Fresh Del Monte Produce Inc. (FDP) CEO Mohammad Abu-Ghazaleh on Q1 2022 Results - Earnings Call Transcript

Fresh Del Monte Produce Inc. (NYSE:FDP) Q1 2022 Earnings Conference Call May 4, 2022 10:00 AM ET

Company Participants

Mohammad Abu-Ghazaleh – Chairman and Chief Executive Officer

Monica Vicente – Senior Vice President and Chief Financial Officer

Ana Miranda – Vice President, Investor Relations

Conference Call Participants

Mitchell Pinheiro – Sturdivant & Company

Jonathan Feeney – Consumer Edge

Operator

Good day, everyone and welcome to Fresh Del Monte Produce's, First Quarter 2022 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. If you would like to ask a question during this time, [Operator's Instruction]. If you would like to withdraw your question again, [Operator's Instruction]. For opening remarks and introductions, I would like to turn today's call over to Vice President Global, FP&A and Investor Relations with Fresh Del Monte Produce, Ana Miranda, please go ahead, Ms. Miranda.

Ana Miranda

Good morning, everyone. And thank you for joining our First Quarter 2022 Conference Call. As Sierra(ph) mentioned, I'm Ana Miranda, Vice President, Global FP&A, and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussions are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer, and Monica Vicente, 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 may also visit the newly updated company's IR website, at investorrelations. 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 this 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 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 filing, we detailed material risks that may cause our future results to differ from these forward-looking statements. Our statements are as of today, May 4th, and we have no obligation to update any forward-looking statements. During the call we will provide a business update, along with an overview of our first-quarter 2022 financial results, followed by a question-and-answer session. With that, I'm pleased to turn today's call over to Mohammad.

Mohammad Abu-Ghazaleh

Thank you Anna, and good morning, everyone. During the first quarter our Net sales increased by $49 million compared with the prior-year periods. A direct benefit of leading the industry and the implementation of inflation justified pricing actions. However, our cost of product sold increased by $64 million due to across the board inflationary pressures resulting in lower operating income. We have two very distinct narratives in our performance. First, we delivered healthy Net sales. As a matter of fact, our fiscal quarter Net sales are near the same level realized in the first quarter of 2019 before COVID. Second, the increase in cost is truly unprecedented negatively impacting flow-through. Despite this narrative, our strong adjusted EBITDA margin of 5.5% is a testament to our mental and a drive management style. We remain focused on driving incremental operating leverage through product innovation, gross management, and operation efficiencies as reflected in the significant growth of our third-party freight services.

We made progress on our strategic initiatives, effectively managing the business for the long term despite incremental deterioration of already unprecedented supply chain constrains, and higher inflation compounded by the war in Ukraine. In keeping with our shareholder value accretion approach, our capital deployment in the first quarter concentrated on operational investments in data driven technology and smart farming, strategic investment, and on paying a higher dividend. Last quarter I updated you on the two exciting strategic investments with Purely Elizabeth and Good Culture. Our investment in Good Culture close in the first quarter while our investment in Purely Elizabeth close at the end of last year. We are in the initial phases with Purely Elizabeth of the development of unique and innovative products, and look forward to incremental performance as the collaboration continues to evolve. Additionally the team is all that work with our new product pipeline. So far this year, we launched our many honey glow pineapple, differentiated by it's remarkable sweetness and small size and met the [Indiscernible], in North America. Later this year, map packing is expected to debut, new brand building packaging, and soon we plan to supplement our avocado category with an exciting new offering.

Last month, we were recognized by Newsweek as one of America's Most Trusted Companies of 2022 after being allies of customer trust, investor trust, and employee trust. We are honored to be among the companies recognized for this award, and remain committed to maintaining the honesty and transparency Fresh Del Monte is known for. Since our last sustainability update, we received high levels scores in the water security and climate change and forest categories by CDP, winning a 2021 Seal Business sustainability award for our approach to farming while preserving biodiversity. Currently, two of our largest farming operations are certified carbon neutral. And we are actively working on amplifying those efforts elsewhere. Our sustainability efforts are the core of what we do as we work to build a food system while agricultural production and biodiversity thrive together. The war in Ukraine has created secondary effects, adding to the already unprecedented macroeconomic challenges, including incremental pressures on the cost of fertilizers, fuel, and shipping disruptions.

