in the prior year And adjusted operating income was CAD34 1,000,000 compared with CAD41 1,000,000 The decrease in adjusted operating income was primarily due to lower gross profit and higher selling, general and administrative expenses. Operating income for the 1st 9 months increased by 38 percent to $172,000,000 from $125,000,000 in the prior year, And adjusted operating income increased by 33 percent to $153,000,000 from $115,000,000 in 2022. FTP net income for the Q3 of 2023 was $8,000,000 compared with $33,000,000 in the prior year And adjusted FDP net income was $17,000,000 compared with $26,000,000 in 2022. FDP net income for the 1st 9 months increased by 19% to $95,000,000 from $80,000,000 in the prior year. Adjusted FPP net income increased 23 percent to $90,000,000 compared with $73,000,000 in the prior year.

Speaker 3

Our diluted earnings per share in the Q3 of 2023 was $0.17 compared with $0.69 in the prior year. Adjusted diluted earnings per share was $0.35 compared with $0.54 in the prior year. The difference between GAAP and adjusted diluted EPS during the Q3 of 2023 was primarily related to the product related charges due to the floods that impacted our Greek production facility. For the 1st 9 months of 2023, Diluted EPS increased 17% to $1.97 per share from $1.68 per share in the prior year period and adjusted diluted EPS increased 23% to $1.87 per share to $1.52 per share in the prior year. Adjusted EBITDA for the Q3 of 2023 was $50,000,000 compared with $58,000,000 in the prior year.

Speaker 3

For the 1st 9 months, adjusted EBITDA increased by 14% to $201,000,000 from $176,000,000 in the prior year. And corresponding adjusted EBITDA Margin increased 90 basis points to 6.1 percent from 5.2%. Let me now turn to segment results. Fresh and value added segments. Net sales for the Q3 of 2023 were $574,000,000 compared with $600,000,000 in the prior year, primarily a result of lower sales volumes of nontropical fruit, Pineapple, fresh cut fruit and fresh cut vegetables as well as prepared, partially offset by higher per unit selling prices of non tropical fruit, fresh cut fruit and pineapple product categories combined with higher sales volume and sales prices of avocados.

Speaker 3

Gross profit for the Q3 of 2023 was $36,000,000 compared with $55,000,000 in the prior year. Gross profit variance was primarily due to higher production and procurement costs of most products, partially due to a stronger Costa Rica along with lower net sales volume partially offset by higher selling prices and lower ocean freight. Gross profit for the Q3 of 2023 included $8,000,000 of other product related charges comprised primarily of inventory write offs and cleanup costs tied to the flooding of our seasonal production facility in Greece. As a result of these factors, gross margin decreased to 6.3% compared with 9.2% in the prior year. Moving to our Banana segment.

Speaker 3

Net sales for the 3rd quarter were $385,000,000 compared with $388,000,000 in the prior year, primarily a result of lower per unit selling prices and sales volume in North America, mostly offset by higher sales volume and per unit selling prices in Europe. Banana gross profit in the 3rd quarter was CAD32 1,000,000 compared with $23,000,000 in the prior year, an increase of 41%. The increase in gross Profit was due to lower distribution, ocean freight and product costs, partially offset by a stronger Costa Rica, Colon. As a result of these factors, gross margin increased to 8.3% compared with 5.8% in the prior year. Lastly, net sales in our other products and services segment for the Q3 were $44,000,000 compared with $65,000,000 in the prior year as a result of lower net sales of 3rd party freight services due to softened global demand.

Speaker 3

Gross profit was CAD6 1,000,000 compared with CAD10 1,000,000 in the prior year as a result of the lower net sales. Gross margin was 14.2% compared with 15.7% in the prior year. Now moving to selected financial data. Selling, general and administrative expenses for the 3rd quarter were $48,000,000 compared with $47,000,000 in the prior year, driven primarily by higher employee compensation expense. Interest expense remained flat at $6,000,000 for the Q3 of 2023 compared with the prior year despite lower average debt balance due to higher interest rates.

Speaker 3

Other expense net for the Q3 of 2023 was $7,000,000 compared with $9,000,000 in the prior year. The decrease relates to lower foreign currency related losses. Income tax provision was $4,000,000 compared with $3,000,000 in the prior year. The increase in the provision was primarily due to increased earnings in certain higher tax jurisdictions. Net cash provided by operating activities for the 1st 9 months of 2023 was $180,000,000 compared with $106,000,000 in the prior year.

Speaker 3

The increase was primarily due to lower working capital, mainly related to lower levels of raw materials and packaging supplies combined with higher net income. Long term debt sequentially retained remained flat at approximately $401,000,000 at the end of Q3 of 2023 as compared with the end of the second quarter and it decreased 26% from $540,000,000 at the end of fiscal year 2022. Our adjusted leverage ratio is now 1.34 compared to the prior quarter of 1.42. As it relates to capital spending, we invested $41,000,000 in capital expenditures in the 1st 9 months of 2023 compared with $36,000,000 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 December 8, 2023 to shareholders of record on November 15, 2023.

Speaker 3

This concludes our financial review and we can now turn to our Q and A. Sharra?

Operator

At this time, Our first question comes from the line of Mitch Perjalio. Your line is now open.

Speaker 4

Yes. Hey, good morning.

