Q2 2022 Fresh Del Monte Produce Inc Earnings Call

I guess third and we have no obligation to update or update any forward looking statements we may make.

Yeah.

During the call we will provide a business update along with an overview of our second quarter 2022 financial results followed by a question and answer session with that I'm pleased to turn today's call over to Mohamad.

Okay.

Thank you and good morning, everyone.

As you will have seen today and we deliver on it.

Philip robust second quarter.

Our net sales increased by $17 million compared.

With the prior year's video.

And we saw a continuation of our robust topline trend comprised of five consecutive quarters of growth.

Versus the previous year's periods.

Demonstrating the resilience of our iconic brands.

During the quarter, we continued to operate in one of the most volatile and uncertain operating environments in recent history.

As a result, the cost of products sold increased by $100 million.

They've been by a broad based inflation really supply chain.

Logistical headwinds.

Despite these headwinds we generated positive earnings all while maintaining our debt balance in line with last year generating strong cash flow from operations.

And continuing our dividend payout.

During the quarter, our adjusted EBITDA margin was four 6%.

We lowered our debt by $91 million generated $95 million in cash flow from operations and invested $1 billion in capital expenditures.

Our results.

<unk> of our commitment to broadband body visiting everything we do.

Alright, thank our dedication to outperform in an environment, where many other notes.

On the product innovation front.

Please about pipeline and the team's focus on the development of our products.

Lined with consumer trends, we recently launched fair trade organic banana.

Good book Roswell, featuring our program does that naturally range from small to large.

Because the goodwill capital facts allow consumers to customize their use of avocados.

We recently announced a collaboration with stored and leading cloud supply chain providers.

There are services include warehousing freight at fulfillment.

<unk> will leverage 22 of our best in class cold storage facilities across the U S. We also expanded our logistics services in the U S with the AG, whereby we provide the egg producers access to all of our temperature controlled warehouses and fleet of trucks. These collaborations are part of our efforts.

Look for additional ways to improve.

Digital assets.

Yes.

In keeping with our asset optimization focus we announced our broke crop expansion project with White court in Guatemala grown on our resting labs between crop corn crop seasons and stuff.

So here, we are looking to expand into other areas with other crops. This is an excellent way to leverage our idea labs.

And it's a win win proposition we play a bigger part of the global food charter solution, while also improving our guidance for the upcoming seasons.

Along the same lines. We are also continuing with the expansion with our mission.

Services via our 15 vessels.

Offering favorable shipping solutions to a broader customer base.

<unk> continuous logistical.

Pleasure.

This is reflected in our robust product services segment, net sales, which are up $36 million year to date compared with the prior year period with a strong double digit gross margins.

On ESG. The team is actively working on our 'twenty. One report due to be released and before we are excited to share. The great progress we have made in reducing greenhouse gas emissions and how we are on track to achieve our science based targets ahead of 2013.

Okay.

In the wake of record breaking temperatures. This summer climate action is more urgent that effort. We strongly believe our business success depends on the meaningful and effective management of our ESG work and then trust and understanding we haven't had for years.

As we move to the back half of the year fluctuations of exchange rates are expected to against us in key selling markets markets due to a forecasted stronger U S dollar.

But should we hedge against movements in the euro and Japanese yen through the end of the year, helping us mitigate a portion of the impact.

Lumped in with.

We continue to focus on efficiencies in our <unk>.

Operations.

And are confident in our product offerings and vertical integration.

Which uniquely positions us to drive incremental profits.

Despite a softening consumer outlook demand for our products remains strong.

Which we believe puts us in a distinctive recession resistant category.

Yeah.

I am confident in our team's dedication to drive profitable sales by concentrating on all aspects of our business.

We plan to do that by focusing our sustainable growth strategy in delivering against its key elements.

<unk> expansion product innovation investments in technology best in class customer relationship and sustainability.

Now I will turn the call to Michael talk about the second quarter financials Monica. Please.

Thank you Mohammed let's turn to our second quarter of 2022 financial results.

As noted that Muhammed net sales for the second quarter of 2022 increased by $17 million or 6% compared with the prior year.

Net sales benefited from inflation justified price increases.

Partially offsetting the increase was the negative impact of fluctuations in exchange rates, mainly versus the Japanese yen and to a lesser extent the euro.

The negative impact of fluctuations in exchange rates was partially mitigated by our foreign currency hedges.

Adjusted gross profit for the second quarter of 2022 with $81 million compared with $112 million in the prior year period.