Additionally, fluctuations in exchange rates are expected to go against us in key selling markets. Given analysts forecast for a stronger U.S. dollar, where we proactively hedged against movements in the euro and Japanese yen to minimize the impact. Lastly, we do not yet see an environment of gross normalization in the near future. Having said that, I'm confident in our team's ability to drive growth. As they focus on our multi-faceted approach, grounded on driving organic and new product expansion, implementation of pricing actions to minimize margin erosion and operational efficiencies. We believe that our vertical integration is a key differentiator, and that rings even truer to date. Because of it, we are relatively shielded from elevated shipping rates in certain key markets. Our vast network has allowed us to optimize our sourcing and distribution. Additionally, our fleet progresses had enabled us to expand our commercial cargo services in North America benefiting from elevated demand given cap ocean freight conditions. Now, I will turn the call to Monica to talk about the first quarter financial results. It is Monica's first time presenting to our earning call. She has been an integral part of finance organization -- our finance organization for 25 years. I'm excited to have her have new role as CFO while I'm certain she will continue to add significant contributions to our financial discipline as we continue to evolve our confidence. Monica?

Monica Vicente

Thank you, Mohammad. It is great to partner with you in my new role. Good morning, everyone. Let's turn to our first quarter of 2022 financial results. As noted by Mohammad, Net sales for the first quarter of 2022 increased by $49 million, or approximately 5% compared with the prior-year period. Net sales primarily benefited from inflation justified pricing actions and key product categories, including bananas, pineapples, and fresh-cut. Conversely, sales were negatively impacted by fluctuations in exchange rates, mainly versus the Euro and the Japanese Yen compared with the prior-year period. Importantly, lack of availability of third party shipping capacity on certain shipping routes, substantially limited to sales of various products. Adjusted Gross Profit for the first quarter of 2022 with $90 million compared with a $107 million in the prior-year period. Despite higher sales, gross profit was negatively impacted by worsening inflationary and other cost pressures compared with the prior-year period.

Specifically, higher cost of key inputs, including packaging material, fertilizer, ocean and inland freight, fuel and labor impacted our performance. Additionally, fluctuations in exchange rates were also unfavorable. Adjusted operating income was $40 million, compared to $58 million in the prior-year period. The decrease in operating income was primarily due to lower gross profit and the net impact of disposal of property, plant, and equipment, partially offset by lower administrative expenses. Adjusted SDP net income was $26 million, compared with $42 million in the prior-year period. Our adjusted diluted earnings per share was $0.55 compared with adjusted diluted earnings per share of $0.88 in the prior-year period. Adjusted diluted earnings per share was relatively in line with our GAAP performance as both periods had minimal non-operational or non-recurring items. adjusted EBITDA for the first quarter was $63 million, compared with $82 million in the prior-year period.

And corresponding adjusted EBITDA margin was 5.5% compared with 7.6% in the prior-year period. Let me now turn to the segment results. Beginning with our Fresh and Value-Added Products. Net sales for the first quarter of 2022 increased $42 million, or approximately 7%, compared with the prior-year period, as a result of increased net sales across most product categories, mainly related to higher pricing. Fresh and value-added product segment gross profit for the first quarter of 2022 was $44 million compared with $52 million in the prior year period. Despite higher sales, gross profit in the segment continued to be impacted by inflationary and other cost pressures, which resulted in higher per unit product and distribution costs.

As noted earlier, the increase in cost of product sold was across-the-board impacted by substantial surges of key input materials, as well as third-party shipping rates. For example, as you know, crude oil prices have increased over 60% compared to the same period last year. Container board was up approximately 50% while the cost of certain key fertilizers more than doubled compared to the prior year period. Additionally, lower gross profit on melons, a seasonal product, impacted segment performance. Lastly, the fresh and value-added product segment had $3 million of one-time charges in the first quarter of 2021 related to damage caused by severe range storms in Chile, which impacted our non-tropical fruit category. There were no one-time charges in the first quarter of 2022. Moving to our Banana segment, net sales for the first quarter of 2022 decreased by $12 million, compared to the prior-year period, as a result of lower sales volume in North America, partially offset by higher pricing. Banana segment gross profit for the first quarter of 2022 was $38 million compared with $50 million in the prior-year period. Similar to the Fresh and Value-Added Product segment, higher input costs impacted gross profit. One-time charges in the Banana segment in the prior-year period included $1.5 million net insurance recovery, related to damage caused by hurricanes in Central America, in the fourth quarter of 2020, there were no one-time charges in the first quarter of 2022. Lastly, net sales in our Other Products and Services segment increased by $19 million or 49%, 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 are benefiting from elevated shipping rates and demand due to the current supply chain environment. Gross profit increased by $5 million as a result of the higher net sales. Now moving to the selected financial data. Selling, general and administrative expenses were $45 million, compared to $49 million in the prior-year periods. The decrease was primarily due to lower administrative. Net interest expense was relatively in line in both periods at $5 million. Income tax expense was $6 million for the first quarter of 2022 compared with $11 million in the prior-year period primarily due to decreased income in certain higher tax jurisdictions. Year-to-date, we used net cash from operating activities of $300,000 compared with net cash provided by operating activities of $47 million in the prior-year period.

