Fresh Del Monte Produce Inc

NYSE:FDP

Earnings Call Analysis

Decreased Profits Amidst Operational Challenges

In the third quarter of 2023, the company reported an adjusted gross profit of $83 million, a decrease from $88 million the previous year, affected by lower sales in fresh and value-added products and higher costs. Diluted earnings per share (EPS) dropped to $0.17 from $0.69, with adjusted EPS at $0.35 compared to $0.54 prior year. Over nine months, EPS rose by 17% to $1.97, and adjusted EPS grew by 23% to $1.87, while adjusted EBITDA increased 14% to $201 million. The banana segment saw a gross profit rise by 41%, owing to lower costs, raising the gross margin to 8.3%. In contrast, the fresh and value-added segment's sales fell to $574 million, a drop of $26 million from the previous year, causing a drop in gross margin to 6.3% due to higher costs and inventory charges from flooding in Greece. The third segment, other products and services, also experienced a decline in net sales to $44 million with a decrease in gross margin to 14.2%. Operating cash flow improved by 69% to $180 million, and the company maintained a dividend of $0.20 per share.

Third Quarter Challenges and Strategic Partnerships

The third quarter presented a series of challenges for the company. Seasonal softness was compounded by the September floods in Greece, which resulted in $8.4 million in inventory write-offs and cleanup costs, contributing to a shortfall in net sales and gross profit compared to the previous year. On a positive note, the banana segment saw an uplift in gross margin by 250 basis points, primarily driven by robust sales volumes and selling prices, particularly from avocados. These gains partially cushioned the financial impact of broader market headwinds.

Revenue and Gross Profit Dynamics

The company's net sales reached $1 billion for the quarter, a sizeable reduction from the $1.54 billion recorded the previous year. Banana sales also declined, affected by lower selling prices in North America, while decreased demand for third-party ocean freight services resulted in lower net sales for other product segments. However, the overall gross profit for the first nine months of the year grew by 11% to $288 million, indicating some resilience in the face of economic challenges.

Operational Income and Net Earnings

The third-quarter's operational challenges manifested in reduced operating income, which fell to $25 million versus the prior year's $51 million. Similarly, the adjusted operating income dipped due to increased selling, general and administrative expenses and decreased gross profit. Net income stood at $8 million for the quarter, translating to a diluted earnings per share of $0.17, but saw a 19% increase to $95 million for the initial nine months of the year.

EBITDA Growth Amidst Tighter Margins

Although adjusted EBITDA for the quarter declined to $50 million from $58 million the prior year, the first three quarters collectively reflected a 14% year-over-year growth, bumping the figure to $201 million. This growth underlines the company's ability to manage costs and enhance efficiencies even with tighter margins.

Segments Overview: Bananas and Other Products

Within its segments, the company witnessed varied performance. Banana net sales dipped slightly to $385 million for the third quarter, primarily due to softer North American pricing and volumes, somewhat offset by European market strength. However, gross profit in this segment grew 41%, reaching $32 million thanks to reduced costs and freight efficiencies. Meanwhile, the other products and services segment experienced a decline in net sales, down to $44 million, as decreased global demand for freight services negatively impacted profits, which fell to $6 million.

Expense Management and Cash Flow

Selling, general and administrative expenses saw a negligible rise to $48 million for the quarter, while interest expenses remained steady. The company generated an impressive net cash inflow from operating activities, totaling $180 million for the nine-month period, largely on account of lower working capital requirements thanks to reduced inventory levels and increased net income.

Debt, Leverage, and Shareholder Returns

Long-term debt remained constant quarter-over-quarter at approximately $401 million but demonstrated a significant 26% reduction since the last fiscal year, reflecting successful debt reduction efforts. The adjusted leverage ratio improved slightly to 1.34. Additionally, investors were rewarded with continued shareholder returns, marked by a declared quarterly cash dividend of $0.20 per share.

Innovation and Sustainability

The company's commitment to sustainability yielded a 26% reduction in Scope 1 and Scope 2 emissions since 2019 and a cut in food loss and waste by 41% in 2022, advancing its goals substantially. Innovative partnerships, like those with Kraft Heinz and global restaurant chain PF Chang's, augment the company's market presence and reflect its focus on health-conscious and fresh product offerings.

