Fresh Del Monte Produce Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 26, 2024

There are 5 speakers on the call.

Operator

Good day, everyone, and welcome to Fresh Del Monte Produce's 4th Quarter and Full Fiscal Year 2023 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 the Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Poe. Please go ahead, Ms.

Operator

Poe.

Speaker 1

Thank you, Regina. Good morning, everyone, and thank you for joining our Q4 and full fiscal year 2023 conference call. As Regina mentioned, I'm Claudia Poe, Vice President, Corporate Communications with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu Ghazali, Chairman and Chief Executive Officer and Monica Vicente, Senior Vice President and Chief Financial Officer. I hope that you've had a chance to review the press release that issued earlier this morning via Business Wire.

Speaker 1

You may also visit the company's IR website at investorrelations.freshdelmonstate.com to access today's earnings material and to register for future distribution. 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 and the other required disclosures 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.

Speaker 1

In today's press release and in our SEC filings, we detail risks that may cause our future results to differ materially from these forward looking statements. Our statements are as of today, February 26, and we have no obligation to update any forward looking statement you may make. During the call, we will provide a business update along with an overview of our 4th quarter full year 2023 financial results, followed by a question and answer session. With that, I'm pleased to turn today's call over to Mr. Bubizale.

Speaker 2

Thank you, Claudia, and good morning, everyone. As you have read in our press release, our strong gross margins and cash flow enabled us to have strong adjusted earnings per share growth. It allows us to reduce our loan debt by $140,000,000 and end the year with an adjusted leverage ratio of 1.7x and allowed us to continue returning value to shareholders and increased our quarterly dividend by 25% for the 2nd year in a row. In the fall of 2023, we conducted a strategic review and assessed our operational priorities of our North America operations, including Mann Packing. Preliminary findings of this review were finalized in the Q4.

Speaker 2

As a result of this strategic review and other factors, we recorded a non cash impairment of $131,200,000 in the quarter related to our Mann Packing operations. We are exploring strategic alternatives for this business, all while continuing to focus on our long term drivers for enhancing shareholder value for 2024. Fresh Del Monte has been leading pineapple innovation since the 1990s, with the debut of the Del Monte Gold Extra Sweet Pineapple, the first of its kind at that time. Since then, our robust pineapple program has released the Pink Glow Pineapple, the Honey Glow Pineapple, the Del Monte 0 Pineapple and just a few weeks ago, the Ruby Glow Pineapple, a new premium hybrid pineapple. In 2023, we saw continued strong demand for our Honey Glow and Pink Grow Pineapples, with sales growing by approximately 25% for these varieties in the year 'twenty three compared with 'twenty two.

Speaker 2

In 2024, we will continue to focus on our pineapple program by working to expand the reach of our existing varieties and our new Ruby Glow variety. During 2023, we made significant progress on our asset optimization program and sold underutilized and non strategic assets, which generated cash proceeds of $120,000,000 This included 2 distribution centers and related assets in Saudi Arabia, an idle production facility in North America, our plastic business subsidiary in South America, idle land assets in South and Central America and 2 carrier vessels. This, combined with our strong operating cash flow, fed into our ability to reduce our long term debt to $400,000,000 at the end of 'twenty three compared to $450,000,000 at the end of 'twenty two. We also raised our quarterly dividend sorry, dollars 500,000,000 at the end of 'twenty two. We also raised our quarterly dividend to $0.25 per share, a 25% increase from the previous quarter.

Speaker 2

Fresh cut fruit is a strength that we are leaning into this year. Our fresh cut fruit top line has grown more than 50% in the past 3 years. We attribute this to innovating around products, packaging and forming strategic partnerships with customers and brands. We will focus on further expanding this category in North America, Europe and Asia, and also by focusing on increasing the mix from the higher margin value added product in our portfolio. In 2023, we achieved the highest adjusted gross margin since 2016, coming in at 8.2%, which was driven by our ability to control costs, optimize our assets and focus on profitable growth.

