Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Fresh Del Monte Produce (NYSE:FDP)
Q3 2021 Earnings Call
Nov 03, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

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 is also being recorded for playback purposes. [Operator instructions] 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.

Ana Miranda -- Vice President, Financial Planning and Analysis, Investor Relations

Thank you, Deborah. Good morning, everyone and thank you for joining our third quarter 2021 conference call. As Deborah 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 Mohammad Abu-Ghazaleh, chief executive officer; and Eduardo Bezerra, 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 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 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 you today, including the answers we give in response to your questions, will include forward-looking statements with the provisions of the federal securities safe 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 -- as of today, November 3 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 Mohammad.

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Thank you, Ana and good morning, everyone. During the third quarter of 2021, we continue to be impacted by unprecedented inflationary pressures across our supply chain, including strain 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 industrywide excess supply and shift in demand toward seasonal fruits. We expect these systemic cost pressures to continue.

To offset the impact, last week, we announced 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 unparallel 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 toward our consumers who look to us to provide a reliable supply of healthy product crops. 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 product 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 Sauter, will represent our company at the World Diversity Summit in Glasgow, a great platform to address the important role the private sector has in responding to the challenges of biodiversity loss and climate change. In September, we 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 surplus some of our key 2025 environmental protection and goals. Therefore, this year, we set even more ambitious goals for 2030, including climate action, water stewardship, management practices and reducing food waste and plastic usage. At this point, I would like to turn the call to Eduardo, please.

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

Thank you, Mohammad 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 segment, 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 colon partially offset this decrease. Adjusted operating income was $300,000 compared with $25 million in the prior-year period, mostly driven by decrease in gross profit and adjusted net income was approximately $1 million compared with $16 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-recurring 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 products 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. Vegetables net sales decreased primarily in North America, including our Mann Packing operations, driven by lower sales volume related to lower demand from the foodservice channel.

Prepared food products decreased mainly in Europe as the prior year benefited from heightening customer demand related to the COVID-19 pandemic as more people stocked up on canned goods 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 products segment was $41 million compared with $56 million in the prior-year period. The primary drivers of the variance were avocado decreased 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 Mann Packing operations were impacted by higher per unit product costs and lower production yields and pineapple decrease 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.

While our 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 with lower per unit sales prices, coupled with higher per unit distribution and production costs impacted by inflationary and cost pressures. 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 balance. Income taxes were a benefit of approximately $7 million during the quarter compared with an expense of $5 million in the prior-year period, primarily due to decreased 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 teams. 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 this 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 land on selling them 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 trailing 12-month period, our total debt stands at 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 $0.15 per share payable on December 10, 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?

Questions & Answers:


Operator

[Operator instructions] And your first question comes from the line of Jonathan Feeney with Consumer Edge.

Jonathan Feeney -- Consumer Edge -- Analyst

Good morning. Thanks verym uch. 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 count us that prices for any major market would be down with huge ubiquitous and highly visible costs increasing. And I know there's some macro effects there, but any detail you could give us on the pineapple once we go particularly and what that means for the next couple of quarters. I'd really appreciate, first off.

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Good morning, Jonathan. 

Jonathan Feeney -- Consumer Edge -- Analyst

Good morning. 

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

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 and higher, let's say, production per hectare number one. And number two, we had 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 any more 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 return margin. And Eduardo, maybe he'd like to add to things?

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

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 pineapples 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 CVOID 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 in all Europe.

And we believe that is going to help bring promises to a more normal situation.

Jonathan Feeney -- Consumer Edge -- Analyst

Got you. Now, you mentioned supply from your farms in pineapple. How about competitors supply in similar size or even different size or slightly different products? Are there other competitive factors that are depressing prices there?

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

Yes, for sure. That's what I was mentioning. When we look to import, we noticed that the four major competitors, they increased significantly imports as compared to previous year.

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Jonathan, when once farm produces, it's a general trend usually in the industry. If we have more bananas, it's because it's a general trend. And 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 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, 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 have divested 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.

Jonathan Feeney -- Consumer Edge -- Analyst

Got you. OK. And 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 wanted to make strategic asset sales now? There's a lot of -- I mean, that's always would seem to me to be a return on investment calculation. You announced the kind of program and several things in the pipeline. Why now?

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

You know what Eduardo mentioned about assets sales. I'm talking about assets that have been with us for almost 30, 40 years, Jon. It's not assets that we we bought five years ago and we want to sell back here. And I'm talking about assets mainly in Chile, in Uruguay and certain -- not in North America, not in Europe, in areas where we have lands and we have facilities that are underutilize 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, Eduardo.

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

And Jonathan, as you may remember, a year ago in the third quarter of last year, we launched this $100 million asset sales optimization program that we have been updating that on a quarterly basis. And the key thing, as Mr. Ghazaleh mentioned, is several of those assets are in South America and because of the political instability in Chile mainly, these sales made some of our expectations to be deferred into next year.

Jonathan Feeney -- Consumer Edge -- Analyst

Got you. OK, make sense. Thank you for the time.

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

Thank you, Jonathan.

Operator

[Operator instructions] We have no questions in queue. I would like to turn the conference back over to management for closing remarks.

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Well, I would like to thank everyone for attending this call today and I wish you a good day and hope to speak to you in the near future. Thank you very much. Have a good day.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Ana Miranda -- Vice President, Financial Planning and Analysis, Investor Relations

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

Jonathan Feeney -- Consumer Edge -- Analyst

More FDP analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.