Fresh Del Monte Produce Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

There are 5 speakers on the call.

Operator

Good day, everyone, and welcome to Fresh Del Monte Produce's Second Quarter 2023 Earnings Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. After the speakers' remarks, there will be a question and answer session. For opening remarks and introductions, I would like to turn today's Call over to Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Poe. Please go ahead, Ms.

Operator

Poe.

Speaker 1

Thank you, Rob. Good morning, everyone, and thank you for joining our Q2 2023 conference call. As Rob mentioned, I am Claudia Poe, Vice President, Corporate Communications with 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. You may also visit the company's IR website at investorrelations.freshlomante.com to access today's earnings materials and to register for future distribution.

Speaker 1

This conference call is being webcast live on our website and will be available for replay after this call. Please note that our press release and our call today include non GAAP measures. Reconciliations of these non GAAP financial measures are set forth in the press release and earnings presentation, which is available on our website. I would like to remind you that much of the information we will be speaking to today, 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 filings, We detail material risks that may cause our future results to differ from these forward looking statements.

Speaker 1

Our statements are as of Today, August 2nd, and we have no obligation to update any forward looking statements we may make. During the call, we will provide a business Along with an overview of our Q2 2023 financial results, followed by a question and answer session. With that, I am pleased to turn today's call over to Mr. Bougazali.

Speaker 2

Thank you, Claudia, and good morning, everyone. We are truly pleased with our performance for the Q2 of 'twenty three. Net income More than doubled compared with the prior year period. Gross profit and gross margin increased substantially when compared with the same period last year, And we further reduced our debt. In the Q2, we sold our plastic business in Chile as well as Island In South and Central America, as part of our commitment to optimize our asset base, We are continuously looking for areas of opportunity within our portfolio to maximize our return on investment.

Speaker 2

Our core products, banana and pineapple, performed very well in the Q2, and we continue to see strong demand For our Honey Glow and Pink Blue Pineapple varieties, which contributed to the margin improvement in the fresh and value added product segment. Our avocado program is also growing. We have expanded our customer base and increased sales volume, And we have also diversified our sourcing origins to acute Colombia, Dominican Republic and Peru. We continue to refine our pricing and sourcing technology for avocados. We believe this technology is the missing link That will help further elevate our avocado business.

Speaker 2

As you know, avocado pricing has been historically hard to predict Because of the ever changing market and weather conditions in Mexico. In recent months, We have all witnessed record heat and changing weather patterns. These climate issues are not going to end And we are seeing these typical weather patterns at the farm level as well. We have embarked We have several climate related projects in the works that get to the root of these new challenges. Our scientists and researchers are working diligently to improve and uncover farming methods to help optimize our yields while preserving and protecting our growing lands.

Speaker 2

We are focused on ways in which we can leverage As a global agricultural company, we understand the importance of focusing on the basics, water, air, trees and soil, And protecting the environment wherever we can. It is essential for human survival. It is essential to our survival. And as an industry leader, we believe it is our duty to set an example. We believe we are making progress for our Vision forward brighter tomorrow.

Speaker 2

Work tomorrow. Recently, Fresh NalMonte was recognized for its work Sustainability by 2 different leading sustainability organizations. We were awarded a 2023 Steel Business Sustainability Award for our reduction of greenhouse gas emissions across the agricultural value chain. And we have been shortlisted for the World Sustainability Award in the new launch category for the Del Monte 0 Pineapple, which is our certified carbon natural pineapple that offsets emissions from farm to market. The Del Monte 0 Pineapple is just one of several examples of how innovation within our pineapple segment Demand for our Pink Blue pineapple has been outpacing supply with sales more than doubling versus the same period last year.

Speaker 2

After years of research and development, we were able to create a big pineapple that only we can produce. Similarly, the Honey Glow Pineapple, our premium product that has a unique golden color and extra sweet taste, continues to increase in demand sales. In North America alone, sales were up more than 50% in the 2nd quarter. Both Pink Blow and Honey Glow are Fresh Day Mountain's innovations and their market acceptance and interest Show how crucial innovation is in the pineapple category. As everybody knows, we are leaders in this space And our successful innovations are paying off.