Speaker 2

We are laser focused on our vision and strategy, which is rooted in enhancing shareholder value, While our bananas play an important part in generating strong cash flow to fuel our innovation, we believe we will get there by focusing our strength on pineapples, fresh cut and residues areas, where we have the capability to innovate and be leaders. We see tremendous opportunities for our company to drive growth through innovation. With that, I would like to turn the call over to Monica Vicente, our Chief Financial Officer, who will get into the results. Monica?

Speaker 3

Thank you, Mohammed. Good morning and thank you for joining us on today's call. As a reminder, there is a seasonality in the cadence of our earnings. The 1st and second quarters are seasonally our stronger quarters, while our 3rd and 4th quarters are seasonally softer. Our 2023 results are consistent with historical trends as we realized a greater portion of our net sales and gross profit during the first half of the year.

Speaker 3

Please keep in mind when looking at the year over year results that our results in 2022 did not follow that same seasonality due to the high inflationary environment and a lag in price increases leading to an unusually soft first half and stronger second half. As Mohammed mentioned, and you will also see in our 10 ks filing later today, in the Q4, we took an impairment charge of $131,000,000 of which $110,000,000 relates to customer list and trade name intangibles as well as building land and land improvement assets related to the fresh and value added product segment in North America and also $22,000,000 related to goodwill in our Prepared Foods reporting unit. These impairments were related to our Mann Packing business acquired in 2018. We are currently exploring strategic alternatives for this business and we will provide updates as they become available. With that, I will now turn to our results.

Speaker 3

Net sales for the Q4 were $1,900,000,000 compared with $1,040,000,000 in the prior year. The decrease in net sales in the 4th quarter were driven by lower net sales of bananas and lower global demand for our 3rd party ocean freight business, partially offset by higher net sales in the fresh and value added product segments in Europe and Asia. For the full year, net sales were $4,300,000,000 compared with $4,400,000,000 in 2022. Lower net sales for the year were driven by lower overall sales volumes combined with lower demand of our 3rd party ocean freight business, partially offset by higher per unit sale prices of bananas and fresh and value added products in Europe and Asia, despite a weaker Japanese yen, Korean won and British pound. Gross profit for the Q4 of 2023 was $63,000,000 compared with $82,000,000 in the prior year.

Speaker 3

The decrease in gross profit was driven by lower net sales coupled with higher per unit production costs, partly due to the negative impact of a stronger Costa Rica colon. Gross profit benefited by lower per unit per distribution and ocean freight costs. Gross margin for the Q4 of 2023 was 6.2% compared to 7.9% in the prior year. For the full year, gross profit increased 3% to $351,000,000 from $340,000,000 in the prior year. The increase was primarily driven by higher selling prices of bananas and fresher value added products combined with lower distribution costs, partially offset by higher per unit production costs, partly driven by the negative impact of a stronger Costa Rica colon, where we source the majority of our pineapple.

Speaker 3

Gross margins increased to 8.1% for 2023 compared to 7.7% in the prior year. Adjusted gross profit for the full year of 2023 was $355,000,000 compared with $340,000,000 in the prior year. Adjusted gross profit for full year excludes $4,000,000 of other product related charges, primarily related to $1,500,000 of inventory write off due to the sale of 2 distribution centers in Saudi Arabia in the Q1 and $1,400,000 of inventory write offs and cleanup costs net of insurance recoveries tied to the flooding of our seasonal production facility in Greece in the Q3. There were no other product related charges in 2022. Operating loss for the Q4 of 2023 was $113,000,000 compared with operating income of $31,000,000 in the prior year.

Speaker 3

The loss was driven by the $134,000,000 asset impairment charge already discussed. Adjusted operating income for the Q4 of 2023 was $12,000,000 compared with $34,000,000 in the prior year. Adjusted operating income excludes the above mentioned asset impairment and $6,000,000 of other product related credits due to the floods in Greece in the 3rd quarter, as well as a gain on asset sale of $2,000,000 related to the sale of a vessel. In the Q1 of Q4 of 2022, adjusted operating income excludes $3,000,000 of asset impairment charges, principally due to banana related fixed assets in the Philippines due to flooding. For the fiscal full year 2023, operating income was $59,000,000 compared with $156,000,000 in the prior year.