Capital Investments

Demonstrating confidence in its growth trajectory, the company invested $41 million in capital expenditures within the first nine months of the year. This investment underscores the company's commitment to expanding its operations and ensuring sustained profitability.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone, and welcome to Fresh Del Monte Produce Third Quarter 2023 Earnings Conference Call. Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. [Operator Instructions] My name is Sheryl, and I will be your conference operator today. [Operator Instructions]

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 Pou. Please go ahead, Ms. Pou.

[Claudia Pou, executive]

Thank you, Sheryl. Good morning, everyone, and thank you for joining our third quarter 2023 conference call. As Sheryl mentioned, I'm Claudia Pou, Vice President, Corporate Communications with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu-Ghazaleh, 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.freshdelmonte.com to access today's earnings materials 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 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 filings, we detail material risks that may cause our future results to differ from these forward-looking statements. Our statements are as of today, November 1, and we have no obligation to update any forward-looking statements we may make.

During the call, we will provide a business update, along with an overview of our third quarter and our 9-month 2023 financial results, followed by a question-and-answer session.

With that, I am pleased to turn today's call over to Mr. Abu-Ghazaleh.

[Mohammad Abu-Ghazaleh, executive]

Thank you, Claudia. Good morning, everyone. We are pleased with our 9-month 2023 results, marked by more than 140 basis points improvement in adjusted gross margins, solid adjusted EBITDA and year-over-year adjusted EPS growth.

Our results were driven by our focus on operational excellence leading logistical infrastructure and continued improvements in efficiencies and sustainability practices. For the 9 months, our adjusted EBITDA increased 14% to $201 million. And our adjusted diluted EPS increased 23% to $1.87. We achieved these strong 9-month results despite facing macroeconomic challenges such as inflationary pressures and escalating weather events such as the floods in Greece, demonstrating our ability to run a profitable global enterprise in the face of large-scale challenges.

The third quarter is seasonally our softest quarter. The headwinds this quarter were as follows: the September floods in Greece impacted our seasonal nontropical product scanning facility, which resulted in $8.4 million of inventory write-offs and cleanup costs. Global demand for our third-party ocean freight business softened, which caused a decrease in our other products and services segments. As a reminder, in the prior year, this segment benefited from elevated shipping rates and demand due to market logistical conditions.

Now for the highlights in the third quarter that partially offset these headwinds. Gross margin in the banana segment during the third quarter was up 250 basis points. Avocados turnaround this quarter were meaningful contributors, thanks to increases in sales volumes, selling prices and gross profit.

Our continued solid adjusted EBITDA enabled us to have numerous options for strong asset allocations. We continue to use our healthy cash flow to return value to shareholders through activities such as improving efficiencies, paying down debt and continuing to deliver innovation-led new-to-market products. We also continue to look for ways to optimize our asset base to maximize our shareholder values. All these actions enabled us to accomplish our mission of meeting the worldwide demand of getting consumers to eat healthier fresh products.

We strive daily to achieve the mission by providing our offerings to consumers when and where they shop. And by partnering with other leading CPG companies that are looking to improve their healthy offerings and are looking to enter the fresh space, 2 areas where we're distributed leaders. Our “Lunchables with Fresh Fruit, partnership with Kraft Heinz continued and -- continues to test in the market. We announced a partnership with the global restaurant chain PF Chang’'s. We unveiled 2 salad kits that allowed consumers to enjoy the restaurants, most popular salad dishes in the comfort of their homes. The kits are available in select retailers across the U.S. with the potential to expand to Canada and Europe.

Tricont, our inland logistics solution, underwent a rebrand this year, which was made public in September. The new website and branding will help the third-party logistics provider to enhance its customer experience and broaden its customer base on the heels of multiyear growth. We also became a part of the Upcycle Food Association. The organization that helps companies such as Fresh Del Monte find ways to maximize the use of our food waste. It is exciting to partner with the Upcycle Food Association and find ways to upcycle our waste, which plays a role in Fresh Del Monte's long-term R&D and sustainability plans.

We also launched our latest sustainability report 2 weeks ago. A few highlights include: we reduced our Scope 1 and Scope 2 emissions by 26% compared to 2019 levels, bringing us 94% of the way towards our 2030 goal. We reduced our food loss and organic waste by 41% in 2022, bringing us 82% of the way towards our 2030 goal. And we donated approximately 53,000 tons -- metric tons of food to organizations that assist those in need and either composite also eligible waste to third parties to convert it into animal feed and biofuel.

We are truly one of the world's leading vertically integrated producer, distributors and marketers of fresh produce. We leave sustainability into all facets of our business while making fresh, healthy produce accessible worldwide. We have several initiatives in different stages with drove CPG brand, similar to Kraft and PF Chang's. In addition, we'll continue to push innovation forward, creating value for our consumers and our business.

