Fresh Del Monte Produce Inc. (NYSE:FDP) Q4 2023 Earnings Call Transcript

Fresh Del Monte Produce Inc. (NYSE:FDP) Q4 2023 Earnings Call Transcript February 26, 2024

Fresh Del Monte Produce Inc. misses on earnings expectations. Reported EPS is $0.25 EPS, expectations were $0.31. FDP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to Fresh Del Monte Produce’s Fourth 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. [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: Thank you, Regina. Good morning, everyone, and thank you for joining our fourth quarter and full fiscal year 2023 conference call. As Regina 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 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 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 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 statements we may make.

During the call, we will provide a business update, along with an overview of our fourth quarter 2023 financial results, followed by a question-and-answer session. With that, I am pleased to turn today’s call over to Mr. Ghazaleh.

Mohammad Abu-Ghazaleh: 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 allowed us to reduce our loan debt by $140 million and end the year with an adjusted leverage ratio of 1.7 times, and allowed us to continue returning value to shareholders and increased our quarterly dividend by 25% for the second 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 fourth quarter. As a result of this strategic review and other factors, we recorded a non-cash impairment of $131.2 million in the quarter, related to our Mann Packing operation.

We are exploring strategic alternatives for this business all the 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 Pinkglow Pineapple, the Honeyglow Pineapple, the Del Monte Zero Pineapple, and just a few weeks ago, the Rubyglow pineapple, a new premium hybrid pineapple. In 2023, we saw continued strong demand for our Honeyglow and Pinkglow pineapples, with sales growing by approximately 25% for these varieties in the year 2023 compared with 2022. In 2024, we will continue to focus on our pineapple program by working to expand the reach of our existing varieties and our new Rubyglow 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 million. This included two 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 two carrier vessels. This combined with our strong operating cash flow fed into our ability to reduce our long-term debt to $400 million compared to $450 million at the end of 2020. We also raised our quarterly dividend, sorry, $500 million at the end of 2020. We also raised our quarterly dividend to $0.25 per share, a 25% increase from the previous quarter.

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 three 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. 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 strengths on pineapples, fresh-cut and resin-used 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?

Monica Vicente: Thank you, Mohammad. 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 first and second quarters are seasonally our stronger quarters, while our third and fourth 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. 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 Mohammad mentioned, and you will also see in our 10-K filing later today, in the fourth quarter we took an impairment charge of $131 million, of which $110 million relates to customer lists 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 million 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. Net sales for the fourth quarter were $1.9 billion, compared with $1.040 [ph] billion in the prior year. The decrease in net sales in the fourth quarter were driven by lower net sales of bananas and lower global demand for our third-party ocean freight business, partially offset by higher net sales in the fresh and value-added product segment in Europe and Asia. For the full year, net sales were $4.3 billion, compared with $4.4 billion in 2022. Lower net sales for the year were driven by lower overall sales volumes, combined with lower demand of our third-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 fourth quarter of 2023 was $63 million, compared with $82 million in the prior year. 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 distribution and ocean freight costs. Gross margin for the fourth quarter of 2023 was 6.2%, compared to 7.9% in the prior year. For the full year, gross profit increased 3% to $351 million, from $340 million in the prior year. The increase was primarily driven by higher selling prices of bananas and fresh and 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.

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 million compared with $340 million in the prior year. Adjusted gross profit for full year 2023 excludes $4 million of other product-related charges, primarily related to $1.5 million of inventory write-offs due to the sale of two distribution centers in Saudi Arabia in the first quarter and $1.4 million of inventory write-offs and cleanup costs, net of insurance recoveries tied to the flooding of our seasonal production facility in Greece in the third quarter. There were no other product-related charges in 2022. Operating loss for the fourth quarter of 2023 was $113 million compared with operating income of $31 million in the prior year.