Speaker 3

And adjusted operating income, which excludes product related charges, asset impairment and gain on asset sales was $165,000,000 compared with $149,000,000 in the prior year. The year over year adjusted operating income increase was primarily driven by higher gross profit. FDP net loss for the Q4 of 2023 was $106,000,000 compared with FDP net income of $18,000,000 in the prior year. Adjusted FDP net income for the 4th quarter was $12,000,000 compared with $22,000,000 in 2022. For the full year, FTP net loss was $11,000,000 compared with FDP net income of $99,000,000 Adjusted FDP net income was $102,000,000 compared with $94,000,000 in the prior year.

Speaker 3

Our diluted earnings per share in the Q4 of 20 23 was a loss of $2.22 compared with $0.38 in the prior year. Adjusted diluted earnings per share was $0.25 compared with $0.45 in Q4 2022. For the full year, diluted earnings per share was a loss of $0.24 compared to $2.06 per share in the prior year. Adjusted earnings per share was $2.12 compared to $1.97 per share in the prior year. Adjusted EBITDA for the Q4 was $38,000,000 compared with $59,000,000 in 2022.

Speaker 3

For the full year, adjusted EBITDA increased to $239,000,000 compared to $235,000,000 in the prior year. I will now go into more detail on the full year performance for each of our segments, beginning with our fresh and value added product segments. Net sales for the fiscal year 2023 were down approximately 4% to $2,500,000,000 compared to $2,600,000,000 in the prior year due to lower sales volume across most products in this category, except for pineapples and avocados, combined with lower sale prices of avocados due to prior year volatility and lower sale prices in our prepared and vegetable product categories, partially offset by higher per unit selling prices across all other products in this segment. As Mohamad mentioned, over the past few years, we have successfully released new pineapple varieties. During 2023, we saw a 25% year over year volume growth in our higher margin Honey Glow and Pink Glow Pineapples.

Speaker 3

We grew our avocado program this past year by expanding our customer base, increasing sales volume by 16% and also further diversifying our sourcing origins to include Colombia, Dominican Republic and Peru, as well as continuing to refine our pricing and sourcing strategies. Gross profit for fiscal year 2023 was $167,000,000 compared with $183,000,000 in the prior year. The decrease was primarily due to lower sales volume and higher product costs due partially to the impact of the strengthening of the Costa Rica Colon and the Mexican peso, somewhat offset by lower distribution, ocean and inland freight costs. As a result, gross margin was 6.8% in 2023 compared to 7.1% in 2022. Adjusted gross profit for fiscal year 2020 3 was $171,000,000 compared to $183,000,000 in the prior year.

Speaker 3

Adjusted gross profit excludes $4,000,000 of other product related charges due to inventory write offs from the sale of 2 distribution centers in Saudi Arabia and inventory write offs and cleanup costs net of insurance recoveries tied to the flood of our seasonal production facility in Greece. For 2024, we expect higher margins in this segment driven by favorable product mix. Moving to our Banana segment. Net sales for fiscal year 2023 increased 1% to $1,638,000,000 compared to $1,620,100,000 in the prior year. The increase was driven by higher per unit selling prices in Europe, partially offset by lower sales in North America due to lower volume and a slight decrease in sale prices.

Speaker 3

Banana gross profit for fiscal year 2023 increased 35% to $163,000,000 compared to $121,000,000 in the prior year. The increase in gross profit was due to higher net sales and lower distribution costs, including ocean and inland freight. Partially offsetting the increase was higher per unit production costs, mainly due to negative fluctuation in the exchange rates in Costa Rica. As a result, gross margin increased to 10% in 2023 from 7.5% in 2022. The increase in gross margin in the Banana segment reflects our continuing efforts to match supply and demand more rationally.

Speaker 3

In 2024, we expect to have similar volumes as compared to 2023. And as you know, sale prices are difficult to predict for this segment due to supply and demand volatility and other factors. Lastly, our full year results for the Other Products and Service segment, Net sales for fiscal year 2023 were $205,000,000 compared to $241,000,000 in the prior year, mainly due to lower net sales of 3rd party ocean freight services as a result of lower rates and volumes driven by softened global demand. Gross profit was $20,000,000 compared with $37,000,000 in the prior year due to lower net sales. Gross margin was 9.8% compared to 15.2% in the prior year.