The decrease was primarily attributable to lower net income, higher levels of accounts receivable, mainly due to higher net sales and timing of collections and higher levels of finished goods inventory, in part driven by the inflationary cost pressures already mentioned. We continue to make progress on our optimization program announced in the second half of 2020. As a reminder, the program involves selling non-strategic and underutilized assets including land and facilities. Since the program was announced, we have generated $59 million in cash, out of which $2 million was realized in the first quarter of 2022, we expect progress towards achieving our target of a $100 million in cash proceeds to continue in 2022. As it relates to capital spending, we invested $11 million in the first quarter of 2022 compared with $34 million in the prior-year period. CapEx spent consisted of improvements to our production facilities in North America, including investments in automation and technology, along with improvements to our pineapple and banana operations.

As a reminder, CapEx in 2021 included delivery of two fuel efficient state-of-the-art refrigerated container vessels, one of which was received in the first quarter of 2021. Our 2022 CapEx will return to more normal levels and is expected to be under $100 million. Having said that similar to what many businesses are grappling with, lead times on machinery and equipment has nearly doubled, which may impact our rate of spend. Long-term debt increased to $554 million at the end of the first quarter of 2022, from $534 million in the premier prior-year period. As announced this morning in our financial results press release, our Board of Directors declared a quarterly cash dividend of $0.50 per share payable on June 10, 2022 to shareholders of record on May 18, compared with $0.10 per share in the prior-year period. This concludes our financial review. We can now turn the call over to Q&A. Sheryl?

Question-And-Answer Session

Operator

Thank you. [Operator Instructions] Your first question is from Mitch Pinheiro of Sturdivant & Company. Please go ahead. Your line is open.

Mitchell Pinheiro

Yeah. Hi, good morning.

Mohammad Abu-Ghazaleh

Good Morning.

Mitchell Pinheiro

So I guess the first question I have is big. You've talked about you've taken pricing, but how much do you actually control pricing, a lot of its market-driven correct? Supply and demand of various fruits and assorted product. Are these -- is this pricing sort of fuel surcharge kind of pricing, or is this like permanent pricing?

Mohammad Abu-Ghazaleh

No. Fuel charge for instance, we have two types of let's say, enforceable clauses in our contracts. One actually is the ocean freight, our ocean fuel, let's say. And this usually is done every quarter. We fixed our way, worked out what is the average current, let's say fuel cost or per barrel, the oil. Oil today is 106, for instance, at the end of the quarter or beginning of the second quarter. So we worked a new rate which would reflect the through gross of the fuel as we charged that our customers on a three months rolling period. By the end of second quarter at the end of let's say in the beginning of the third quarter, we will have to go back and look at the price of oil in the market, whether it has gone down or up, and we will adjust our ocean freight, so taken example by beginning of this month of April actually, we have reviewed and revised our ocean freight. For argument sake, we have been kind of impacted negatively in the first quarter because the price of oil have increased tremendously while our rate was locked at a lower, let's say, ocean freight and at the beginning of April has been adjusted to reflect the current let's say more or less, fuel cost. As far as inland trade, which relates also to the fuel cost, we have been talking to our customers, and we have taken action to adjust the inland trade as well in this regard with the same kind of formula.

Mitchell Pinheiro

Well, I guess my question, like in your banana business, your gross margin was kind of normal for the big range that you can have. But your banana margins were decent. And your other margins are increasing because you're getting nice, I guess, nice margins on your commercial freight revenue, but it's on the fresh and value-added, is where it continues to struggle. Is that where most of the inflationary pressures are in the fresh and value-added segment more on a percentage basis, perhaps?

Monica Vicente

So. Hi, this is Monica. So on that segment, we actually had a couple of other things going on. We did have lower margins on our melons. We had over production and we did have lower margins on that and our deciduous products suffered from the lack of shipping and we were unable to ship some of our product that of chili and that impacted our fresh and value-added. We do have higher pricing in pineapple and fresh-cut fruit. So that definitely helped that segment.

