Q3 2022 Fresh Del Monte Produce Inc Earnings Call

Good day, everyone and welcome to fresh del Montes third quarter 2022 earnings conference call. Today's 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. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.

For opening remarks, and introductions I would like to turn today's call over to Vice President Global P&A and Investor Relations with fresh del Monte produce number Amanda please.

Please go ahead Ms Miranda.

Thank you Sharon good morning, everyone and thank you for joining our third quarter 2022 conference calls as Sharon mentioned.

I'm, the Vice President Global F P&A and Investor Relations with fresh del Monte approach.

Joining me in today's discussion are Mohammad Abu Dhabi, Chairman, and Chief Executive Officer, and Mark <unk>, Senior Vice President and Chief Financial Officer.

I hope you've had a chance to review the press release that was issued earlier this morning via business wire you.

You May also visit the company's IR website at Investor Relations, Scott Fresh del Monte <unk> Dot 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 includes non-GAAP measures reconciliations of these non-GAAP financial measures are set forth in our press release and earnings presentation, which is available on our website.

We would like to remind you that much of the information 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 Law Safe Harbor in today's press release and in our SEC filings, we detail mature right.

They may cause our future results to differ from these forward looking statements.

Our statements are as of today November 2nd and we have no obligation to update them.

Any forward looking statements we may make.

During the call, we'll provide a business update along with an overview of our third quarter 2022 financial results.

With that I'm pleased to turn today's call over to Mohammed.

Thank you.

Good morning, everyone and thank you for joining our third quarter 2022 conference call.

As mentioned.

Okay.

Thank you Anna and good morning, everyone and thank you for joining us on today's call and as per our press release, we delivered another solid quarter with strong performance across our operations.

We generated strong net sales and profitability despite ongoing macroeconomic headwinds.

Our team's efforts enabled us to strides this quarter in the face of wide range challenges, including persistent inflation geopolitical risks and volatility in the fuel markets to name a few.

During the third quarter, our net sales increased 5% compared with the prior year period, we saw a continuation of a continuation of our robust.

Top line.

Marking six consecutive quarters of growth versus the periods periods.

Where do you like adjusted EBITDA was $58 million.

Representing more than twofold increase compared with the prior year.

Period.

As a result, we posted a robust adjusted EBITDA margin of 5.5 best set.

Gross margin in our fresh and value added segment was nine 2%.

This level achieved in two years.

Benefiting from product mix of higher margin products.

We accomplished these desired results, while maintaining a healthy balance sheet.

Our debt balance remained relatively in line with the same period last year below $490 million.

Our adjusted leverage ratio came in at two four times.

We invested $30 million in Capex with an emphasis on automation and <unk>.

Clothing optical sorter support our leading snap piece program and process enhancements in our fresh cut facilities.

All while maintaining our dividend payout 15 cents per share as part of our continuing commitment to return cash to shareholders.

In October we launched exciting new higher margin product offerings, and the ready to eat and convenience category.

The team's commitment to provide wholesome.

Convenience offerings based on developing value added products are aligned with our deep understanding of consumer insights.

<unk>.

And keeping with delivering on diversification and expanded technology solutions during the quarter, we invested in the company as a startup technology company that provides blockchain driven flexibility apology for the food industry.

Technology focuses on capturing each stage of production from planting to distributions. We believe this will enable our conscious consumer.

To see a complete loss of product information from farm to table.

During the quarter, we also finalized an agreement with a tech.

Digitize our network shipping operation.

Which we believe will make our onshore logistics more attractive took a mixture of cargo customers.

This will allow us to automate manual processes, including scheduling.

Management and vessel tracking.

Year to date, our other products and services segment has realized.

Significant top and bottom line growth driven by our commercial cargo services.

Although the category is benefiting from transitory logistics of Badger.

Because the pressures due to market conditions.

We remain keenly focused on continuing to expand this double digit margin offering.

On ESG, we recently published our 2021 sustainability report, which showed solid progress towards achieving our 2030 goals.

Including significant improvements toward the reduction of our scope, one and two greenhouse gas emissions.

In addition to delivering 95% of our food waste from landfills.

82% of our global product volume being certified as sustainably growing bikes FRP.

In line with our efforts to evolve and improve.