Quality programs for our popular Honeyglow and Pinkglow pineapples are being activated and we are close to launching a new pineapple variety that will be unique to Fresh Del Monte as we further cement our reputation as the leader of pineapple irrigation. As always, our management team will continue to focus on enhancing long-term shareholder value by evaluating how to best leverage our experience in smart farming logistics, sustainability and marketing combined with our valuable portfolio of agricultural labs.

With that, I would like to turn the call over to Monica, our CFO.

[Monica Vicente, executive]

Thank you, Mohammad. Good morning, everyone, and thank you for joining us on the call today. I would like to start this morning by providing some background on the seasonality of our business before we jump into the results. We believe the best way to view our business is on an annual basis, not quarterly. Historically, our first and second quarters are seasonally stronger quarters, while our third and fourth quarters are seasonally softer.

The selling price of any fresh produce item fluctuates throughout the year due to supply and demand for that particular item as well as the pricing and availability of other fresh produce items, many of which are seasonal in nature, such as summer months when competing seasonal fruit is abundant. Last year was an atypical year for our company in terms of seasonality due to the high inflationary environment we faced and a lag in price increases, which resulted in an unusually soft first and a stronger second half of the year.

So far this year, our results are consistent with historical trends where we have realized a greater portion of our net sales and gross profit during the first 2 fiscal quarters of the year.

With that, let's move on to our third quarter 2023 results followed by our 9-month results. Net sales for the third quarter of 2023 were $1 billion compared with $1.54 billion in the prior year. Net sales for the first 9 months of 2023 were $3.3 billion compared with $3.4 billion in the first 9 months of '22. In both periods, the net sales variance was primarily driven by lower sales volume in the fresh and value-added product segment and a decrease in sales in the other products and services segment due to the softened global demand of our third-party ocean freight business.

Banana net sales for the third quarter of '23 were lower primarily due to selling prices in North America. However, for the first 9 months, banana net sales were higher due to higher pricing and volumes.

Gross profit for the third quarter of 2023 was $74 million compared with $88 million in the prior year. Gross profit was impacted by lower sales volume across most products, a stronger Costa Rica colon and a Mexican peso and the inventory write-off related to the flooding of our seasonal prepared product facility in Greece, partially offset by lower distribution and ocean freight costs.

Excluding the impact from the inventory write-off and cleanup costs in Greece, adjusted gross profit for the third quarter of '23 was $83 million compared with $88 million in the prior year. Gross profit for the first 9 months of '23 increased by 11% to $288 million from $259 million in the prior year. The increase was primarily driven by higher sales volume, selling prices of bananas, partially offset by lower sales of fresh and value-added products and our third-party ocean freight services.

Adjusted gross profit for the first 9 months increased 15% to $298 million from $259 million in the prior year. Operating income was $25 million compared with $51 million in the prior year, and adjusted operating income was $34 million compared with $41 million. The decrease in adjusted operating income was primarily due to lower gross profit and higher selling, general and administrative expenses. Operating income for the first 9 months increased by 38% to $172 million from $125 million in the prior year. And adjusted operating income increased by 33% to $153 million from $115 million in '22.

FDP net income for the third quarter of 2023 was $8 million compared with $33 million in the prior year and adjusted FDP net income was $17 million compared with $26 million in 2022. FDP net income for the first 9 months increased by 19% to $95 million from $80 million in the prior year. Adjusted FDP net income increased 23% to $90 million compared with $73 million in the prior year. Our diluted earnings per share in the third quarter of 2023 was $0.17 compared with $0.69 in the prior year.

Adjusted diluted earnings per share was $0.35 compared with $0.54 in the prior year. The difference between GAAP and adjusted diluted EPS during the third quarter of 2023 was primarily related to the product-related charges due to the floods that impacted our Greek production facility. For the first 9 months of 2023, diluted EPS increased 17% to $1.97 per share from $1.68 per share. In the prior year period, adjusted diluted EPS increased 23% to $1.87 per share to $1.52 per share in the prior year.

Adjusted EBITDA for the third quarter of 2023 was $50 million compared with $58 million in the prior year. For the first 9 months, adjusted EBITDA increased by 14% to $201 million from $176 million in the prior year and corresponding adjusted EBITDA margin increased 90 basis points to 6.1% from 5.2%.

