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spk01: Good day everyone and welcome to Fresh Del Monte Produce's first quarter 2022 earnings conference call. Today's conference call is being broadcast live over the internet and is also being recorded for playback purposes. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. For opening remarks and introductions, I would like to turn today's call over to Vice President, Global FP&A and Investor Relations with Fresh Del Monte Provost, Anna Miranda. Please go ahead, Ms. Miranda.
spk00: Thank you, Cheryl. Good morning, everyone. And thank you for joining our first quarter 2022 conference call. As Cheryl mentioned, I am Ana Miranda, Vice President, Global FP&A and Investor Relations with Freshland Monaco. Joining me in today's discussion are Muhammad Abu-Ghazali, Chairman and Chief Executive Officer, and Monica Vicente, Senior Vice President and Chief Financial Officer. I hope you've had a chance to review the press release that was issued earlier this morning via Business Wire. You may also visit the newly updated company's IR website at InvestorRelations.FreshZoneMonkey.com to access today's earnings materials and 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 the 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 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 Law's safe harbor. In today's press release and in our SBC filings, we detail material risks that may cause our future results to differ from these forward-looking statements. Our statements are as of today, May 4th, and we have no obligation to update any forward-looking statements. During the call, we will provide a business update along with an overview of our first quarter 2022 financial results, followed by a question and answer session. With that, I am pleased to turn today's call over to Mohamed.
spk04: Thank you, Anna, and good morning, everyone. During the first quarter, our net sales increased by $49 million compared with the previous period, a direct benefit of leading the industry and the implementation of inflation-justified pricing actions. However, Our cost of products sold increased by $64 million due to across-the-board inflationary pressures, resulting in lower operating income. We have two very distinct narratives in our performance. First, we delivered healthy net sales. As a matter of fact, our first quarter net sales are near the same level realized in the first quarter of 2019 before COVID. Second, the increase in cost is truly unprecedented, negatively impacting flow through. Despite this narrative, our strong adjusted EBITDA margin of 5.5% is a testament to our nimble and agile management style. We remain focused on driving incremental operating leverage through product innovation, cost management, and operation efficiencies as reflected in the significant growth in our third-party trade services. We made progress on our strategic initiatives, effectively managing the business for the long term despite incremental deterioration of already unprecedented supply chain constraints, and higher inflation compounded by the war in Ukraine. In keeping with our shareholder value accretion approach, our capital deployment in the first quarter concentrated on operational investments in data-driven technology and smart farming, strategic investment, and on paying a higher dividend. Last quarter, I updated you on the two exciting strategic investments with Pure Elizabeth and Good Culture. Our investment in Good Culture closed in the first quarter, while our investment in Pure Elizabeth closed at the end of last year. We are in the initial phases with Pure Elizabeth on the development of unique and innovative products and look forward to incremental performance as the collaboration continues to evolve. Additionally, the team is hard at work with our new product pipeline. So far this year, we launched our mini Honey Glow Pineapple, differentiated by its remarkable sweetness and small size, and Meslet Hummus in North America. Later this year, map packing is expected to execute new brand building packaging, and soon we plan to supplement our avocado category with an exciting new offering. Last month, we were recognized by Newsweek as one of America's most trusted companies of 2022. After being allies of customer trust, investor trust, and employee trust, We are honored to be among the companies recognized for this award and remain committed to maintaining the honesty and transparency Fresh Dalmatia is known for. Since our last sustainability update, we received high-level scores in the water security and climate change and forest categories by CDP, winning a 2021 SEAL Business Sustainability Award for our approach to farming while preserving biodiversity. Currently, two of our largest farming operations are certified carbon neutral, and we are actively working on amplifying those efforts elsewhere. Our sustainability efforts are the core of what we do as we work to build a food system where agricultural production and biodiversity thrive together. The war in Ukraine has created secondary effects, adding to the already unprecedented macroeconomic challenges, including incremental pressures on the cost of fertilizers, fuel, and shipping disruptions. Additionally, fluctuations in exchange rates are expected to go against us in key selling markets, given analysts forecast for a stronger U.S. dollar. We proactively hedged against movements in the Euro and the Japanese Yen to minimize the impact. Lastly, we do not yet see an environment of cross-normalization in the near future. Having said that, I'm confident in our team's ability to drive growth as they focus on a multifaceted approach grounded on driving organic and new product expansion. implementation of pricing actions to minimize margin erosion and operational efficiencies. We believe that our vertical integration is a key differentiator and that brings even through today. Because of it, we are relatively shielded from elevated shipping rates in certain key markets. Our vast network has allowed us to optimize our sourcing and distribution. Additionally, Our fleet of vessels has enabled us to expand our commercial cargo services in North America, benefiting from elevated demand given current ocean freight conditions. Now I will turn the call to Monica to talk about the first quarter financial results. It is Monica's first time presenting to our earning call. She has been an integral part of our finance organization for 25 years. I'm excited to have her in her new role as CFO. While I am certain she will continue to add significant contributions to our financial discipline as we continue to evolve our company.