This year marks the first time.

I think in conformance with the sustainable accounting standards board within agriculture products for the food and beverage industry.

As we close out the fourth quarter, we expect we expect broad based cost pressures to continue to affect our results.

A more stabilized rate.

We don't foresee input costs getting worse from current levels.

Having said that fluctuations in exchange rates are expected to continue to go against us in key selling markets in Europe and Asia.

We are partially hedged against movements in the euro and Japanese yen drove the <unk>, helping us mitigate mitigate a portion of the impact.

I remain confident in our growth, but get out of this a profitable sales.

Disciplined.

<unk> management digital transformation and sustainability.

All while remaining true to our core mission of high quality fresh or fresh cut fruit and vegetables.

Now I will turn the call over to Monica to Monica to talk about third quarter financials. Please Monica. Thank you Mohammed.

Thank you for joining us on today's call, let's turn to our third quarter 2022 financial results.

As noted by Mohamed net sales for the third quarter of 2022 increased by 41 million $49 million or 5% compared with the prior year.

Net sales primarily benefited from inflation justified price increases.

The increase in net sales, partially offset by the negative impact of fluctuations in exchange rates, primarily versus the Euro Japanese yen Korean won and British pound.

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

Gross profit for the third quarter of 2022 with $88 million compared with $49 million in the prior year.

The increase in gross profit was due to higher overall net sales and product mix in our fresh and value added products segment.

The increase was partially offset by the continued impact of higher input costs.

This resulted in higher per unit production and distribution costs.

Specifically packaging material fertilizer ocean and inland freight fuel and labor were all higher compared to prior year.

Adjusted operating income was $41 million compared to close to breakeven in the prior year.

The increase in adjusted operating income was primarily due to higher gross profit and to a lesser extent lower SG&A expenses.

Adjusted STP net income was $26 million compared with $1 million in the prior year.

Diluted earnings per share was <unk> 69, compared with diluted earnings per share of <unk> in the prior year.

Adjusted diluted earnings per share was <unk> 54, compared with one in the prior year.

The difference between GAAP and adjusted diluted earnings per share during the quarter of 2022 relates to a 10 million one time benefit related to a reduction in our North America environmental restart.

Adjusted EBITDA for the third quarter with $58 million compared with $26 million in the prior year period.

And a corresponding adjusted EBITDA margin was five 5% compared with two 6% in the prior year.

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

Net sales for the third quarter of 2020 to remain relatively in line with the prior year at 600 million.

Having said that the segment realized higher net sales.

Cross key product category, including Pineapple and fresh cut fruits.

Related to inflation justified price increases.

The increase was predominantly offset by lower net sales of avocados and fresh cut vegetable.

A result of lower sales volumes.

Net sales were also negatively impacted by fluctuations in exchange rates in Europe and Asia.

Fresh and value added products segment gross profit for the third quarter of 2022 was $55 million compared with $42 million in the prior year.

<unk> gross profit benefited from product mix of higher margin categories, including pineapples in prepared foods.

The increase in gross profit was partially offset by higher costs across the board.

Gross margin for this segment increased to nine 2% compared with six 9% in the prior year.

Moving to our banana segment net sales for the third quarter of 2022 increased by $23 million compared with the prior year.

The increase in net sales relates to higher per unit sales prices due to a combination of inflation justified price increases contractually indexed fuel and freight surcharges within certain of our contracts.

Our strategic sourcing decisions in response to market conditions.

And in a typical seasonally low industry supply in certain markets in the third quarter of 2022.

In contrast in the third quarter of 2021, the banana segment was impacted by excess industry supply.

The increase in net sales was partially offset by the negative impact of fluctuations in exchange rates in Europe and Asia.

Banana segment gross profit for the third quarter of 2022 was 23 million compared with $4 million in the prior year.

The increase in gross profit was primarily driven by the higher net sales.

Partially offset by the higher per unit distribution costs, including Ocean in England freight and higher per unit production costs.

Gross margin increased to five 8% compared to 1% in the prior year.

Lastly, net sales in our other products and services segment increased by $27 million or 70%, mainly due to higher net sales of third party freight services in North America.

Our fleet of vessels has enabled the expansion of our commercial cargo services.

Which continues to benefit from elevated shipping rates and demand due to market conditions.