Despite higher net sales gross profit continued to be negatively impacted by broad based inflationary pressures and the statistics constraints.

Higher cost across the board, we felt it and the increasing cost of.

Sales of $100 million.

Including cost of packaging materials, fertilizer Ocean, and England free fuel and labor.

Adjusted operating income was $33 million compared with $61 million in the prior year period.

The decrease in operating income was primarily due to lower gross profit.

Actually offset by lower administrative and advertising expenses.

Adjusted FTP net income was 21 million compared with $47 million in the prior year.

Our diluted earnings per share was <unk> 44 cents.

Compared with diluted earnings per share of <unk> 99 in the prior year.

Adjusted diluted earnings per share was relatively in line with our GAAP performance as both periods had minimal nonoperational and nonrecurring items.

Adjusted EBITDA for the second quarter was $56 million compared with $84 million in the prior year.

And corresponding adjusted EBITDA margin was four 6% compared with seven 3% in the prior year period.

Let's now turn to the segment results, beginning with our fresh and value added products segments.

Net sales for the second quarter of 2022 increased by $58 million or approximately 9% compared with the prior year period.

As a result of higher pricing in most product categories.

Sales volumes remained in line with the prior year.

Fresh and value line of products segment adjusted gross profit for the second quarter of 2022.

$49 million compared with $60 million in the prior year.

A decrease in gross profit was primarily driven by our non tropical fruit category.

This was negatively impacted by lack of availability of third party shipping capacity uncertain shipping routes.

Well, that's our avocado, Canada category due to market volatility.

Despite higher pricing gross profit continued to be negatively impacted by higher per unit production and distribution costs, including ocean and inland freight.

As a result, adjusted gross margin decreased to $6 seven compared to eight 9% in the prior year period.

The fresh and value added products segment included a $1 6 million one time charge in the second quarter of 2021, primarily in the middle East.

No one time charges gross profit in the second quarter of 2022.

Moving to our banana segment net sales for the second quarter of 2022 decreased by $5 million compared with the prior year period.

The decrease was mainly due to slightly lower sales volume and unfavorable fluctuations in exchange rates in Asia.

Banana segment adjusted gross profit for the second quarter of 2022.

<unk> was $22 million compared with $49 million in the prior year period.

Mainly driven by higher per unit production and distribution costs, including Ocean and inland Frank Act.

As a result of these factors gross margin decreased to five 3% compared with 11, 3% in the prior year period.

Okay.

Lastly, net sales of our products of our other products and services segment increased by $17 million or 42%, mainly due to higher net sales of third party freight services in North America as noted by Mohammad our fleet of vessels with has enabled us to expand our commercial card.

So services.

Which are benefiting from elevated shipping rates and demand to market constraints.

Gross profit increased by 5% as a result of higher net sales of third party freight services.

Moving to selected financial data.

Selling general and administrative expenses was $47 million compared with $51 million in the prior year period.

The decrease was primarily due to lower administrative and advertising expenses.

Net interest expense was approximately $6 million half a million higher compared with the prior year, mainly due to higher interest rates.

Income tax expense was similar in both periods at approximately $5 million, despite lower income before taxes.

Taxes last year reflected the impact of return to provision adjustments, including a $1 million benefit relating to the coronavirus Cares Act.

Year to date.

<unk> generated net cash from operating activities of $95 million compared with 140 million in the prior year period.

The decrease was primarily attributable to lower net income compared to the first quarter of 2022.

Our cash flow from operations is <unk> $95 million higher mainly driven by working capital improvements.

Long term debt decreased to $463 million at the end of the second quarter of 2022 from $473 million at the end of the second quarter of 2021 despite.

Despite unprecedented pressures to working capital related to increases in cost of goods sold as well as increases in accounts receivable.

Long term debt decreased $91 million compared with the first quarter of this year.

We continue to make progress on our optimization program announced in the second half of 2020.

At that time, we performed a comprehensive review of our asset portfolio aimed at identifying non strategic and underutilized assets.

Disposal, while reducing cost and driving further efficiencies in our operations.

Since the program was announced we have generated $63 million of cash proceeds.

<unk> 5 million were realized in the second quarter.

We expect progress towards achieving our target of $100 million in cash proceeds to continue in the back half of the year.

As it relates to capital spending we invested $23 million in the first six months of 2022.

Paired with $70 million in the prior year period.

The $70 million last year included the final payments on the purchase of two of our refrigerated container ships.

The spend this year has focused on improvements on a banana and pineapple operations.