spk02: Monica. Thank you, Mohamed. It is great to partner with you in my new role. Good morning, everyone. Let's turn to our first quarter of 2022 financial results. As noted by Mohamed, net sales for the first quarter of 2022 increased by $49 million, or approximately 5%, compared with the prior year period. Net sales primarily benefited from inflation-justified pricing actions on key product categories, including bananas, pineapples, and fresh cuts. Conversely, sales were negatively impacted by fluctuations in exchange rates, mainly versus the euro and the Japanese yen, compared with the prior year period. Importantly, lack of availability of third-party shipping capacity on certain shipping routes substantially limited the sales of various products. Adjusted gross profit for the first quarter of 2022 was $90 million compared with $107 million in the prior year period. Despite higher sales, gross profit was negatively impacted by worsening inflationary and other cost pressures compared with the prior year period. Specifically, higher cost of key inputs, including packaging material, fertilizer, ocean and inland freight, fuel, and labor impacted our performance. Additionally, fluctuations in exchange rates were also unfavorable. Adjusted operating income was $40 million compared to $58 million in the prior year period. The decrease in operating income was primarily due to lower gross profits and the net impact of disposal of property planning equipment partially offset by lower administrative expenses. Adjusted SDP net income was $26 million compared with $42 million in the prior year period. Our adjusted diluted earnings per share was $0.55 compared with adjusted diluted earnings per share of $0.88 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 or non-recurring items. Adjusted EBITDA for the first quarter was $63 million compared with $82 million in the prior year period. And corresponding adjusted EBITDA margin was 5.5% compared with 7.6% in the prior year period. Let me now turn to the segment results. Beginning with our fresh and value-added products, net sales for the first quarter of 2022 increased 42 million, or approximately 7%, compared with the prior year period, as a result of increased net sales across most product categories, mainly related to higher pricing. Fresh and value-added product segment gross profit for the first quarter of 2022 was $44 million compared with $52 million in the prior year period. Despite higher sales, gross profit in the segment continued to be impacted by inflationary and other cost pressures, which resulted in higher per unit product and distribution costs. As noted earlier, the increase in cost of products sold was across the board impacted by substantial surges of key input materials as well as third-party shipping rates. For example, as you know, crude oil prices have increased over 60% compared to the same period last year. Container board was up approximately 50%, while the cost of certain key fertilizers more than doubled compared to the prior year period. Additionally, lower gross profit on melons, a seasonal product, impacted segment performance. Lastly, the fresh and value-added product segment had 3 million of one-time charges in the first quarter of 2021 related to damage caused by severe rainstorms in Chile, which impacted our non-tropical fruit category. There were no one-time charges in the first quarter of 2022. Moving to our banana segment, net sales for the first quarter of 2022 decreased by 12 million compared to the prior year period as a result of lower sales volume in North America, partially offset by higher pricing. Banana segment gross profit for the first quarter of 2022 was $38 million compared with $50 million in the prior year period. Similar to the fresh and value-added product segment, higher input costs impacted gross profits. One-time charges in the banana segment in the prior year period included 1.5 million net insurance recovery related to damage caused by hurricanes in Central America in the fourth quarter of 2020. There were no one-time charges in the first quarter of 2022. Lastly, net sales in our other products and services segment increased by 19 million, or 49%, mainly due to higher net sales third-party freight services in North America. Our fleet of vessels has enabled the expansion of our commercial cargo services, which are benefiting from elevated shipping rates and demand due to the current supply chain environment. Gross profit increased by $5 million as a result of the higher net sales. Now moving to the selected financial data. Selling general and administrative expenses were $45 million compared to $49 million in the prior year period. The decrease was primarily due to lower administrative expenses. Net interest expense was relatively in line in both periods at $5 million. Income tax expense was $6 million for the first quarter of 2022 compared with $11 million in the prior year period. primarily due to decreased income in certain higher tax jurisdictions. Year to date, we used net cash