Mitchell Pinheiro

So as you look in that same segment, in -- for the rest of the year, with maybe the melons as you going away, would we expect -- I mean, I remember fresh and value-added was probably a business segment that may be could get to double-digit margins at one point or close to it. I mean, are you still tracking towards that? And should we see improvement in those margins in this, in the last three quarters here?

Mohammad Abu-Ghazaleh

Absolutely. That's what we're working for and all the loopholes or all the task kind of mistakes have been taking care of and hopefully we will be in the double-digit range for the value-added products.

Mitchell Pinheiro

A couple of things. The -- and just specifically to bananas. What's the outlook for supply and demand for the next couple of months as far as you can see? And how has the Ukraine, Russia situation hurt either pricing or how has it affected European pricing or -- you can talk about that? I appreciate it.

Mohammad Abu-Ghazaleh

[Indiscernible], actually the situation this year was very particular, a different way that Ecuador was hit very, very, very severely in terms of supply. It's because Ecuador main markets were Russia and Ukraine and the eastern markets so with the deterioration in the Russia, and of course the almost the closure of the Ukrainian markets, so much volume where cut off from these markets as there was abundance of fruit in Ecuador. So prices for argument sake, prices in Ecuador at this time of the year between March, April, February would be around, let's say, the fruit, I'm talking about fruit would be around $8, $9 to $10 per box went for the last 6, 7 weeks has been around $2 to $ [Indiscernible] per box. So you can see the impact as far as the export from there. European market in particular has been steady in maintaining strong pricing since the beginning of the year. So we're very kind of optimistic about the open market as a matter of fact, I think the war in Ukraine and Russia has been a positive factor for the European market in terms of also the shipping scarcity.

I mean, when I say shipping, I mean equipment, containers and ships available to move to Europe was disrupted and did not have enough, let's say, space and capacity to have fruit shipped to Europe. So this has helped us well in terms of volumes going to Europe. Going forward, I believe that this situation is not sustainable in terms of availability. In Ecuador, small growers, mid-sized growers will suffer tremendously, not only because the pricing has eroded substantially, but also the fertilizers costs have gotten more than 300% aside from the fuel as well. Aside from other inputs, the paper, the cartons, there is not a single component that has not gotten up by 50% to 300%. And ultimately we will see substantial -- in my opinion, I might be wrong, but I believe that we will see some really structural changes in the Ecuadorian supply chain from -- in terms of bananas. So we just have to wait and see. We are playing very safely as far as we are concerned, and we would like to be able to save site and we see a positive going forward. I believe that will be a positive impact to the industry in general.

Mitchell Pinheiro

I will. Thank you. I'll get back in the queue.

Mohammad Abu-Ghazaleh

Thank you.

Operator

Your next question is from Jonathan Feeney of Consumer Edge. Please go ahead. Your line is open.

Jonathan Feeney

Thank you so much and thank you so much, Mitch, for thinking of me. How are you, Mohammad? A couple of questions. First, could you quantify in any way shape or form the revenue or profit impact from sales lost due to the supply shortages that were referenced in the prepared remarks? That will be my first question.

Mohammad Abu-Ghazaleh

We can give you this information if you don't mind after the call.

Monica Vicente

Yeah. We haven't quantified that, Jonathan. We just know that there was definitely a lot of volume that we had the opportunity to ship, not just from our tropical products in Chile, but also out of Ecuador that because of the space constraints, we were not able to do it.

Mohammad Abu-Ghazaleh

We can give you kind of a rough figure that we have. We believe that we lost about thousands containers of sales during the first few months of this year, especially in the first quarter that by not having enough equipment and shipping space, as well as containers. And mainly to the European, Asian, and the Middle Eastern markets. So, yes, we lost --

Jonathan Feeney

What's -- how many containers is the base like what's the total container usage in a quarter? It's fascinating and its own right? Or is this a thousand out of a 100,000 million?

Mohammad Abu-Ghazaleh

I can give you this information later on, Jonathan. But what I'm telling you, what we missed is about a thousand containers.

Monica Vicente

Yes, we usually, Jonathan, we don't provide that level of detail on a regular basis.