Let me now turn to segment results. Fresh and value-added segments: net sales for the third quarter of 2023 were $574 million compared with $600 million in the prior year, primarily a result of lower sales volumes of nontropical fruit, pineapple, fresh-cut fruit and fresh-cut vegetables as well as prepared, partially offset by higher per unit selling prices of nontropical fruit, fresh-cut fruit and pineapple product categories, combined with higher sales volume and sales prices of avocados.

Gross profit for the third quarter of 2023 was $36 million compared with $55 million in the prior year. Gross profit variance was primarily due to higher production and procurement costs of most products, partially due to a stronger Costa Rica colon and Mexican peso, along with lower net sales volume, partially offset by higher selling prices and lower ocean freight.

Gross profit for the third quarter of 2023 included $8 million of other product-related charges, comprised primarily of inventory write-offs and cleanup costs tied to the flooding of our seasonal production facility in Greece. As a result of these factors, gross margin decreased to 6.3% compared with 9.2% in the prior year.

Moving to our banana segment. Net sales for the third quarter were $385 million compared with $388 million in the prior year, primarily a result of lower per unit selling prices and sales volume in North America, mostly offset by higher sales volume and per unit selling prices in Europe. Banana gross profit in the third quarter was $32 million compared with $23 million in the prior year, an increase of 41%. The increase in gross profit was due to lower distribution, ocean freight and product costs, partially offset by a stronger Costa Rica colon. As a result of these factors, gross margin increased to 8.3% compared with 5.8% in the prior year.

Lastly, net sales in our other products and services segment for the third quarter were $44 million compared with $65 million in the prior year as a result of lower net sales of third-party freight services due to softened global demand. Gross profit was $6 million compared with $10 million in the prior year as a result of the lower net sales. Gross margin was 14.2% compared with 15.7% in the prior year.

Now moving to selected financial data. Selling, general and administrative expenses for the third quarter were $48 million compared with $47 million in the prior year, driven primarily by higher employee compensation expense. Interest expense remained flat at $6 million for the third quarter of 2023 compared with the prior year despite lower average debt balance due to higher interest rates.

Other expense net for the third quarter of 2023 was $7 million compared with $9 million in the prior year. The decrease relates to lower foreign currency-related losses.

Income tax provision was $4 million compared with $3 million in the prior year. The increase in the provision was primarily due to increased earnings in certain higher tax jurisdictions.

Net cash provided by operating activities for the first 9 months of 2023 was $180 million compared with $106 million in the prior year. The increase was primarily due to lower working capital, mainly related to lower levels of raw materials and packaging supplies, combined with higher net income.

Long-term debt sequentially retained -- remained flat at approximately $401 million at the end of third quarter of 2023 as compared with the end of the second quarter and it decreased 26% from $540 million at the end of fiscal year '22.

Our adjusted leverage ratio is now 1.34 compared to the prior quarter of 1.42. As it relates to capital spending, we invested $41 million in capital expenditures in the first 9 months of 2023 compared with $36 million 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 December 8, 2023, to shareholders of record on November 15, 2023.

This concludes our financial review, and we can now turn to our Q&A. Sheryl?

[Operator]

[Operator Instructions] Our first question comes from the line of Mitch Pinheiro.

[Mitchell Pinheiro, analyst]

Yes. I wanted to talk first question about bananas. So we're in the same quarter. And here, we had North America, we had lower prices and lower volume. And in Europe, we have higher prices and higher volume, which really is [ counter-tally ] normal elasticity expectations. So could you just talk about why these 2 markets behave differently in the quarter? And related to that, what we should expect here in the fourth quarter?

[Mohammad Abu-Ghazaleh, executive]

Mitch, the -- let's -- in Europe, we have fixed contracts for most of the volume that goes into Europe regularly. So the margins and the prices are more or less fixed and not fluctuating. In the U.S., of course, a majority of our supplies are on contract basis with retailers and buyers. However, part of that also volume goes into the spot market. And during the last couple of months, there has been, I would say, a soft market in the U.S. and consumption of bananas has been, unfortunately, on the decline side as we speak. And that's why prices have been adversely affected. But as Monica mentioned, we -- Mitch, that the most important thing that we need to focus on is really an annual basis rather than transactional or quarter-to-quarter basis because that will give you a better picture at the end of the year how the fruition performed rather than just taking quarter per quarter.