Gross profit increased by $7 million as a result of higher net sales of third party freight services.

Now moving to selected financial data.

Selling general and administrative expenses was $47 million compared with $48 million in the prior year.

The decrease was primarily due to lower advertising expenses.

Net interest expense was $6 million or $1 4 million higher than the prior year due to higher interest rates and higher average debt balances.

Other expense net for the third quarter of 2022 was $9 million compared with $2 million in the prior year.

The increase is primarily due to higher foreign currency losses.

Yes.

Income tax expense was $3 million compared with a benefit of approximately $7 million in the prior year.

The increase in tax was mainly due to increased earnings in certain higher tax jurisdiction.

Along with the impact of a $1 5 million provision for foreign earnings not permanently reinvested.

So our cash flows our year to date, we generated net cash from operating activities of $106 million compared with $152 million in the prior year.

The decrease was primarily due to higher working capital and lower net income compared with the first nine months of 2021.

Long term debt remained relatively in line in both periods, increasing by $9 million to $486 million at the end of the third quarter of 2022, compared with $477 million at the end of the same quarter last year.

Our optimization program announced in the second half of 2020 is of utmost priority to us.

As a reminder, the initiative is comprised of a deep dive assessment to identify and dispose of non strategic and underutilized assets.

Our objective is to improve return on assets asset utilization and in turn reduce operational expenses.

Since the program was announced we have generated $65 million in cash proceeds, although we did not have meaningful asset sales in the third quarter, we do expect progress towards achieving our target of $100 million in cash proceeds to continue.

Our focus is on selling these assets at a good value.

As it relates to capital spending we invested $36 million in capital expenditures in the first nine months of 2022.

Compared with $83 million in the prior year period.

Prior year capital spend included the final payments on the purchase of two of our refrigerated container ships.

The spend this year has focused on improvements to our banana and pineapple operations in Central America in Kenya.

And automation in our production facilities across our operations.

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 December nine 2022 to shareholders of record on November 16 2022.

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

To ask a question. Please press star one on your telephone keypad.

First question is from Jonathan Feeney of consumer edge. Please go ahead. Your line is open.

This is taking a pizza for John or.

My question is what will have the huge move in currency play in your profit pool within this quarter and potentially in 'twenty three.

With the strong dollar and.

The net positive or negative do you think I know.

You have a lot of closings in carrying Susanna weaker.

There is revenue revenue opposite certainly from the euro as well.

I'm sorry could you repeat the question it was hard to hear you.

Yes, yes.

So what role each moves in currency played in your profit pool, this quarter and potentially into 'twenty three.

The currency impact was significant in the quarter.

Due to the Euro and then on the GBP being weaker than last year, we do have some hedges that offset partially the impact through year end.

So our gross profit it was approximately $14 million negative impact.

Okay.

Okay great.

I have a follow up question. So he has a tremendous amount of strategic assets that showed this quarter with the ability to deliver value.

Inflationary environment, considering the power of integration point of competitors without so many assets is it possible a bit of sustaining inflationary environment.

Net positive for you.

So we are we are working towards optimizing our assets that's definitely one of our priorities.

And we will continue to sell underutilized our nonproductive assets.

Yes.

Okay. Thank you.

Your next question is from Mitch Pinheiro of derivatives and company. Please go ahead. Your line is open.

Hey, good morning.

Sure.

A couple first of all I'll start with the banana business for a second.

So.

From a sales perspective, obviously you had some inflation justified price increases can you.

What level, where these price increases.

We cannot disclose mix what level of price increases, but we are pricing our banana as we speak at a profitable level, we're not planning to set any vanilla is at the loss going forward. This is our <unk> at all and we are adjusting.

Rationalizing our supply to our demand.

What did you do you talk about strategic sourcing decisions.

What were those strategic moves that you made.

Matching matching demand would supply in a much more sensible way as well as trying not to have any successes at any time of the year.

Okay.

Alright.

When I look back.

Darkly.

<unk> been sort of.

Trying to diversify.

Away from bananas, and you've been focusing on profitable volume growth.

I guess across the board, but certainly in the banana business.

Okay.

It seemed to have been sort of stuck.

You know in a range did not really it's not really growing on a revenue number if you look back five years plus the long term.

