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spk04: Good day and welcome to Fresh Del Monte Produce third 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 a listen only mode. After the speaker's presentation, there will be a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. For opening remarks and introductions, I would like to turn the call over to Vice President, FP&A, and Investor Relations with Fresh Del Monte Produce, Ana Miranda. Please go ahead, Ms. Miranda.
spk03: Thank you, Debra. Good morning, everyone, and thank you for joining our third quarter 2021 conference call. As Debra mentioned, I'm Ana Miranda, Vice President, Global FP&A, and Investor Relations with Fresh Del Monte Produce. Joining me in today's discussion are Mohamed Abou Ghazali, 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 we issued earlier this morning via Business Wire. 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 freshdelmonte.com under the investor relations tab. 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, will include forward-looking statements with the provisions of the Federal Security State Harbor Laws. 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 today are as of today, November 3rd, and we have no obligation to update any forward-looking statements we may make. With that, I'm pleased to turn the call over to Mohamed.
spk01: Thank you, Anna, and good morning, everyone. During the third quarter of 2021, we continue to be impacted by unprecedented inflationary pressures across our supply chain, including strained transportation capacity, lack of sufficient labor availability, and other cost pressures. These pressures were intensified by our seasonality as the second half of the year is typically more challenging due to the industry-wide excess supply and shifts in demand towards seasonal fruits. We expect these systemic cost pressures to continue. To offset the impact, last week we announced to our customers inflation-justified price increases on bananas, pineapples, and fresh-cut fruits. Despite our efforts to mitigate these increasing costs within our supply chain, they are simply too great to absorb. The unparalleled costs have been persistent and show no signs of normalizing. These pressures are not unique to our business and therefore are working collaboratively to mitigate them. within our supply chain and with our business partners. We are also cognizant of our responsibility towards our consumers who look to us to provide a reliable supply of healthy product options. From our end, we are keenly focused on effectively managing our cost, including sourcing, optimization, and consolidation of our operations and product rationalizations via improved asset utilization, better planning and execution, and cost structure. As we move forward, we remain focused on the growth of our brand by managing our business for the long term. We believe that recent capital investments aimed at automation of our production facilities, improving our margins by growing our fresh and value-added and other products and services segments, and further leveraging of our vertical integration such as the recent addition of six new refrigerated container vessels to our fleet will prove to be advantageous by putting us in a stronger, more agile position as we continue to provide reliable quality service to our customers. I would like to highlight that despite the difficult operating conditions, The first nine months of 2021, our gross profit is up $50 million compared with the prior year period, while corresponding gross margin is up 150 basis points at 8.2%. On the sustainability front, I'm proud to announce that our Chief Sustainability Officer, Hans Sautter, will represent our company at the World Biodiversity Summit in Glasgow. a great platform to address the important role the private sector has in responding to the intertwined challenges of biodiversity loss and climate change. In September, we were selected to join the Nature-Based Solutions, Finance and Regenerative Agriculture Panel at the United Nations Climate Week, And during the quarter, we published our 2020 sustainability report, solidifying our leadership position in defining what sustainable production means for large-scale producers. We set some of our key 2025 environmental protection goals. Therefore, this year, we set even more ambitious goals for 2030, including climate action, water stewardship, soil health management practices, and reducing food waste and plastic usage. At this point, I would like to turn the call to Eduardo, please.
