Fresh Del Monte Produce, Inc.

Good day and welcome to Fresh Del Monte Produce second quarter 2021 earnings conference call. Today's conference is being broadcast live over the internet and it's also being recorded for playback purposes. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you're requiring further assistance, please press the star zero. For opening remarks and introductions, I would like to turn the call over to the Vice President, Best Relations with Fresh Del Monte Produce, Christine Cannella. Please go ahead, Ms. Cannella.

Thank you, Brian. Good morning, everyone, and thank you for joining our second quarter 2021 conference call. As Brian mentioned, I'm Christine Cannella, Vice President, Investor Relations with Cresto Money Produce. Joining me in today's discussion are Mohamed Boubazali, Chairman and Chief Executive Officer, and Eduardo Becerra, Senior Vice President and Chief Financial Officer. I hope that you had a chance to review the press release that was issued earlier this morning by a business lawyer. You may also visit the company's website at freshdelmonte.com for a copy of today's release as well as to register for future distributions. This conference call is being webcast live on our website and will be available for replay after this call. Please note that our press release and our call today include non-GAAP measures. Reconciliations of these non-GAAP financial measures are set forth in the press release we issued today and on the company's website at freshsalmonte.com under the Investor Relations tab. 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 Security State Harbor Law. 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, August the 4th, and we have no obligation to update any forward-looking statement we may make. With that, I am pleased to turn today's call over to Mohamed.

Thank you, Christine. Good morning, everyone. During the second quarter of 2021, we delivered strong financial results with growth throughout several key areas of our business, which will be highlighted by Eduardo. However, as it was reported this morning, our gross profit for the quarter increased 40% from last year and gross margin increased from 7.2% in the prior year period to 9.6% in the second quarter of 2021. Gross margin is an important component of our strategic transformation to a value-added global food company. And this is reflected in our strong year-over-year operating income and net income. Like many other companies, we are facing unprecedented disruptions in global supply chains and shortages of labor resulting in significant cost increases. During the second quarter, we experienced inflation in labor, fuel, inland trade, packaging, production, and procurement costs. We anticipate these inflationary pressures will remain for the near term and have taken proactive measures to counter the impacts on our results, including a comprehensive review of our pricing strategy and sourcing plans for the remainder of the year. We made additional progress with our global operational initiatives as well during the quarter. For example, in Europe, we restructured our fresh operations in France that led to increased efficiencies and cost savings. We entered into a licensing agreement with a UK retailer to brand frozen fruit and chilled juices, which offers a new revenue opportunity for us in europe that can be expanded to other markets in the middle east and africa as you may have seen in our press release this morning as a result of our strong cash position our board of directors approved an increase in our quarterly cash dividend to 15 cents per share as you know the second half of the year is historically a tougher market for our industry and this year in particular as we do not see inflationary and cost pressures ending in the near future. Before I turn the call over to Eduardo, I am pleased to share that we will soon publish Fresh Delamonte's annual corporate responsibility and sustainability report, detailing our guiding principles and continued progress since our last sustainability update. We look forward to sharing the report with you. At this point, I will turn the call to Eduardo to talk about the second quarter financial results. Eduardo.