Your profitability has been stable, maybe a little lower than than you'd like.

Right now that can be accounted for by the current environment, but.

Where can you talk about the banana business in the context of your overall sort.

The growth algorithm is our banana is going to be what they are right. Here is this is this what we should expect going forward or do you see growth in that segment.

I believe that that would be.

Youre kind of.

Good assumption that don't forget on my last call I said I believe that the banana prices would reach about what develops a box.

And as we speak today, the exit price from Ecuador.

<unk> just for the fruit along but.

All the other expenses packaging for Worthing handling you name it it's about two five.

5% to $3 more you are talking about almost $16.

And then you have to put on top of that the ocean freight expenses, so more or less what I predicted three months ago, It's almost sure.

Through today.

We believe that the banana.

As banana traders as far as banana importers with the present expenses and cost of producing bananas, considering fertilizers and other inputs.

As Dave mentioned with Monica why the goal.

This will not allow anybody to.

Certainly not for fresh del Monte that's the way to go and sell bananas at the Los without a meaningful return.

On the on the investment so I believe that this strategy is that you saw on our banana at all.

Well.

Youre welcome.

I will strive to continue to let David this this percentage.

Is.

Question on the bananas or two more questions actually.

Broadly speaking, it's been that way.

Kinetic consumption.

Is it still stable is it flat to up 2% ish globally.

I believe yes.

If you look at the banana today is the cheapest item on the shelf and any super markets around the world.

And considering other fruits.

<unk> products vegetables bananas today is the cheapest in this inflationary period.

Think there would be more kind of focus on bananas for consumers rather than buying our products.

Priority, so EBIT contributing in all of the increasing cost of diesel prices or bananas today.

We are still far cheaper than any other product in the market.

Okay.

And then.

You spoke about the low industry supply.

In this quarter.

To help the supply looks for the next three to six months in your view.

But would it be a more or less in line.

I don't think that there wouldn't have.

Don't forget that we still have it.

The.

Risk authentic we're talking today.

I had already very approaching you at all.

East Coast of Central America, We don't know what will happen in the next 24 hours.

That would be determinant that if there was any impact.

Up is due to the excellent to four hours.

Right.

Got it.

Yes sure.

Then just moving on to the fresh and value added segment.

How has mann packing done.

Is it recovering from the from that.

The demand impact from the pandemic.

Can you talk a little bit about the progress youre, making there.

It's definitely improving week by week and we are.

That's by next year.

Annual pace.

Take place.

Okay.

So.

So from a foodservice point of view have you recovered.

Pre pandemic levels.

Not yet, but we are improving week by week as I said, Mitch we are confident that hopefully by next year, we should be able to recover.

And we have to define it already covered.

We don't want any loss, making products to be included.

We'll be looking at the bottom line and we were looking at profitability, that's what we would be able to pick up.

And so again.

Don't forget that.

As we sold that water is becoming an issue.

Imports are becoming an issue so commodity prices over the last few weeks has skyrocketed at that was because of certain issues that happened in the last few months and I don't think this will change I think that.

More of a rationalization is taking place in the producing areas.

And.

I believe things are changing as far as we are we believe that we have already got the business under control through a different.

Metal to be on the administration and management level.

Or bottleneck.

On the product selection and production don't forget that we have integrated manner and to the lumpy about few weeks ago.

And that has definitely it will take.

A big kind of improvement going forward.

Okay.

And then I guess just last question on your commercial cargo services.

Is that something that can grow.

From here you have excess capacity beyond what we're seeing in the numbers today or.

Is this something that's sort of the sort of just becomes.

Flat line.

Gross.

Moving forward.

No I think that our our target is to have annual growth.

Don't forget we're not just focusing on ocean freight.

<unk>.

Company, where we can.

Ill provide services door to door.

And I cannot discuss this here on this call, but we do have a lot of plans for our services sector.

Segment going down.

The future.

Okay. That's it for me thanks for taking the questions.

Thank you Mitch.

There are no further questions at this time I will now turn the call over to management for closing remarks.

I would like to thank everyone today for joining us and look forward to talk to you on our next call and I hope that it will be even better news. Thank you very much and have a good day.

Thank you.

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

Please wait the conference will begin shortly.

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