Speaker 3

As a reminder, ocean freight rates were elevated last year because of the supply constraints and we saw an increase in availability over the course of 2023, which caused pricing to come back to more normalized levels. For 2024, we expect to see a more balanced ocean freight market in the Americas, which is where we provide these services. Now moving to selected financial data for the full year. Net interest expense was flat compared to 2022 due to higher interest rates partially offset by the impact of lower average debt balances. Income tax provision was $18,000,000 compared to $20,000,000 in 2022.

Speaker 3

The decrease in income tax provision is primarily due to decreased earnings in certain higher tax jurisdictions, partially offset by the tax effect related to asset sales throughout the year. Now turning to our financial position. For the year, we generated $178,000,000 in cash from operating activities compared to $62,000,000 in 2022. In 2023, we reduced our inventory balances, which were impacted in the prior year by the inflationary cost pressures. Also in 2022, we strategically increased our levels of key raw materials and packaging supplies in order to secure costs and availability.

Speaker 3

As Mohamad mentioned, we ended the year with about $400,000,000 of long term debt, a $140,000,000 or 26 percent reduction from $540,000,000 in the end of fiscal year 2022 and also a 23% reduction from the end of fiscal year 2021. By lowering our debt, our adjusted leverage ratio now stands at 1.7 times adjusted EBITDA compared to 2.2x in the prior year. Our full year CapEx investment was 58,000,000 dollars compared with $48,000,000 invested in 2022. For 2024, we expect CapEx to be slightly higher at a range between $65,000,000 $75,000,000 due to our continued efforts and focus on expanding production in certain key global operations, such as Freshpet production facility in the UK. During Q4, we announced and completed a $500,000 share buyback.

Speaker 3

And as previously announced, we declared in Q4, we recently declared an increase in our quarterly dividend from $0.20 to $0.25 per share as we stay committed to returning cash to our shareholders. Finally, our credit facility was due to expire later this year and therefore we recently refinanced our facility for a 5 year term with a borrowing capacity of $750,000,000 Our strong free cash flow projections allowed us to decrease our facility from the previous borrowing capacity of $900,000,000 This concludes our financial review. We can now turn the call over to Q and A. Regina?

Operator

Our first question will come from the line of Mitch Panaro with Sturtevant and Company. Please go ahead.

Speaker 4

Yes. Good morning. So a question first on bananas. For the year, the 10% gross margin was the best I've seen going back to 2012. And I heard some of the reasons in your script, but what else is driving this margin?

Speaker 4

This margin is a higher level of banana margin sustainable. What's your outlook here in near term? And what have you been doing internally to improve the margin as opposed to just pricing?

Speaker 2

Good morning, Mitch. The reason for several reasons, one of them was Europe was a strong market last year and banana consumption was higher than normal and the volumes were more in line with the demand. That was number 1. Number 2, our management of supply and demand was more synchronized in a way that we did not have to have very high inventories at times when we don't need them. And that, in my opinion, has helped a lot in controlling our costs, let's put it that way.

Speaker 2

And thirdly, we are focusing on a more, let's say, on the cost structure of our banana farms. That's where we are working very hard in order to really keep our plantations, which are within normal cost structure. I wouldn't say we're going to shut down our plantation, that's not the case, but we are going to be looking at every farm and every plantation and make sure that we're having the best, most efficient farms in operation and production. And that all these actual factors together have helped to improve the gross margins as you have seen in the announcement. And this is something that we will continue to do, Mitch, hopefully, and despite all the other negative impacts that we have in the market, competition and retail force influence, be it in Europe or North America to reduce prices selling prices.

Speaker 2

But all in all, we are very much kind of pleased with what we are doing and where we are going. But bananas, like Monica mentioned, is like our cash flow generation in this, but really our focus would be on more value added products and more value added operations that will really put the company in a much different platform.