Thank you, Mohamed, and good morning, everyone. We delivered strong results in the second quarter of 2021 compared to the prior year period, despite inflationary and cost pressures and other unfavorable economic conditions, including labor shortages. Now let's review our second quarter of 2021 results. Net sales increased $49 million, or 5%, to $1,142,000,000 compared with the prior year period, primarily driven by our fresh and value-added business segment with favorable exchange rates benefiting net sales by $17 million. Adjusted gross profit increased $23 million, or 25%, to $112 million, and our adjusted gross profit margin increased 160 basis points from 8.2% in the prior year period to 9.8% in the second quarter of 2021. The increase was driven by higher gross profit in all of our business segments. Adjusted operating income increased $17 million, or 39%, to $61 million compared to the prior year period, mostly driven by increased gross profit. And adjusted net income increases $21 million, or 82%, to $47 million compared with the prior year period. We achieved diluted earnings per share of $0.99, comparing diluted earnings per share of $0.38 in the prior year period. Excluding non-operational and non-recruiting items, we delivered adjusted diluted earnings per share of 98 cents compared with adjusted diluted earnings per share of 54 cents in the prior year period. Adjusted EBITDA increased 32 percent and adjusted EBITDA margin increased 150 basis points from 5.8 percent in the prior year period to 7.3 percent in the second quarter of 2021. Let me now turn to segment results, beginning with our fresh and value-added product segment. Net sales in our fresh and value-added product segment increased $38 million, or 6%, compared with the prior period. The primary drives of the variants were increased demand in our pineapple, fresh-cut fruit, and fresh-cut vegetable product lines, as several countries began to lift COVID-19 restrictions. As an offset, we were impacted by the severe rainstorms in Chile in the first quarter of 2021 that resulted in lower volumes in our non-tropical fruit crops and lower sales volume and per unit sales prices for avocados as a result of excess supply in North America. For the quarter, adjusted gross profit in our fresh and value-added product segment increased 28% to $59 million. The primary drivers of the variance were in pineapple, increased sales volumes and higher prices in all of our region, along with the lower per unit ocean freight cost compared to the prior year period due to our new fleet and container ships. In fresh cut fruit and prepared products, gross profit margins achieved low and high teens respectively, Fresh-cut vegetables in our man-packing business were impacted by higher per-unit product and distribution costs, partially upset by higher per-unit sales prices, and avocado gross profit decreased as a result of lower sales volume and prices due to increased supply in the markets. Net sales in our banana segment decreased $3 billion to $427 million, while adjusted gross profit increased 16% or $7 million during the quarter. The primary drivers of the variance were lower net sales in the Middle East and to a lesser extent North America, partially offset by higher net sales in Europe and Asia. Higher per unit sales prices and lower per unit ocean freight costs in North America and Europe drove the increase in gross profit. These improvements were partially offset by higher fuel, labor, inland freight, packaging, production, and procurement costs. Now moving to selected financial data. Some in general administrative expenses increased $6 million to $51 million, compared with $46 million in the prior year period. The increase was primarily due to higher administrative expenses. The foreign currency impact at the gross profit level for the second quarter was favorable by $11 million, compared with an unfavorable effect of $1 million in the prior year period. Interest expense net for the second quarter at $5 million, compared with $6 million in the prior year period, mainly due to lower interest rates and lower average debt balances. The provision for income tax was $5 million during the quarter compared with $4 million in the prior year period, primarily due to increased earnings in certain jurisdictions. During the quarter, we generated $140 million in cash flow from operating activities compared to $111 million in the prior year period. The increase was primarily attributable to higher net income and lower cash outflows associated with accounts payable and accrue the expenses. As it relates to capital spending, we invested $70 million in capital expenditures in the first six months of 2021, compared with $36 million in the prior year period. Our investments were mainly related to the final two new container vessels we received during the first six months of 2021, along with the expansion and improvements to our facilities in North America and Asia. As of the end of the quarter, we have received cash proceeds of $51 million in connection with asset sales under the asset optimization program of which approximately $40 million was received in 2020. The cash proceeds during the second quarter of 2021 primarily related to the sale of surplus land in the Middle East and the vessel. Total debt decreased from $542 million at the end of 2020 to $474 million at the end of the second quarter of 2021. Based on a trailing 12-month period, our total debt stands below two times adjusted EBITDA. As announced this morning in our financial results press release, our board of directors declared a quarterly cash dividend of $0.15 per share payable on September 10, 2021 to shareholders on record on August 18, 2021. This is an increase of $0.05 per share from the dividend we paid to shareholders in June 2021. This concludes our financial review. We can now turn the call over for Q&A, right?

As a reminder, ladies and gentlemen, if you wish to ask a question, you may do so by pressing star followed by the number one on your telephone keypad. Again, that is star one to ask a question. Okay, and we now have our first question coming from the line of Jonathan Feeney with Consumer Edge.

Hello. Thank you very much. Obviously, terrific results. Nice and otherwise mixed earnings season. I guess a couple of questions. So, it seems like we're in a sweet spot here where supply shortages, at least, you know, for bananas anyway, have eased and yet there's still a reasonable amount of pricing power and blame around, like, Can you give us any outlook on supply for the second half? Because usually the cash flow and profit dynamics of that business are radically different, lower in the second half than first half. And I wonder, as we model, if that's still going to be the case this year, given the extraordinarily good dynamics that seem to be out there today. That'd be my first question. And secondly, do you think, you know, you mentioned, Mohamed, you mentioned you prepared remarks, this unprecedented supply chain pressures, everybody feeling that and will that, flow through to pricing in all tropical fruit, in your opinion? Or is that, you know, this is a very different kind of industry, right? It's an agricultural industry that moves a lot more with cycles of agricultural success and volume and quality fruit than it does with global inflation. So any perspective you have on your pricing power in light of those cost pressures, I'd appreciate it.