Speaker 2

Sustainability and innovation go hand in hand with our Through innovation, exceptional customer service, asset optimization, strategic partnerships and research and development, coupled with our extensive industry knowledge and deep data library. We understand that achieving this transformational vision would take time. We, out of all companies, know very well that The day you plant the seed is not the day you eat the fruit. We are laying the groundwork for our transformational vision as we speak. Lastly, before I pass the call over to Monica, this week we announced a new partnership with Lunchables And Kraft Heinz launching Lunchables with Fresh Fruit, which will feature the multi fruit prominently in select lunchable meal kits.

Speaker 2

We are currently in the early testing stages of Lunchables with Fresh Fruit, selling to retailers in The South Central region of the U. S. With the goal of further expansion into the U. S. Markets.

Speaker 2

We believe there is a significant potential in partnering with a brand like Kraft Heinz. With more than 30 years On the consumer front, we see this as a great opportunity to change children's perspective around fruits and vegetables, Ideally helping to make fruit and vegetable consumption second nature to younger generations by showing up Front and center in a product they already know and enjoy. This partnership aligns closely with our mission to inspire At this point, I will turn the call to Monica to talk about the 2nd quarter

Speaker 3

Thank you, Mohammad, and thank you for joining us on today's call. Let's turn to our Q2 of 20 Net sales for the Q2 of 2023 were CAD1.18 billion compared with CAD1.21 billion Paired with $1,210,000,000 in the prior year. The net sales variance was primarily driven by the fresh and value added product segment, Specifically lower per unit pricing of avocados due to market conditions, as Mohamad mentioned, and lower sales volume of nontropical fruit. This was partially offset by increased net sales of bananas driven by higher pricing and volume. Gross profit for the Q2 of 2023 was higher by $36,000,000 an increase of 45% compared with the prior year period.

Speaker 3

Gross profit benefited from lower product and distribution costs in the fresh and value added product segment combined with higher banana profitability. Operating income was CAD72 1,000,000 compared with CAD34 1,000,000 in the prior year, And adjusted operating income was CAD68 1,000,000 compared with CAD33 1,000,000 The increase in adjusted operating income was primarily due to the higher gross profit. FTP net income for the Q2 of 2023 was CAD48 1,000,000 compared with CAD21 1,000,000 in the prior year And adjusted FDP net income was $46,000,000 compared with $21,000,000 Our diluted earnings per share was $0.99 compared with $0.44 in the prior year. Adjusted diluted earnings per share was $0.96 compared with $0.43 The difference of $0.03 per share between GAAP and adjusted diluted EPS during the Q2 of 2023 was related to the gain on sale of underutilized assets. Adjusted EBITDA for the Q2 of 2023 was $85,000,000 compared with $56,000,000 in the prior year and corresponding adjusted EBITDA margin with 7.2% compared with 4.6% in the prior year.

Speaker 3

Let's now turn to the segment results, beginning with our fresh and value added product segment. As we said, net sales for the 2nd quarter were CAD678,000,000 compared with CAD732,000,000 in the prior year, primarily a result of our lower per unit prices of due to market conditions combined with lower volumes of non tropical fruit. Partially offsetting the decrease were higher net sales of pineapple, fresh cut fruit, vegetables and melons due to higher per unit selling prices, as well as higher avocado sales volume. Gross profit for the Q2 of 2023 was CAD62,000,000 compared with CAD49,000,000 in the prior year, an increase of 26%. The increase in gross profit was positively impacted by higher per unit selling prices for most products in the segment and lower distribution and ocean freight costs.

Speaker 3

We also saw higher gross profit of avocados due to lower per unit product cost and higher volume. As Mohammad mentioned, strong demand for our Honey Glow and Pink Glow Pineapple varieties also contributed to the higher gross profit. Partially offsetting these cost reductions were higher production and procurement costs of most products, which continue to be impacted by lingering inflationary pressures as well as the impact of a stronger Costa Rica colon. As a result of these factors, gross margin increased to 9.2% compared with 6.7% in the prior year. Moving to our Banana segment, net sales for the 2nd quarter of 2023 increased by $27,000,000 or 6% compared with our prior year, primarily as a result of higher per unit selling prices in Europe and North America and higher sales volume in Asia, Europe And North America.

Speaker 3

Banana gross profit in the Q2 of 2023 was $51,000,000 compared with CAD22 1,000,000 in the prior year, an increase of 120%. The increase in gross profit was driven by higher net sales And lower distribution and ocean freight costs, partially offset by higher production and procurement costs due to the continuing impact of the inflation combined with the impact of a stronger Costa Rica Colon. As a result of these factors, gross margin increased to 11.3% compared with 5.3% in the prior year. Lastly, net sales of our Other Products and Services segment for the Q2 were CAD54 1,000,000 compared with CAD58 1,000,000 in prior year as a result of lower net sales of 3rd party freight services due to softened global demand. Gross profit for this segment was $4,000,000 compared with $9,000,000 in the prior year as a result of the lower net sales.

