Fresh Del Monte Produce (FDP) Q4 2021 Earnings Call Transcript

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Fresh Del Monte Produce (FDP -0.28%)
Q4 2021 Earnings Call
Feb 23, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Fresh Del Monte Produce fourth quarter and full fiscal year 2021 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 vice president, Global 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, Chantal. Good morning, everyone, and thank you for joining our fourth quarter and full fiscal year 2021 conference call. As Chantal mentioned, I am Ana Miranda, vice president, Global FP&A, and investor relations with Fresh Del Monte Produce. Joining me in today's discussions are Mohammad Abu-Ghazaleh, chairman and chief executive officer; and Eduardo Bezerra, 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 website at freshdelmonte.com for a copy of today's release and investor relations presentation. On the site, you can also 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, may include forward-looking statements within 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 are as of today, February 23rd, and we have no obligation to update any forward-looking statements we may make. With that, I'm pleased to turn today's call over to Mohammad.

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Thank you, Ana. Good morning, everyone. In 2021, we posted robust double-digit operating income growth compared with 2020. We demonstrated agility and industry leadership in navigating the current challenging macroeconomic environment as we focused on mitigating industrywide supply and labor headwinds.

We implemented inflation-justified price increases toward the end of the year, made investments targeted at automation, and focused relentlessly on productivity. In the first half of 2021, despite these pressures, gross profit benefited from strong performance across all of our segments, particularly higher per-unit selling prices in our banana segment. This higher pricing helped offset incremental production and procurement costs following the hurricanes in Central America in the fourth quarter of 2020 and higher demand on key product categories related to relaxed restrictions on social gathering in some of our main markets compared with 2020. However, in the second half of 2021, inflationary and other cost pressures intensified, negatively impacting gross profit.

The price increase, which took effect toward the later part of the year, resulted in improved performance as we moved through the end of the fourth quarter. Overall, during the year, we increased adjusted EBITDA to $207 million from $189 million in 2020. As a result, adjusted EBITDA margin increased 40 basis points to 4.9% from 4.5%. As a brief recap during the year, we made significant progress on our strategic initiatives, and I would like to focus on that.

We added two state-of-the-art refrigerated container vessels in the first half of the year, bringing our fleet to a total of 13 vessels. As previously mentioned, six out of the 13 vessels are new, putting us in a stronger, more agile position as we continue to provide reliable quality service to our customers. The fleet also enabled us to expand our third-party freight services. In keeping with our shareholder accretion approach, in the second half, we increased our quarterly cash dividend from $0.10 per share to $0.15 per share, bringing our total dividend payout for the year to $0.50 per share, and the same approach will continue in 2022.

In 2021, we reduced long-term debt by approximately $23 million. Throughout the year, we also made progress on our strategic partnerships. We successfully implemented a licensing agreement with one of Europe's top frozen goods retailer, the name is Iceland, whereby we offer a broad product mix generating consistent income stream. In June, we invested in I Squared Capital Global InfraTech Fund.

The fund invests in innovative growth-stage companies, applying technology in various infrastructure sectors, including logistics, supply chain, and agriculture, which are complementary or adjacent to our business. In November, through a partnership with SEMCAP Private Equity, we invested in Purely Elizabeth, a category-leading organic consumer products brand. Their current offerings include granola, oatmeal, and pancake mixes. The partnership is an opportunity to expand our business in the convenience category, providing the platform for us to work together on the development of unique and innovative products.

Additionally, we are excited to leverage our vertical integration to support our partners with supply chain and logistics services. During our progress into 2022, we announced today another brand partnership with Good Culture. Founded in 2014, the company focuses on high-quality cultured dairy products, specifically cottage cheese, and sour cream. They have been an innovator and disruptor in this space, gaining significant market share since its inception.

Both investments, Purely Elizabeth and Good Culture, were facilitated by SEMCAP's food and nutrition team who searches for brands that have proven themselves in the market and ready to scale up their business through strategic alliances. And we are excited to announce a partnership with McCormick & Company, a global leader in flavor. This agriculture product aligns very closely with our vision and strategy. With this project, we are leveraging technology and data, coupled with our agriculture expertise to grow products while minimizing costs and preserving the environment.