We are in produce business. We are CPG consumer goods manufacturers. So we are always influenced by market and climate. And one of the things that Monica mentioned about Greece at the flood and we took a write-off of over $8 million. But really, on the other side, we have also insurance, EUR 10 million that we are going to be recovering. So these losses you see today will be recovered in the next 3 or 4 months -- I mean, in the next few months. So we don't want the picture to be kind of clouded or misguided. I mean we state the facts as they are today, but we have also contingency plans like the insurance that covers that damage of that loss and even we have support from the government of Greece to also cover other losses, be it machinery and material. So all in all, I'm very optimistic about the -- and the quarter itself is not too bad compared to the conditions and the environment around us. And going forward, I have very high confidence in our delivery and our performance.

[Mitchell Pinheiro, analyst]

Why do you think volumes are down in the U.S.? And they've been soft for a little bit, is there something going on, just generally speaking, with the consumer?

[Mohammad Abu-Ghazaleh, executive]

We got about 2% decline in volumes or in consumption. And we don't know really the reasons for that, except that either the people are spending on other items or focusing on other types of fruits during this period. But this has been a pattern that we have witnessed over the last couple of years.

[Mitchell Pinheiro, analyst]

Okay. And then -- so if you look at the business on an annual basis and the bananas in particular, again, for a second. Typically, I've covered you for a long time. And I've always thought that gross margins would be in 4% to 6% annualized range and generally around 6%. But for the last couple of years, you've been on the higher end of that. Last year, you've been on a business at 7.4% gross margin. And this year, it's looking good, looking that or better. So what do you think it is driving the banana margins to above historic level range? Are we -- anything you're doing internally, whether it's buying more of your own fruit versus purchase fruit? Is there efficiencies in the field? Is it just pricing? Can you talk a little bit about that?

[Mohammad Abu-Ghazaleh, executive]

Yes. Well, to start with efficiencies in the field, that is one major item. Secondly, we are more kind of streamlining and more efficient in supply and demand kind of alignment. In the prior years, especially during the second half of the year, there have always been oversupply of bananas through improper, let's say, planning and meeting kind of demand and supply.

In the last couple of years, last year and this year, we are efficiently and better managing the supply and demand side of the story. So our margin has improved significantly because mainly of our efficiency in terms of meeting only the demand and rather than having oversupply in the market among other things that we are doing, of course, with logistics and other issues in terms of cost structure. But that's why -- and we believe this will continue to improve as we go forward.

[Mitchell Pinheiro, analyst]

Okay. So you think it's sustainable, like the higher end of the range kind of level from year to year?

[Mohammad Abu-Ghazaleh, executive]

Yes, yes.

[Mitchell Pinheiro, analyst]

Okay. And then if you could talk, Mohammad, your -- what's going on in the Middle East, I mean, how is that going to affect your business in the near term?

[Mohammad Abu-Ghazaleh, executive]

It's really marginal. I mean where we are -- our major markets are in the Gulf and Turkey and other areas that is not influenced by what is going right now. And we don't see really any kind of significant or material impact on our business in this part of the world right now.

[Mitchell Pinheiro, analyst]

Okay. And then just last question for me, and I'll get back in the queue. But on the fresh and value-added business, you continue to -- I mean, year-over-year and sequentially, the margins were down, but you're making some nice progress there climbing back to where I think you think the business ought to be. Is -- are there any headwinds for that business in the fourth quarter? And can you talk about how the margins are going to look next year roughly? I mean are we going to see continued improvement? Is there any other headwinds that we need to know about?

[Mohammad Abu-Ghazaleh, executive]

Not really. I think that we are doing well. We are going into new -- as I speak, new kind of transactions and joint ventures as we go into the new year, that will improve our margin and improve our kind of utilization of our assets, and that's the most important thing, resources and assets. And I think that for '24, we are very confident about the future. We are definitely going in the right direction.

[Mitchell Pinheiro, analyst]

And where do you think, by the way, that's this thing, but where do you think margins can go longer term in the fresh and value-added business?

[Mohammad Abu-Ghazaleh, executive]

I would go for about our target and our objective is to reach about 12% of the gross margins.

[Mitchell Pinheiro, analyst]

Okay. So still a lot of upside left there?

[Mohammad Abu-Ghazaleh, executive]

Yes.

[Operator]

I will now turn the call back over to Mr. Abu-Ghazaleh for closing remarks.

[Mohammad Abu-Ghazaleh, executive]

Thank you very much, everyone, and it was a pleasure to talk with you today. And hopefully, we can join again on our next call. Thank you, and have a good day.

[Operator]

You may now disconnect. Have a good day.