Speaker 3

Yes. And I mentioned, as I just mentioned, the banana pricing is difficult to predict because there's a lot of variables, including supply and demand. So just keep that in mind.

Speaker 4

Sure. So I mean most of your Northern American volume is contracted. So how does that look, the current contracted prices relative to 2023?

Speaker 2

The contracted on the supply side or on the selling side?

Speaker 4

On the selling side.

Speaker 2

Selling side is a little bit North America is tough because competition is very tough as we speak. And players are trying to position themselves for market share, additional market share. But we really focus on margins, Mitch. I don't mind sacrificing some volume for a better margin rather than just going for volume and selling at very low margins.

Speaker 4

Okay. And then in terms of pineapples, you've done very well innovating in pineapples. And you talked about 25% growth in your I guess it's your the Pink Glow and Honey Glow. How big is are these 2? And I guess you're going to start RubyGlow.

Speaker 4

How big is that as a percentage of your overall pineapple sales? And then where does distribution stand? I know when I look for the Honey Glow, it's not in every supermarket. So that looks like an opportunity for you. And I'm curious what your ACV is on these products?

Speaker 2

Yes. I do know that Honeywell cannot be we can't have 100% of our production as Honeywell because this is very selective item that we have to work very diligently in the fields to create this Honeygrow segment, which is a certain percentage of our production. I would not disclose it publicly, but we are working in a way that to increase our ratio of Honeywell compared to the total production as well as increasing our production in general to create more volumes on this in this segment, Mitch. So it's something that is an operation and ongoing as we speak. So I mean, hopefully, going forward, we will see continuous improvement in terms of volume and the growth of this segment.

Speaker 2

We're very, very of course, we're at the very early stages for the Rubiret, which has just been announced, and there will be only few thousand pieces. This will be a limited edition, let's say, variety that we are not going to produce at big volumes, but certainly limited volume, but with very high prices and very high margins.

Speaker 4

Okay. And then looking at Mann Packing,

Speaker 2

you bought it a couple

Speaker 4

of years ago, but I guess maybe 5 years ago, the pre pandemic and it really hasn't regained its footing since then. I'm just curious what changed in your thinking about Mann as you did your strategic review?

Speaker 2

Well, I mean, I was very clear, we are going to look at the best ways to first of all, we would like to minimize or eliminate any losses coming from that operation. Secondly, we will look what's best for the company. And thirdly, this segment of vegetables and leaves, in particular, has been extremely competitive with very low margins in the last couple of years. Weather hasn't been helping as well. So it's a combination of reasons and factors that have led to this situation.

Speaker 2

But as I said, I mentioned earlier, we are going to take some strategic decisions in order to improve our business in general. And I hope that in the next few months, we can announce and tell you where we're going.

Speaker 4

What are the sales of Mann?

Speaker 3

We don't disclose that, Mitch.

Speaker 4

Okay. And then, I guess, this final question is you've done well reducing debt and especially with some asset sales. What are the plans in asset sales for the coming year?

Speaker 2

Well, as I mentioned, we are not selling for the sake of selling. We are selling lands that are idle or not suitable for our purposes. Secondly, facilities that have no use for us and we can operate by the way, these facilities that we sold in Saudi Arabia, we re leased part of it for our operations. So we did not get out of our operations in this country. However, what we did, we deleveraged our exposure into assets and had a better cash flow as well as better operating model, let's say.

Speaker 2

So other assets that we sold in South America were assets that really does not fit like the plastic operation, it didn't fit well in our today, let's say, world. So that was a good opportunity to serve, and that's why we didn't dispose of it. And other lands or facilities as well, where the right time to sell and to optimize our operations in certain countries. So what we are doing really, we are optimizing and creating efficiencies and creating more opportunities.

Speaker 4

Okay. Yes, thank you for taking the questions.

Speaker 2

Thank you.

Operator

And with that, I'll hand the call back to Mr. Mohammad Abu Ghazaleh for closing remarks.

Speaker 2

Well, I would like to thank everyone attending this call today. Hopefully, we can give you better news next time, and I wish you a good day. Thank you.

Operator

Everyone, that now concludes our call for today. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Fresh Del Monte Produce Q4 2023
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