At this moment, both companies have decided to keep the location and products and production undisclosed. In 2021, we made great progress on our sustainability journey. We were the first global marketer of fruits and vegetables to commit to the science-based targets, consistent with the levels required to meet the goals of the Paris Agreement. The science-based targets initiative has since validated that our emissions reduction targets conforms with its criteria and recommendation.

And we released our 2020 sustainability report. On the people front, last month, we announced the appointment of Mohammed Abbas as executive vice president and chief operating officer. Mohammed joined the company in 2009 and has served in various leadership roles, including head of our Asia and Middle East Regions. I'm excited to have him in his new role where I am certain he will add significant value to our operations.

Having said that, I'm confident in our team's ability to continue to execute on our long-term strategy of growing our core business; increasing the reach of higher-margin, value-added categories; implementing and leveraging technology solutions as we evolve into an agritech company; and expanding our customer and brand partnerships throughout our global operations. At this point, I would like to move the call to Eduardo to talk about the financial results. Eduardo?

Eduardo Bezerra -- Senior Vice President and Chief Financial Officer

Thank you, Mohammad, and good morning. I will start with our fourth quarter performance by product line, followed by a consolidated overview of our full fiscal year 2021. Net sales for the fourth quarter of 2021 increased $15 million or 2% compared with the prior-year period. The increase was driven by higher net sales in our other products and services segment, which includes third-party freight services and poultry and meats category, and our fresh and value-added products segment.

As it relates to comparability between periods, the fourth quarter of 2021 consisted of 13 weeks compared with 14 weeks in the fourth quarter of 2020. The additional week in the fourth quarter of 2020 contributed an estimated $72 million in net sales. On a comparable basis, net sales increased $87 million or 9%. Adjusted gross profit for the fourth quarter of 2021 was almost $40 million compared with $49 million in the previous year.

The decrease was primarily driven by the continuation of inflationary and other cost pressures, which resulted in higher per-unit production and distribution costs, including packaging materials, fertilizers, inland freight, labor, and fuel. The decrease was partially offset by an inflation-justified price increase effective toward the latter part of the fourth quarter. The increase was implemented in an effort to maintain our continued supply and service levels with our business partners. Having said that, during the fourth quarter, we realized sequential improvements in gross profit, specifically in December.

And in addition to pricing, gross profit benefited from fluctuations in exchange rates. Adjusted operating income for the fourth quarter was a loss of $7 million, compared with a loss of $4.5 million in the prior-year period, primarily related to lower adjusted gross profit, partially offset by a decrease in selling, general, and administrative expenses. And adjusted net loss was $8.5 million, compared with a loss of $3.7 million in the prior-year period. Our diluted earnings per share for the fourth quarter was a loss of $0.24, compared with earnings of $0.02 in the prior-year period.

Adjusted diluted earnings per share was a loss of $0.18, compared with a loss of $0.08 in the prior-year period. Adjusted EBITDA for the fourth quarter was $15 million, compared with $24 million in the prior-year period, and corresponding adjusted EBITDA margin decreased to 1.5% from 2.4% in the prior-year period. Let me now turn to segment results, beginning with our fresh and value-added products segment. Net sales for the fourth quarter of 2021 increased by $12 million or 2% when compared with the prior-year period.

As previously noted, the fourth quarter of 2021 consisted of 13 weeks, compared with 14 weeks in the fourth quarter of 2020. The additional week in the prior-year period contributed an estimated $42 million in net sales. On a comparable basis, net sales for the fourth quarter of 2021 increased $54 million or 10% compared with the prior-year period. The primary drivers were increases in our melon and pineapple product lines.

Melon net sales increased in North America driven by higher sales volume and per-unit sales prices, and pineapple net sales increased across most regions driven by higher per-unit sales price. As an offset, sales of fresh-cut vegetables decreased during the fourth quarter compared with the prior-year period. Fresh-cut vegetables net sales decreased primarily in North America, including in our Mann Packing operations. The decrease was driven by lower sales volume and lower per-unit sales prices related to lower demand from foodservice channel and lack of sufficient labor availability.