Speaker 2

Good morning, Mitch.

Speaker 4

Hey, I wanted to just talk first question about bananas. So we're in the same quarter and here we had North America, we had lower prices and lower volume. And in Europe, we have higher prices and higher volume, which really is Counts are any normal elasticity expectations. So could you just talk about why these two markets Behave differently in the quarter. And related to that, what we should expect here in the Q4?

Speaker 4

Mitch,

Speaker 2

the let's in Europe, we have fixed contracts For most of the volume that goes into Europe regularly. So the margins and the prices are more or less Fixed and not fluctuating. In the U. S, of course, Majority of our supplies are on contract basis with retailers and buyers. However, part of that also volume goes into the spot market.

Speaker 2

And during the last couple of months, there has been, I would say a soft market in the U. S. And consumption of bananas has been Unfortunately, on the decline side, as we speak, And that's why prices have been adversely affected. But as Monica mentioned, We mentioned that the most important thing that we need to focus on is really an annual basis above the Transaction on quarter to quarter basis, because that will give you a better picture at the end of the year how the operation Performed rather than just taking quarter by quarter. We are in produce business.

Speaker 2

We are not CPAG consumer goods Manufacturers, so we are always influenced by markets and climate. And one of the things that Monica mentioned about Greece and the flood, and we took a write off of Over $8,000,000 But really on the other side, we have also insurance For €10,000,000 that we are going to be recovering. So these losses that you see today will be recovered in the next 3 or 4 months, I mean, in the next few months. So we don't want the picture to be Kind of clouded or misguided. I mean, we have stated the facts as they are today, But we have also contingency plans like the insurance that covers that damage or that loss And even we have support from the government of Greece to also cover Other losses, be it machinery and material.

Speaker 2

So all in all, I'm very optimistic about the and the quarter itself It's not too bad compared to the conditions and the environment around us. And going forward, I have very high confidence in

Speaker 4

Why do you think volumes are down in the U. S? And they've been soft for a little bit. Is there something going on just Generally speaking, with consumer

Speaker 2

We noticed about 2% decline In volumes or in consumption. And we don't know really the reasons for that except that Either the people are spending On other items or focusing on other types of fruits during this period, but this has been a pattern that we have Witnessed over the last couple of years.

Speaker 4

Okay. And then So if you look at the business on an annual basis and the bananas in particular again for a second, Typically, I've covered you for a long time and I've always thought that gross margins would be in a 4% to 6% annualized range, generally around 6. But for the last couple of years, you've been on the higher end of that. Last year, your banana business did 7.4% gross margin. And this year, it's looking good, looking that or better.

Speaker 4

So what do you think it is Driving the banana margins to above historic level range, are we anything you're doing Internally, whether it's buying more of your own fruit versus purchased fruit, Is there efficiencies in the field, is it just pricing? Can you talk a little bit about that?

Speaker 2

Yes. Well, to start with efficiencies in the field, that is one major item. Secondly, we are more kind of Streamlining and more efficient in supply and demand kind of alignment. In the previous years, especially during the second half of the year, there have always been oversupply Of bananas through improper, let's say, planning and meeting Kind of demand and supply. In the last couple of years, last year and this year, we are efficiently and better managing The supply and demand side of the story.

Speaker 2

So our margin has improved Significantly because mainly of our efficiency in terms of meeting only The demand and rather than having oversupply in the market. Among other things that we are doing, of course, With logistics and other issues in terms of cost structure. That's why. And we believe this will continue to improve as we go forward.

Speaker 4

Okay. So you think it's sustainable, like the higher end of the range kind of level from year to year?

Speaker 2

Yes.

Speaker 4

Okay. And then if you could talk, Mohammed, your what's going on in the Middle East, I mean, how is that going to affect Your business in the near term?

Speaker 2

It's really marginal. I mean, where we are, Our major markets are in the Gulf, in Turkey and other areas that is not Influenced by what is going on right now. And we don't see really any kind of Significant or material impact on our business in this part of the world right now.

Speaker 4

Okay. And then just last question for me and I'll get back in the queue. But on the fresh and value added business, You continue to I mean year over year and sequentially the margins were down, but you're making some nice progress there climbing back To where I think you think the business ought to be. Is are there any headwinds for that business In the Q4 and can you talk about how the margins are going to look next year roughly? I mean, are we going to see continued improvement?

Speaker 4

Is there any other headwinds that we need to know about?

Speaker 2

Not really. I think that we are doing well. We are going into new, as I speak, new kind of transactions and joint ventures As we go into the New Year, that will improve our margin and improve our kind of utilization of our assets, And that's the most important thing, resources and assets. And I think that for 2024, we are very confident about the future. We're definitely going in the right direction.

Speaker 4

And where do you think by the way, let's just

Speaker 2

I would go for about our target and our objective is to reach about 12% of the gross margins.

Speaker 4

Okay. So still a lot of upside left there. Yes. Okay. Well, thank you.

Speaker 4

I'll get back in the queue.

Speaker 2

Thank you, Mitch.

Operator

I will now turn the call back over to Mr. Abu Ghazaleh for closing remarks.

Speaker 2

Thank you very much, everyone. And it was a pleasure to talk with you today. And hopefully, we can Join again on our next call. Thank you, and have a good day.

Operator

You may now disconnect. Have a good day.

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