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

An adjusted operating income, which excludes product-related charges, asset impairment, and gain on asset sales, was $165 million compared with $149 million in the prior year. The year-over-year adjusted operating income increase was primarily driven by higher gross profit. FTP net loss for the fourth quarter of 2023 was $106 million compared with FTP net income of $18 million in the prior year. Adjusted FTP net income for the fourth quarter was $12 million compared with $22 million in 2022. For the full year, FTP net loss was $11 million compared with FTP net income of $99 million. Adjusted FTP net income was $102 million compared with $94 million in the prior year. Our diluted earnings per share in the fourth quarter of 2023 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 with $2.06 per share in the prior year. Adjusted earnings per share was $2.12 compared with $1.97 per share in the prior year. Adjusted EBITDA for the fourth quarter was $38 million compared with $59 million in 2022. For the full year, adjusted EBITDA increased to $239 million compared with $235 million 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 segment. Net sales for the fiscal year 2023 were down approximately 4% to $2.5 billion compared with $2.6 billion 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 Mohammad mentioned, over the past few years, we have successfully released several new pineapple varieties. During 2023, we saw a 25% year-over-year volume growth in our higher margin Honeyglow and Pinkglow pineapples. 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 million compared with $183 million 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 2023 was $171 million compared to $183 million in the prior year. Adjusted gross profit excludes $4 million of other product-related charges due to inventory write-offs from the sale of two distribution centers in Saudi Arabia and inventory write-offs and cleanup costs net of insurance recovery 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 million compared to $1,620 million 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. Banana gross profit for fiscal year 2023 increased 35% to $163 million compared to $121 million 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. 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 segments. Net sales for fiscal year 2023 were $205 million compared to $241 million in the prior year, mainly due to lower net sales of third-party ocean freight services as a result of lower rates and volumes driven by softened global demand. Gross profit was $20 million compared with $37 million in the prior year due to lower net sales. Gross margin was 9.8% compared to 15.2% in the prior year.

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 million compared to $20 million in 2022. 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 million in cash from operating activity compared to $62 million 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. As Mohammad mentioned, we ended the year with about $400 million of long-term debt, a $140 million or 26% reduction from $540 million 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 2.2 times in the prior year.

Our full year CapEx investment was $58 million compared with $48 million invested in 2022. For 2024, we expect CapEx to be slightly higher at a range between $65 million and $75 million. Due to our continued efforts and focus on expanding production in certain key global operations, such as Fresh Pet Production Facility in the U.K. During Q4, we announced and completed a $500,000 share buyback. 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 five-year term with a borrowing capacity of $750 million.

Our strong free cash flow projections allowed us to decrease our facility from the previous borrowing capacity of $900 million. This concludes our financial review. We can now turn the call over to Q&A. Regina?

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Mitch Pinheiro with Sturdivant & Company. Please go ahead.

Mitch Pinheiro: 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. I heard some of the reasons in your script, but what else is driving this margin? This margin is a higher level of Banana margin sustainable? What’s your outlook here in the near term? And what have you been doing internally to improve the margin as opposed to just pricing?

Mohammad Abu-Ghazaleh: Good morning, Mitch. There are 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 one. Number two, 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. 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 plantations.

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, despite all the other negative impacts that we have in the market, competition and retail, of course, influence, be it in Europe or North America, to reduce prices, selling prices. 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 terms of — 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.

Monica Vicente: Yes, 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.

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

Mohammad Abu-Ghazaleh: The contracted on the supply side or on the selling side?

Mitchell Pinheiro: On the selling side.

Mohammad Abu-Ghazaleh: The 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.

Mitchell Pinheiro: 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 Pinkglow and the Honeyglow. How big is — are these two and I guess you’re going to start Rubyglow. 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 Honeyglow, 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.

Mohammad Abu-Ghazaleh: Yes, I do know that Honeyglow cannot be — we can’t have 100% of our production in Honeyglow. This is a very selective item that we have to work very diligently in the fields to create this Honeyglow segment, which is a certain percentage of our production. I would not disclose it. But we are working in a way that — to increase our ratio of Honeyglow 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. We are very, very — of course, we are in the very early stages for the Ruby [Indiscernible], which has just been announced, and there will be only few thousand pieces.

This will be a limited addition, let’s say, variety that we are not going to produce in big volumes but certainly limited volume, but with very high prices and very high margins.

Mitchell Pinheiro: Okay. And then, looking at Mann Packing, you bought it a couple of years ago, I guess maybe five 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.

Mohammad Abu-Ghazaleh: 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. 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 are.

Mitchell Pinheiro: What are the sales of Mann?

Monica Vicente: We don’t disclose that, Mitch.

Mitchell Pinheiro: 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?