Production and distribution facilities in the U S mainly.

Mainly comprised of investments in automation and technologies.

As announced this morning in our financial results press release, our board of directors declared a quarterly cash dividend of <unk> 15 per share payable on September nine 2022 to shareholders of record on August 17 2022.

This concludes our financial review, we can now turn the call over to Q&A Rob.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Your first question comes from the line of Jonathan Feeney from consumer edge. Your line is open.

Hey, good morning, Thanks very much.

I'm most interested in the progress in the banana business, we all understand there is unprecedented costs.

Alright.

One has unprecedented costs what is it that's preventing the obviously a significant year over year definition of margin what is it that's preventing pricing from going higher you mentioned the Asian markets, specifically I am curious about U S contract pricing in European market, just markets broadly why wouldn't pricing be more robust with everybody, saying.

<unk> costs.

Good morning, Jonathan.

Good morning.

Main reason for the price is not going up is because of where the data is the resistance to increase the pricing on the shelf and hopefully they will understand that this cannot go on forever, because we will not be able to supply bananas and.

Material form going forward unless the clients with cloud growing up and really compensating talk all day efforts.

Investments that were put on performance.

It's simpler.

The prices on the shelf has to go up.

Absolutely.

There are have to be some cooperative suppliers at the moment I understand that's been the dynamic.

We've been together a long time now I've been through a lot of these 20 years or more.

Yes.

What's unique this time is how ubiquitous this inflation is I mean, you can't go anywhere without people talk about inflation inflation. So.

One of the marks are you, losing Danny will you. Let me ask you. This are you losing share in some of these markets for this business you won't do and Theres others.

More commodity clients are willing to sell at lower prices.

Not working.

Not necessarily not necessarily and Jonathan.

Slide Windows on one side, we gave on the other side.

In my opinion it's.

It's unfortunately at all its slide.

The.

What I keep repeating myself here at all.

The price of bananas hasn't moved for the last 12 to 15 years of the shelf.

<unk>.

Of more of a general alike.

Almost 100%.

And then if you go to a supermarket today cannot upper floor above probably of $2. Even in some cases, a piece of level one level for $1 of Yodle and then everything is a strong omnichannel and if you go to a pound of bananas and is 50 60 says it doesn't make sense to you.

We are like in between the hammer.

Yes.

Our producers cannot continuing on all its shifting as increased fuel has gone up the rules are through the roof.

It does really increase and.

We're at the point now.

With.

Action needs to be taken as a matter of fact.

I guess that's helpful context can you comment specifically about.

The effective you mentioned Ethan exchange rates, but I was surprised Martha you mentioned of the roughly 15% decline in the Euro a press release like historically this business has been extraordinarily euro drivel was that a big headwind this quarter.

No.

We have to be honest.

We have been hedged against the euro at the beginning of the year.

The plan.

Currently number one number two the European prices is that it was during the last.

A few months saw and this is really have helped a lot in terms of.

The banana.

Yes.

And this is part of the.

Of the logistical issues that the market is facing.

Not enough containers that freight is very high.

Even on <unk>.

Some cases, you know banana started showing some shortages in some locations and this is due also to the increase of crystallizes and all the inputs that you need to have into the.

The plots on bananas, and so many grow as well.

Sure.

And two.

To use fertilizers and the same with this.

And Thats.

Principally the deals.

Production.

Right.

If this continues I think this will be in fact, we'll see the impacts even greater growth in the future.

Interesting so.

Yes, it sounds like there was a little bit more discipline in the European market maybe.

Some other places.

My last question is how would you compare that pricing dynamic that youre seeing in banana to the better performance you see.

Some of your other products.

Our other product areas more is it easier to raise pricing are you satisfied that the second half of the year cost stay elevated youll be youll be able to recover pricing and drive margin the way youll off one or two coming into the year.

I think I think in the value added.

Second segment Channel and said this is segment, we have more let's say flexibility in.

And working with the customers to two.

To put a decent pricing, let's say in the case of bananas, we are always influenced by the price on the shelf.

Bob.

Got you okay. Thanks.

Thanks, very much for your time.

Thank you Joseph.

Hello, again, if you'd like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the line of Mitch Pinheiro from Sterne event. Your line is open.

Yeah, Hi, good morning.

Good morning, Mitch.

Okay.

Following up a little bit on.

John's questions.

If you look longer term you go back 10 years to take out some of the volatility.