from operating activities of 0.3 million compared with net cash provided by operating activities of 47 million in the prior year period. The decrease was primarily attributable to lower net income, higher levels of accounts receivable, mainly due to higher net sales and timing of collections, and higher levels of finished goods inventory, in part driven by the inflationary cost pressures already mentioned. We continue to make progress on our optimization program announced in the second half of 2020. As a reminder, the program involves selling non-strategic and underutilized assets, including land and facilities. Since the program was announced, we have generated $59 million in cash out of which $2 million was realized in the first quarter of 2022. We expect progress towards achieving our target of $100 million in cash proceeds to continue in 2022. As it relates to capital spending, we invested $11 million in the first quarter of 2022, compared with $34 million in the prior year period. CAPEX spend consisted of improvements to our production facilities in North America, including investments in automation and technology, along with improvements to our pineapple and banana operations. As a reminder, CapEx in 2021 included delivery of two fuel-efficient, state-of-the-art refrigerated container vessels, one of which was received in the first quarter of 2021. Our 2022 CapEx will return to more normal levels and is expected to be under $100 million. Having said that, similar to what many businesses are grappling with, lead times on machinery and equipment have nearly doubled, which may impact our rate of spend. Long-term debt increased to $554 million at the end of the first quarter of 2022 from $534 million in the previous prior year period. 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 June 10, 2022, to shareholders of record on May 18, compared with 10 cents per share in the prior year period. This concludes our financial review. We can now turn the call over to Q&A. Cheryl?
spk01: Thank you. To ask a question, please press star one. Your first question is from Mitch, the hero of Sturvidant and Company. Please go ahead. Your line is open.
spk03: Yeah. Hi. Good morning. Good morning. So I guess, you know, the first question I have is you talk about, you know, you've taken pricing, but like how much You know, how much do you actually, you know, control pricing? I mean, it's a lot of it's market driven, correct? You know, supply and demand of various fruits and assorted, you know, product. Is this pricing, you know, sort of fuel surcharge kind of pricing or is this like permanent pricing?
spk04: No fuel charge, for instance, we have two types of, let's say, enforceable clauses in our context. One actually is the ocean freight or ocean fuel, let's say. And this usually is done every quarter. We fix or we kind of work out what is the current of the average current, let's say, fuel cost or per barrel the oil. Oil today is 106, for instance, at the end of the quarter or beginning of the second quarter. So we worked a new rate which would reflect the true cost of the fuel, and we charge that to our customers on a three-month rolling period. And by the end of Second quarter, at the end of, let's say, the beginning of the third quarter, we will have to go back and look at the price of oil in the market, whether it has gone down or up, and we will adjust our ocean freight. So, taking an example, by the beginning of this month of April, actually, we have reviewed and revised our ocean freight. So we have been, for argument's sake, we have been kind of impacted negatively in the first quarter because the price of oil have increased tremendously while our rate was locked at a lower, let's say, ocean freight. And at the beginning of the year, it has been adjusted to reflect the current, let's say, more or less fuel costs. As far as inland freight, As far as inland trade, which relates also to the fuel cost, we have been talking to our customers and we have taken action to adjust the inland trade as well in this regard with the same kind of formula.
spk03: Well, I guess my question, you know, like, so in your banana business, you know, your gross margin, you know, is kind of normal for, you know, the big range that you can have But your banana margins were decent, and your other margins are increasing because you're getting nice, I guess, nice margins on your commercial freight revenue. But on the fresh and value-added is where it continues to kind of struggle. Is that where most of the inflationary pressures are in the fresh and value-added segment, more on a percentage basis perhaps?
spk02: So hi, this is Monica. And so in that segment, we actually had a couple of other things going on. We did have lower margins on our melons. We had overproduction, and we did have lower margins on that. And then our deciduous products suffered from the lack of shipping, and we were unable to ship some of our product out of Chile. And that impacted our fresh and value added. We do have higher pricing in pineapples.