spk02: Thank you, Mohamed, and good morning, everyone. As noted earlier, during the third quarter, systemic increases in input costs and labor shortages impacted our margins and profitability. Let's review our third quarter of 2021 results. Net sales increased $15 million, or 2% to slightly above $1 billion, compared with the prior year period, driven by higher net sales across all of our segments, particularly the other products and service segments, including third-party freight services and poultry and meat. Net sales were also positively impacted by fluctuations in exchange rates, mainly versus the euro, the British pound, and the Korean won. Adjusted gross profit was $49 million compared with $69 million in the prior year period, while corresponding adjusted gross margin decreased to 4.9% from 7% in the prior year period. The decrease was primarily driven by inflationary and cost pressure, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland freight, labor, and fuel costs. The impact of these pressures in the third quarter was intensified by seasonality. Positive fluctuations in exchange rates versus the Euro and Costa Rica Cologne partially offset this decrease. Adjusted operating income was $300,000 compared with $25 million in the prior year period, mostly driven by decreased gross profit. And adjusted net income was approximately $1 million compared with $60 million in the prior year period. Our diluted earnings per share was $0.03 compared with diluted earnings per share of $0.37 in the prior year period. Adjusted diluted earnings per share was relatively in line with our GAAP performance as both periods had minimal non-operational and non-recruiting items. Adjusted EBITDA was $26 million compared with $51 million in the prior year period. and corresponding adjusted EBITDA margin decreased to 2.6% from 5.2% in the prior year period. Let me now turn to segment results beginning with our fresh and value-added product segment. For the third quarter of 2021, net sales in our fresh and value-added product segment increased approximately $1 million compared with the prior year period. The primary drivers were increases in our pineapple and avocado product lines. Pineapple net sales increased in most regions driven by higher sales volume, partially offset by lower per unit sales prices. Avocado net sales increased primarily in North America, driven by higher per unit sales price, partially offset by lower sales volume. As an offset, Sales of vegetables, prepared food products, and non-tropical fruit decreased during the third quarter compared with the prior year period. Vegetable net sales decreased primarily in North America, including our man-packing operations, driven by lower sales volume related to lower demand from the food service channels. Prepared food products decreased in May in Europe as the prior year benefited from heightened customer demand related to the COVID-19 pandemic as more people stocked up on canned foods last year. Lastly, non-tropical fruit net sales decreased primarily in the Middle East. For the quarter, adjusted gross profit in the fresh and value-added product segments was $41 million compared with $56 million in the prior year. The primary drivers of the variance were avocado decrees in North America primarily driven by lower sales volume coupled with higher per unit production and distribution costs. Prepared food products were lower primarily in Europe driven by lower net sales coupled with higher per unit distribution costs. Fresh-cut vegetables in North America, primarily in our man-packing operations, were impacted by higher per-unit product costs and lower production yields. And pineapple decreased in North America due to lower per-unit selling price, coupled with higher per-unit production and distribution costs. Moving to our banana segment, sales increased $3.5 million, or 1%, compared with the prior year period. Ohio adjusted gross profit was approximately $2.5 million compared with $11 million in the prior year period. The consolidated decrease was driven by excess industry supply, which lowered per unit sales prices, coupled with higher per unit distribution and production costs impacted by inflationary and cost pressure. Now moving to select financial data. Selling general and administrative expenses was $48 million compared with $44 million. The increase was primarily due to higher administrative expenses. Net interest expense was slightly lower, mainly due to lower interest rates and lower average debt benefit. Income taxes were a benefit of approximately $7 million during the quarter, compared with an expense of $5 million in the prior year period, permissible to decrease income in certain higher tax jurisdictions. Year-to-date, we generated $152 million in cash flow from operating activities, compared with $174 million in the prior year period. The decrease was primarily attributable to higher levels of inventory, mainly impacted by the increase in cost of goods largely related to current cost pressures as well as receivables. Partially offsetting the decrease were higher net income and higher balances of accounts payable and accrued expenses. Given current conditions, effectively managing our working capital is a top priority for our team. As it relates to capital spending, we invested $83 million in the first nine months of 2021, compared with $93 million in the prior year period. The lion's share of the spend relates to the last two new container vessels added to our fleet, along with the expansion and improvements to our operations in North America, Asia, and Central America. To counteract current labor pressures in our facilities, we are prioritizing projects expected to improve automation. Having said that, because of supply chain bottlenecks, lead times on machinery and equipment have nearly doubled. During the quarter, we received cash proceeds of $1.5 million under our asset sale optimization program, bringing the total to date to $52 million. The program entails selling non-strategic and underutilized assets, including land and facilities. The benefits include free cash flow to drive shareholder value, cost improvements resulting from the consolidation of facilities, and better return on assets. The completion of the program will extend past the first quarter of 2022, and our focus is on value maximization and less so on selling than quickly. Certain conditions, including COVID-19 travel restrictions, are making some of the transactions harder to close. Having said that, we remain confident in the successful completion of the program, which we expect will supplement our already strong cash flow position. Total debt decreased to $477 million at the end of the third quarter from $511 million at the end of the third quarter of prior year. Based on a trading 12-month period, our total debt stands slightly above two times adjusted EBITDA. This improvement reflects our disciplined cash flow management approach, including capital expenditure planning and continuing proceeds from asset sales under our asset sales optimization program. As announced this morning in our financial results press release, our board of directors declared a quarterly cash dividend of 15 cents per share, payable on December 10th, 2021, to shareholders of record on November 17, 2021. This concludes our financial review. We can now turn the call over to Q&A. Deborah?
spk04: If you would like to ask a question or make a comment, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We'll pause for a moment to compile the Q&A roster. And your first question comes from the line of Jonathan Feeney with Consumer Edge.