Your banana business has been relatively flattish for all the reasons that you sort of mentioned I guess Mohamad was just retailers reluctance to take pricing.

But then I'm looking at the fresh and value added segment and you've added over the last 10 years, you've added a $1 billion in sales, but we're at the same with the same gross profit level and by the way you've done an excellent job on.

SG&A SG&A over the last 10 years has been relatively flat in absolute dollars. So youre doing a great job in controlling those costs, but it seems like the fresh and value added slide.

Kent.

Can't get moving.

And I understand the inflation today and things, but there's always going to be something globally, you bet will be a headwind.

Over the course of 10 years, so can you talk.

Why you think the fresh and value added.

Business.

A lot more profitable than it is I know you.

Thank you.

You, obviously expect it will be but what.

What's happened over 10 years that it just can't.

Joe.

A meaningful profit improvement.

Unfortunately, I need to be ready.

General.

On the fresh cut and the value add that we have increased prices over time of course.

Cost of production and cost of products has been also growing up sometimes we even raised the price this quarter.

At the end of the quarter, the close EBIT catch up with us for whatever we have increased the pricing and we get back to like.

Ground zero again, but another area, where we really.

Hep suffered during the last couple of years is our acquisition of Mastec and where we are.

Have suffered to the margins.

And especially during the Covid period in 2021.

Where the market has almost come to a stop.

We suffered.

Substantial losses.

From over product step out of the fields with a lot more.

Less demand.

Yes.

And my follow ups. So this probably is what you see us as a factor.

And seeing globally.

Movement.

And the average pricing and the LNG, yes, we are doing very well except for this particular.

Case, which was the amount that can hopefully by the end of.

This will be taken care of and we would see.

Going forward with growth in that area.

What is it with Mann packing, specifically that you want to see improved.

Getting pricing, but is it is it is it a channel issue is it customer issue.

No.

It's unfortunate.

When you sign a contract and the contract is not reflecting the real cost or is that it.

It isn't a very good margin and then you will end up with them.

That period that youll have to keep supplying with the with negative returns addressing all these issues.

<unk>.

Being enough has been.

Lots of New World Cup often so.

It's somewhat upfront on the Trump of production as well as our contracting with grow.

Contract grower.

Another area, where we need to.

Also fix.

Well, so we'd love to have more production, that's what we need.

It's on several fronts, it's mainly with sales.

Our production side, which our team is handling very well as we speak now and I have.

Confidence going forward that would be taken care of.

Okay.

That something I mean is that something over the next year that we're going to actually see improvement there or is it.

I hope within the 'twenty three we should see improvements there yes.

Okay that was.

Helpful color there.

<unk> also.

On just the banana segment can you just give us.

How the supply demand outlook looks here in the very near term.

Yeah.

It's been better and I think in the last few months here at all especially with Ecuador, Ecuador.

I mean really is in a very.

Uh huh.

<unk> in terms of consistency of production, yes, they have production, but the quality of the condition of the fruit that isn't the market right now on <unk> on besides Ecuador.

Not consistent because like I said, a few minutes earlier.

Application of fertilizers.

Chemicals to control the diseases.

<unk> is not being applied as as normal as it should be and that has affected production in terms of yields and quality.

And we see it as well as the.

The disruption to the supply chain disruption in shipping.

Equipment and containers to move the fruit from one.

From from source to the markets.

The small medium size grow was really having a lot of difficulties is securing financing to continue operations. All of these factors together in my opinion will drive the banana sector to a point, where the production will come down.

In my opinion significantly.

In the future alright cannot decide one year or two years.

But I believe that.

Banana industry, and Jim <unk> will not be able to be sustained.

It has been growing for the last 10 years as.

They were living on a lifeline money was easy.

This was almost zero chemical.

Chemicals fertilizers imports transportation you name it everything was quite.

Competitive cheap.

The picture has turned around completely now.

Everybody knows.

So you add up everything.

What does not work I wouldn't be surprised to wake up one morning, unfair banana bulks close to get flipped evolves.

I'm not at all this is not something.

Something that I speculate I believe in this and I believe that for many years.

Think there would come a time when everybody wakes up and there will be enough.

<unk>.

To feed the markets.

Okay, well, thank you for your time.

Uh huh.

Okay.

And there are no further questions at this time I will turn the call back over to management for some final closing remarks.

I would like to thank everybody for attending.

Attending this call today and I hope to talk to you.

Our next quarter and wish you a good day. Thank you.

And this concludes today's conference call. Thank you for your participation you may now disconnect.

Yes.