spk03: and fresh cut fruit so that definitely helped that that segment so as you look as you look um in that same segment um in for the rest of the year um with with maybe the melon issue going away um would we expect i mean i remember you know freshen value added was you know probably a business segment that maybe could get to double digit margins at one point or close to it. I mean, are you still tracking towards that? And should we see improvement in those margins in the, in the, in the, in the, in the last three quarters here?
spk04: Absolutely. That's what we're working for. And all the loopholes or all the kind of, uh, past kind of mistakes are being taken care of and hopefully we will be in the double digit range for the value added products.
spk03: Okay. A couple other things. Just specifically to bananas, what's the outlook for supply and demand for the next couple months, as far as you can see? And how has the Ukraine-Russia situation hurt either pricing, or how has it affected European pricing? You can talk about that. I'd appreciate it.
spk04: Yeah, actually, the situation this year was very particular, in a different way that Ecuador was hit very, very, very severely in terms of supplies, because Ecuador's main markets were Russia and Ukraine and the eastern markets. So with the deterioration in the Russian, and of course almost the closure of the Ukrainian markets, so much volume were cut off from these markets, and there was abundance of fruit in Ecuador. So prices, for argument's sake, prices, you know, in Ecuador at this time of the year, you know, between March, April, February, would be around, let's say, the fruit, I'm talking about fruit, would be around $8, $9 to $10 per box. While for the last six, seven weeks has been around $2 to $2.50 per box. So you can see the impact as far as the exports from there. European market in particular has been steady in maintaining strong pricing since the beginning of the year. So we are very kind of optimistic about the European market. As a matter of fact, I think the war in Ukraine and Russia has been a positive factor for the European market in terms of... Also, the shipping scarcity. I mean, when I say shipping, I mean equipment, containers, and ships available to move food to Europe was disrupted and did not have enough, let's say, space and capacity to have food shipped to Europe. So this has helped as well in terms of volumes going to Europe. Going forward, I believe that you know, this situation is not sustainable in terms of availability. In Ecuador, small growers and mid-sized growers will suffer tremendously, not only because the pricing has eroded substantially, but also the fertilizers cost have gone more than 300%, aside from the fuel as well, aside from other inputs, you know, the paper, the cartons, the There is not a single component that has not gone up, you know, by 50 to 100, 300 percent. And ultimately, we will see, you know, substantial, in my opinion, you know, I might be wrong, but I believe that we will see some really structural changes in the Ecuadorian supply chain in terms of bananas. So we'll just have to wait and see. We are, you know, playing very safely as far as we are concerned. And, you know, we would like to be on the safe side. And we see going forward, I believe there will be a positive impact to the industry in general.
spk03: I will thank you. I'll get back in the queue. Thank you.
spk01: Next question is from Jonathan Feeney of Consumer Edge. Please go ahead. Your line is open.
spk03: Thank you so much. And thank you so much, Mitch, for thinking of me. How are you, Mohamed? I've got a couple of questions. First, could you quantify in any way, shape, or form the revenue or profit impact from sales lost due to these supply shortages that were referenced in the prepared remarks? That would be my first question.
spk04: We can give you this information, if you don't mind, after the call.
spk02: We haven't quantified that, Jonathan. We just know that there was definitely a lot of volume that we had the opportunity to ship, not just from our tropical products in Chile, but also out of Ecuador, that because of the space constraints, we were not able to do it. We can give you, you know,
spk04: kind of a rough figure that we have. We believe that we lost about 1,000 containers of sales during the first few months of this year, especially in the first quarter. That by not having enough equipment and shipping space as well as containers. and mainly to the European, Asian, and Middle Eastern markets.
spk03: So, yes, we lost... How many containers is the base? What's the total container usage in a quarter? It's fascinating in its own right. Is this 1,000 out of 100,000, 1,000 out of a million? I can give you this information later on...
spk04: Jonathan, but what I'm telling you, what we miss is about 1,000 containers.
spk02: Yeah, we usually, Jonathan, we don't provide that level of detail on a regular basis.