Jonathan Feeney

Okay. I Just wanted to try to skills that. Will follow-up after the call. Thank you. Second of, I want to follow-up on this Ecuador 250 a box situation because I had heard that before and that sounds if there's a lot of inexpensive crude out there marginally, because there's been a demand shock. And logistics are constrained, so that's having a hard time getting the market. Does that mean there is a big overhang for the second quarter and that right now there's a lot of people looking to get rid of a lot of fruit on different markets. And as soon as they can get it to North America or any place else they're going to get it there. How should I think about that because that sounds -- the historically those are distressing numbers, aren't they?

Mohammad Abu-Ghazaleh

Yeah. But listen, North America in particular. You know that most of the truth, most of these is contracted. The majority of everything that we import and our other suppliers, [Indiscernible] been competitors import is all almost on a contractual basis. So we do not usually go and speculate in the market. So the volume from Ecuador and as I can see right now, I don't see that there will be extra volume coming in North America in the next few months, or actually in normal times. Where the markets usually are on spot and speculative markets, it's usually Europe, Middle East, in particular. West Mediterranean, East Mediterranean that's where you will see the speculation and the overflow. However, as I mentioned earlier, that because of the shipping constraints, because of lack of containers, not enough ships and vessels going to these destinations that has been also a factor of not having enough or more volumes going to this market, and that's as a matter of fact, stabilized these markets in very positive way during the last [Indiscernible]. So I expect that this will continue, as well as the war in Ukraine today, is going to be also another factor of the big disruptions into the supply chain. So in summary, I don't believe that the situation is going to change so much for from what we see right now.

Jonathan Feeney

Yeah, that makes a lot of sense. And I wasn't thinking from the perspective that you would be active speculating with trading fruit in the markets in North America. I'm just more thinking that fruit, there are others who sourced directly opportunistically that can then -- that weighs on contract pricing as that puts pressure on retail prices, but who knows. And this environment, maybe that's not even something retailers think about because the price vary still. Thank you. So I wanted to also follow-up, Mohammad, on your comments. It was an interesting choice of what to put in the script there that your revenue exceeded that of Q1 2019 or was I right about in line, I think is what you said. Where -- if I just think about food service, which like can you give me a sense? Are you saying where -- is that like retail has grown and food service is still well off its highs or is your food service and institutional business at what was formerly known as comfortable capacity levels in the first quarter of '19 or '18 for that matter? How does that split to work?

Mohammad Abu-Ghazaleh

No, I think food service still lagging behind. I think that food service has not grown up with the three-year COVID. Let's say pre-COVID period. We'll have to wait and see how this will develop if the pandemic doesn't erupt again. But it's a matter of -- as well as we have to take into consideration China, and pricing. So there are may factors playing. But I don't see that food service have cope up with the kind of demand that we were the regular or now normal in pre-COVID times.

Jonathan Feeney

Last one, I always asked you about this and I know it's takes a while, but -- so these JVs, these products, you're value-added products block broadly. Anything that you own license to or do so through a partnership, I mean, how is the progress going with that right now? Is there any prospects to see you different mix of more branded mix of product, higher margin mix of products, things like beverages, cafes, you've talked about. Now, at any point in the next 12 months to 18 months, I mean, COVID put the brakes on a lot of that stuff. I just wonder, now that it worked, everybody is digging out and thinking more long term, can we be more ambitious about that? Or any perspective upon that, will help.

Mohammad Abu-Ghazaleh

That is exactly what we're actually initially staging, but we are in the initial stages, Jonathan, but this definitely our kind of objective is to go and add value to our products and optimize our assets, and leverage everything that we have in terms of transportation, in terms of asset utilization, as well as working with partners off leveraging our brand, and our ability to distribute. Our distribution network has been an extremely important part of why we were able to survive in this environment in the loss. Actually, I would say year or year-and-a-half. Because without this distribution centers and address couple operations across the United States, across North America. We would not be in a much more difficult position as we speak today. This in my opinion was very, very important factor in growing our business and having more sales and being able to reach more customers. This also have really strong too many other operators or producers, and companies that would like to eat [Indiscernible] and leverage with our network and distribution capabilities, which we are really now capitalizing on. And without elaboration on that, we have many things going on right now which looks very positive for the near and the long-term future.

Jonathan Feeney

Very helpful as always. Thank you.

Mohammad Abu-Ghazaleh

My pleasure.

Operator

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

Mohammad Abu-Ghazaleh

Thank you very much. I appreciate having your attendance to the call today and I hope we can come back with better news in the next quarter in the rest of the year. Have a good day. Thank you.

Operator

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

Please wait. The conference will begin shortly.