spk00: Good morning. Thanks very much. I guess my first question would be, like particularly in the pineapple segment, you mentioned pricing was down. I'm curious as to your cost position relative to others. I mean, it's hard to countenance that. prices for any major commodity would be down um with you know huge you know ubiquitous and highly visible costs increasing and i i know there's some micro effects there but any detail you could give us on the pineapple but twinkle particularly and you know what that means for the next couple of quarters i'd really appreciate first off good morning jonathan Good morning.
spk01: No, as far as the pineapple, the major impact that we had during the last, I would say, three months has been the improved supply, let's say, from our farms. A higher, let's say, production per hectare, number one. And number two, we have a lot of sizes that are not kind of demanded by retailers in the market. And that's something that we need to rectify going forward, to be honest with you. And I've been discussing this with our sales team, that we will not be able to sell anymore the way that we have been selling. And so we're going to make some changes to our selling strategy regarding the pineapple. But as you see going forward, we have raised our prices on pineapples as well. And I can assure you that we are not going to sell any pineapples in the future unless they maintain a decent and good retail margin. And Eduardo, maybe he'd like to add something.
spk02: Yeah. So just to add a little bit color there as well, Jonathan. So I think similar to what we saw in bananas in terms of excess supply. So we track imports in North America closely. And compared to last year, we saw a significant increase year over year on imports of pineapple across all the ports. And I think everybody was expecting that demand would increase in the second half of the year. But because of the COVID situation, as well as food service restrictions, that higher demand didn't happen. So it created more pressure in terms of more supply in the marketplace versus the demand driving prices down in the third quarter. We have seen most in the recent two weeks a reduction in that trend year over year, and we believe that is going to help bring prices to a more normal situation.
spk00: Got you. Now, you mentioned supply from your farms in pineapples. How about, you know, competitor supply in similar sized or even different sized or slightly different products? Are there other competitive factors that are depressing prices there?
spk02: Yes, for sure. That's what I was mentioning. When we looked at imports, we noticed that the four major competitors, they increased significantly, you know, imports as compared to previous years.
spk01: Yes. Jonathan, when one farm produces, it's a general trend usually in the industry. If we have more bananas, it's because it's a general trend. If we have more pineapples, it's because it's a general trend. It's not because somebody is producing more than the other. It's usually because of weather conditions, because of certain elements that really can make one year more than the other year. You know, you usually have more production in certain times, and this can be not the same going forward. So it's nature that is taking its effects, but even in our condition, you know, we were lucky that we have our concentrate plant and our IQF, operation in Costa Rica, which has absorbed a good amount of fruit that if we didn't have these facilities, we would have to send to the market as well. So imagine that we had diverted a lot of this fruit into our industrial operations and really made much more money than we would have been selling it as fresh in the market. So we do have flexibility ourselves, but sometimes you cannot control nature. And going forward, I believe we have different plans as far as pineapple is concerned.
spk00: Got you. Okay. Now, one other thing. The timing of the strategic asset sales, it seems to me that at all times, Maybe I should rephrase that. What specifically drove the timing of wanting to make strategic asset sales now? There's a lot of – I mean, that always would seem to me to be a return on investment calculation. You announced a kind of program and several things in the pipeline. Why now?
spk01: You know, what Eduardo mentioned about asset sales, I'm talking about assets that have been with us for almost 30, 40 years, Jonathan. It's not assets that we bought five years ago and we want to sell back here. And I'm talking about assets mainly in Chile, in Uruguay, in certain areas, not in North America, not in Europe, in areas where we have land and we have facilities that underutilized at this time. And why? Because we have better efficiencies, because now we are consolidating operations in a better way. So really, the asset sale is because we don't utilize these as they should be utilized. Go ahead.
spk02: Yeah, and Jonathan, as you may remember, a year ago in the third quarter of last year, we launched these 100 million dollars asset sales optimization program that we have been updating that on a quarterly basis. And the key thing, as Mr. Gozali mentioned, is several of those assets are in South America. And because of the political instability in Chile mainly, this has, you know, made some of our expectations to be deferred into next year.
spk00: Got you. Okay, makes sense. Thank you for the time. Thank you.
spk04: We have no other questions in queue at this time, but I would like to give the audience ample time to ask a question, and you may do so by pressing star 1. We'll pause for just a moment to see if anyone else comes into queue. We have no questions in queue. I would like to turn the conference back over to management for closing remarks.
spk01: Well, I would like to thank everyone for attending this call today, and I wish you a good day. I hope to speak to you in the near future. Thank you very much. Have a good day.
spk04: This does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
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