spk03: Okay. Just wanted to try to scope that. We'll follow up after the call. Thank you. And second, I wanted to follow up on this Ecuador 250 box situation, because I hadn't heard that before, and that sounds... You know, if there's a lot of inexpensive fruit out there marginally because there's been a demand shock and. logistics are constrained, so that's having a hard time getting to market. Does that mean there's a big overhang for the second quarter and that right now there's a lot of people looking to get rid of a lot of fruit on different markets, and as soon as they can get it to North America or anyplace else, they're going to get it there? How should I think about that? Historically, those are distressing numbers, aren't they?
spk04: Yeah, but listen, North America in particular, you know that most of the fruit, most of it is contracted. The majority of everything that we import and our other suppliers, I mean, competitors import is all almost done on a contractual basis. So we do not usually go and speculate in the market. So the volume from Ecuador And as I can see right now, I don't see that there will be extra volume coming in North America in the next few months, or actually in normal times. Where the markets usually are on spot and speculative markets, it's usually Europe, Middle East in particular, West Mediterranean, East Mediterranean. That's where you will see the speculation and the overflow. However, as I mentioned earlier, that Because of the shipping constraints, because of lack of containers, not enough ships and vessels going to these destinations, that has been also a factor of not having enough or more volume going to these markets. And that, as a matter of fact, stabilized these markets in a very positive way during the last... So I expect that this will continue, as well as the war in Ukraine today is going to be also another factor of big disruptions into the supply chain. So in summary, I don't believe that the situation is going to change so much from what we see right now.
spk03: Yeah, that makes a lot of sense. And I wasn't thinking from the perspective that you would be active speculating with trading fruit in the markets of North America. I'm just more thinking that fruit, there are others who source directly opportunistically that can then, you know, that weighs on contract pricing as just those, that puts pressure on retail prices. But who knows, in this environment, maybe that's not even something retailers think about because the price of everything is going up. Thank you. So I wanted to also follow up, Mohammed, on your comment. It was an interesting choice of what to put in the script there that your revenue exceeded that of Q1 2019 or was right about in line, I think is what you said. If I just think about food service. which yeah like can you give me a sense are you saying we're all is that is that like retail has grown and food service is still well off its highs or is your food service and institutional business at what was formerly known as you know comfortable capacity levels in the first quarter of 19 or 18 for that matter how does that split been working now i think food service still lagging behind i think that food service has not caught up with the
spk04: pre-COVID, let's say, pre-COVID period. We'll have to wait and see how this will develop if the pandemic, you know, doesn't erupt again. But it's a matter of, as well as we have to take into consideration China, you know, and pricing. So there are many factors playing, but I don't see that food service has caught up with with the kind of demand that we were regular or normal in pre-profit times.
spk03: And last one, I always ask you about this, and I know it takes a while, but so these JVs, these products, value-added products broadly, anything that you own license to or do so through partnerships, I mean, how is the progress going with that right now? Is there any prospect to see a different mix, a more branded mix of product, a higher margin mix of product, things like beverages, cafes you've talked about, at any point in the next 12 to 18 months? I mean, COVID put the brakes on a lot of that stuff. I just wonder, now that everybody's kind of digging out and thinking more long-term, can we be more ambitious about that or, or, you know, to any perspective, haven't I?
spk04: Well, that is exactly what we are actually kind of initially staging, but we are in the initial stages, Jonathan, but this is definitely our kind of objective is to go and add value to our products, optimize our assets and, and, leverage everything that we have in terms of transportation, in terms of asset utilization, as well as working with partners of leveraging our brand and our ability to distribute. Our distribution network has been an extremely important part of why we were able to survive in this environment in the last, actually, I would say a year or a year and a half, because without these distribution centers and threshold operations across the United States, across North America, we would have been in a much more difficult position as we speak today. And this is, in my opinion, was a very, very important factor in growing our business and having more sales and being able to reach more customers. This also has really shown to many other operators or producers and companies that would like to utilize and leverage on our network and distribution capabilities, which we are really now capitalizing on. And without elaboration on that, we have many things going on right now, which looks very positive for the near and the long-term future.
spk03: Very helpful as always.
spk04: Thank you. My pleasure.
spk01: There are no further questions at this time. I will now turn the call over to Mohamed Abou Ghazaleh for closing remarks.
spk04: Thank you very much. I appreciate having your attendance to the call today and I hope we can come back with better news in the next quarter and the rest of the year. Have a good day. Thank you.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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