Thank you, Jonathan, and good morning. As far as the banana is concerned, you know, actually the first half of the year we were impacted mainly by the hurricane that impacted our production in Guatemala and in a lesser extent in Costa Rica, as well as the competition. And this has created the situation where we had to go and buy maybe extra food from Ecuador, where we had to enforce our force majeure price increase during the first half of the year. And that actually is the situation. It wasn't a big supply shortage. We had some tightness in the market in the first few months. And the main issue was the damages, huge damages that happened to the farms and to the infrastructure. So supply of banana is constant and it's available in the market. There is no shortage in that site. And as we speak, we know that there is a pressure on the pricing and the banana in the market because of the supply and because of the leverage of the retailers over the industry players. And it's unfortunate that we cannot find a mutual kind of way to keep us as producers, marketers, to survive. uh in this kind of environment uh now talking about other fruits and other tropical fruits uh the price you know the cost pressures it goes throughout the industry not only just for bananas but across the industry for anything that we talk about you know packaging shipping materials fertilizers everything that you are talking we use into our inputs in our kind of packaging and production, you know, in the field that has been impacted. However, we have taken several steps by increasing, you know, on the fresh cut price, on fresh cut supply. We implemented price increases in the last couple of months to offset some of this cost increases, which has helped us somehow. And as we go forward, we are looking at different ways to reduce the impact of the cost itself, as well as hoping to be able to reach with our customers ways to mitigate these cost increases by increasing our prices as well.

So it sounds like it affects everyone in the industry, and you're confident that, you know, since it affects everybody, that pricing will get through, generally speaking?

Well, we hope so. You know, we are doing our best. You and me both. You know, I mean, it's a joint effort. It's a mutual – I think it's a mutual benefit for everybody when everybody survives.

Well, let me ask you one follow-up, please, Mohamed, and then I'll pass it on, please. You know, the retail environment has changed quite a bit. You're seeing, you know, you mentioned, I mean, I've been around a long time. I know it's had its ups and downs as far as how you go to market. Certain places, it's more spot-based, and retailers are immediately amenable to price increases because they just don't have any of the choices. Other places, you know, you have these contracts that sometimes work in your favor, but a lot of times they don't. Has COVID, the new volume, the sudden success a lot of these retailers have had, and their urgency, I've heard from a lot of more consumer staples, less fresh product, more consumer staples players, that grocers have been much, much more friendly as far as carrying inventory, guaranteeing inventory. They're scared to be out of inventory because they left millions, probably billions on the table without a stock. when people rushed into these grocery stores, and they really, maybe after years of reducing working capital, are maybe going back the other way. Has it become a more friendly retail environment anyway, or is it unchanged?

Well, unfortunately, I have to say that it has been unchanged, even though that we have been up to the maximum by supplying our retailers with their consistent supplies every single day of the year. You know, during last year, during April, May, June last year, we had to dump fruit in the region of $30 to $40 million. That was not because of the kind of slow... pace at the supermarket. In the first couple of months, in the first month or two, there was a huge rush to the supermarkets and buying stuff to stock. And then all of a sudden, there was a sudden drop in demand and sales. And we were stuck with a huge volume of products, mainly bananas and pineapples, melons, and they had Though we have contractual relationships, you know, but the retail will tell you we cannot sell it because we don't have the buyer. So we had to dump about $50 to $40 million in these products last year that we had to absorb ourselves. That was in 2020. So, you know, this is the kind of things that we are doing, as a matter of fact, as a company as well. And I mentioned this in my script. is that we are moving towards more food items into our markets where we own the brand of Del Monte in Europe, in the Middle East, in Africa, which we have quite a success, actually, during the last seven, eight months. And we are going to leverage on that and really bring back our brand onto the food side of the business. And I believe that this is a very big, bright spot for us going forward. Yeah, for sure. Which will really stabilize the business in a better way.

Yeah, for what it's worth, I completely agree. It's been a long time, but you've made a lot of progress too. So congrats on that and thanks for the time and a nice quarter again. Thank you very much.

Okay. Again, ladies and gentlemen, if you wish to ask a question, you may do so by pressing star, then the number one on your telephone keypad. Again, that is star one to ask a question. I see that there are no more further questions. I'll turn the call over to Muhammad Abu-Bazawi.

I would like to thank everyone for attending this call and wish you a good day and hope to speak to you soon. Thank you very much, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.