Speaker 3

Gross margin was 7.8% compared with 15.6% in the prior year. Now moving to selected financial data. Selling, general and administrative expenses for the Q2 of 2023 remained relatively in line at $47,000,000 compared with the Net interest expense slightly increased compared to the prior year, driven by higher interest rates, partially offset by lower debt balance. Other expense net for the Q2 of 2023 was CAD6 1,000,000 compared with CAD3 1,000,000 in the prior year. The increase relates to higher foreign currency related losses, primarily due to unrealized losses on balance sheet remeasurement.

Speaker 3

Income tax provision was CAD 11,000,000 Compared with $5,000,000 in the prior year, the increase in the income tax provision was due to increased earnings in certain higher tax jurisdictions, combined with the tax effect related to the sale of our plastic business subsidiary. Now moving to our cash flows. Net cash provided by operating activities for the 6 months of 2023 was CAD133 1,000,000 compared with CAD95 1,000,000 in the prior year. The increase was primarily attributed to lower levels of raw materials and packaging supplies inventory combined with higher net income. Long term debt decreased to CAD400 1,000,000 at the end of the Q2 of 2023 compared with CAD473 1,000,000 at the end of the Q1 of this year.

Speaker 3

By lowering our debt, our adjusted leverage ratio has also decreased to $1,340,000 compared to $1,840,000 last quarter. As it relates to capital spending, We invested $19,000,000 in capital expenditures in the 1st 6 months of 2023 compared with $23,000,000 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 September 8, 2023 to shareholders of record on August 16, 2023. This concludes our financial review. We can now turn the call over for Q and A.

Speaker 3

Rob?

Operator

And your first question comes from the line of Mitch Panaro from Stravian and Company. Your line is open.

Speaker 4

Hi, good morning.

Speaker 3

Good morning, Mitch. Good morning.

Speaker 4

So first, I want to talk about the fresh and value added. Sales were down. I'm just trying to I don't see the So I wanted to get some of the detail, but so pineapple sales We're up, correct?

Speaker 3

Yes. Overall, the segment was down because of avocados, Because of the selling price and the volume of non tropicals, but all the other products had higher selling prices, And that's what caused the Fresh and Value Added segment to be lower, but it was still a strong performance.

Speaker 4

Okay. I'm just assuming $55,000,000 down year over year. Avocados couldn't have and so avocados were down what maybe 50% in the quarter? That about

Speaker 3

So what happened with avocados, I don't know if you recall last year, the pricing on avocados was Extraordinarily high. This year, avocado sale prices are approximately half of what they were last year. So the impact of avocado Selling prices is significant. It doesn't really impact our profitability on the avocado because the cost goes down as well. But the pricing definitely had a huge impact.

Speaker 4

Okay. And In terms of Fresh Cut Fruit and the Fresh Cut Veggie business, that was they were up in the quarter?

Speaker 3

The Fresh Cut, yes, I'm not sure we're giving all those details at the We're talking the fresh and value added segment includes all those products, yes.

Speaker 4

Yes. So was fresh cut fruit and fresh cut vegetables up year over year?

Speaker 3

Fresh cut fruit and fresh cut vegetables were basically flat.

Speaker 4

Okay. And are you seeing any I mean, is it flat because on the retail side or flat Do you do foodservice?

Speaker 2

In the case of fruit, we have capacity issues in terms of Processing more fruit, which we are addressing as we speak. In case of vegetables, there has been a decline in terms of

Speaker 4

Is that I mean is that

Speaker 2

in is it

Speaker 4

a food service issue or Is it a channel issue or is it across all channels is really what I would like?

Speaker 2

Across all channels, Mitch. Okay.

Speaker 4

And when you look at Honey Glow and the Pink Glow, How big is that within your Pineapple business? I mean, I know it's small, but it's growing and I'm just curious where we are now.

Speaker 2

Listen, you need to have into consideration that we are not only And North America with Honeyglow. Honeyglow is global. We produce in Costa Rica. We produce in Kenya, and we produce in the Philippines. So we have Honeywell on all these three sourcing areas.

Speaker 2

And it's about ranging between 25% to 30% of our total volume. So we have a very strong I know that competition has tried to imitate and copy what we have been doing for the Honeywell. But I believe that first time, they have the Knowledge because we have started this several years back. And we have, I believe, Kind of refined tune and have the technology to produce this in a much more And not only in North America. North America actually was the last one to follow after Kenya and the Philippines.

Speaker 2

So we haven't seen the potential yet of an optimization in North American market. We're just starting actually a few quarters ago. So I believe going forward that will become a more impactful.

Speaker 4

Okay. And then on the Banana side, I guess, this is one of the strongest margin quarters I've seen in quite a while. I think I went back to 2017 With the last time your banana business had this margin in the 2nd quarter, what I mean, what It drove that and is any of this sort of sustainable into the 3rd quarter?

Speaker 2

Well, you know, 3rd quarter as you know, historically that the 3rd quarter and 4th quarter and the 2nd half of the year is usually much softer on bananas than the first half because of the summer fruits and competing

Speaker 4

Other items

Speaker 2

and the heat and vacations and as you say, out of school. But What really drove this, in my opinion, is that we have kind of rationalized and Kind of demand and supply were more synchronized in a way that we didn't have peaks in supply where demand wasn't there. And that has helped a lot in terms of maintaining kind of Equilibrium as well as not eroding our margins by Having a lot of waste and reject, that's number 1. Number 2, I think that the cost in terms of the freight and other inputs I don't believe pricing has increased a lot compared to the previous years. We are more or less You know, in the same more or less in the same range.

Speaker 2

However, it's more rationalization, more optimization of Our assets, like I said, it's many other factors that have helped the Banana In general, to improve the margins and maintain cost at a reasonable level. So Even though we have been impacted negatively with the foreign exchange in Costa Rica, in particular, Last year, for instance, was around 650, or 503. No, I think it was around 600.

Speaker 3

600 and Yes, 600 something

Speaker 2

crores per dollar. Today, we are talking about 450, 445. So you I see the impact of that kind of strength of the Colombo that has impacted our cost tremendously.

Speaker 3

And Mitch, I think we also need to remember that last year's Q2 was actually a lower than normal 2nd quarter, usually our Q2 is our strongest quarter, because of the inflation and we hadn't caught up with our pricing, etcetera. So that really the comparison is also a little bit it's impacted because of that too.

Speaker 4

Okay. And so

Speaker 2

This is still

Speaker 4

a part of your efforts to continue to focus on profitable volume. You're no longer Just taking any volume at any cost, that's all part of this, correct?

Speaker 2

That is correct.

Speaker 4

Okay. And right now is the supply and demand balance, how would you describe that for the upcoming quarter In the global market?

Speaker 2

It's a normal I would say that What we see right now in the Q3 as we started, this is a we're just starting in the 2nd month of Q3. So We see a pattern like the historical patterns that the market and the banana market and the Consumption has gone down quite not drastically, but definitely in the Same kind of more of historical numbers and statistics. I believe that it's not a total collapse, but it's definitely Softer, much softer than the Q2 and the Q1.

Speaker 4

Sure. And last question, it was nice to see the asset sales in Quarter, are there anything left in terms of asset sales of significance?

Speaker 2

I would like to tell you one thing that Fresh Del Monte is so rich with assets across the world. It's not that we are going to sell our assets just for the sake of selling assets. No, we are selling assets that are really underutilized or not even utilized, Lands, buildings, businesses that we believe it will their margins are too little like the plastics, for instance, that's where we Kind of spin it off. This is the kind of assets that we have. We do have other assets That we may sell, but not in the same kind of pace that we have done during the last Couple of years.

Speaker 4

So you'll still optimize your portfolio your asset portfolio, but it's going to Slow down a little bit.

Speaker 2

Yes, for sure. But like I said, there are other things that are mitigating this. I mean, as I said on the last call, if you remember, Mitch, I said that we have so many Projects and so many initiatives in the pipeline that will change our business going forward. I can't You know, kind of give details, but there is so much in the pipeline that will transform our business from what you see today to the future.

Speaker 4

Okay. Well, thank you for the questions.

Speaker 3

Thank you.

Operator

And we have reached the end of our question and answer session. I will now turn the call back over to management for any final closing comments.

Speaker 2

Thank you so much, everyone. I appreciate your attendance today and hope to talk to you on the next call. Wish you a good day. Thank you.

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Earnings Conference Call
Fresh Del Monte Produce Q2 2023
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