For the quarter, adjusted gross profit in the fresh and value-added products segment was $28 million, compared with $32 million in the prior-year period. The decrease was driven by inflationary and other cost pressures, which resulted in higher per-unit production and distribution costs. As it relates to comparability, the additional week in the prior year contributed an estimated $2 million in gross profit. From a product view, the primary drivers of the variance were: in avocados, gross profit decreased primarily in North America, driven by lower sales volume, coupled with higher per-unit procurement and distribution costs; fresh-cut vegetables gross profit decreased in North America, primarily in our Mann Packing operation, mainly driven by lower net sales, coupled with higher per-unit production, and distribution costs.

The decrease was partially offset by higher gross profit across most of our other key product categories, including nontropical fruits, melons, and pineapples. Moving to our banana segment, for the fourth quarter of 2021, net sales decreased by $13 million or 3% compared with the prior-year period, primarily driven by North America and Asia. The additional week in the prior-year period contributed an estimated $28 million in net sales. On a comparable basis, net sales for 2021 increased $15 million or 4% compared to prior-year period.

Adjusted gross profit for the fourth quarter of 2021 was $9 million, compared with $17 million in the prior-year period, primarily driven by North America and Asia. In both regions, the decrease was driven by lower net sales. As it relates to per-unit cost, North America gross profit was negatively impacted by higher production and distribution costs, while Asia was negatively impacted by higher production and ocean freight costs. Now moving to selected financial data.

Selling, general and administrative expenses was $44.5 million, compared with $54 million in the previous year. The decrease was driven by lower provision for credit losses and lower promotional and administrative expenses. Net interest expense was lower related to lower interest rates and lower average debt balance. Income tax were a benefit of approximately $7 million during the quarter compared with a benefit of $4 million in the prior-year period, primarily due to the release of valuation allowance as it was determined deferred tax assets will be utilized.

Now turning to our full year 2021 results. For the full year 2021, net sales increased $50 million or 1% compared with the prior-year period. In both periods, the increase in net sales was driven by higher net sales in our other products and services segment, which includes third-party freight services and poultry and meats category, and by our fresh and value-added products segment. The additional week in the prior-year period contributed an estimated $72 million in net sales.

On a comparable basis, net sales for 2021 increased $122 million or 3%. Adjusted gross profit was $307 million, compared with $284 million in the prior-year period. As previously mentioned by Mohammad, in the first half of 2021, despite inflationary and other cost pressures, gross profit benefited from strong performance across all of our segments. The banana segment realized higher per-unit price -- selling prices.

The higher pricing helped to offset incremental production and procurement costs following the hurricanes in Central America in the fourth quarter of 2020. In the second half of 2021, inflationary and other cost pressures intensified, coupled with seasonality, negatively impacting gross profit. As it relates to exchange rates, gross profit was favorably impacted by fluctuations versus the euro, Costa Rican colon, and British pound, partially offset by stronger Mexican peso. For the full fiscal year, adjusted operating net income was $112 million, compared with $89 million in the prior-year period.

The increase was primarily driven by higher gross profit and a decrease in selling, general, and administrative expenses. Adjusted net income was $81 million, compared with $55 million in the prior-year period. Diluted earnings per share was $1.68, compared with $1.03 in the prior-year period, while adjusted diluted earnings per share was $1.69, compared with $1.15 in the prior-year period, a 47% improvement year over year. Moving on to cash flow.

For the year, we generated $129 million in cash flow from operating activities, compared with $181 million in 2020. The decrease was primarily attributable to higher levels of inventories as we proactively increased the inventory of key raw materials to secure costs and availability. Inventory was also impacted by the increase in cost of goods, largely related to current cost pressures. Partially offsetting the decrease were higher net income and higher balances of accounts payable and accrued expenses.

In the second half of 2020, we announced our optimization program. The program involves selling nonstrategic and underutilized assets, including land and facilities. The program is improving our return on assets, shoring up our balance sheet, and reducing operational costs. Since the program was announced, we generated $57 million in cash proceeds, out of which $17 million came in 2021.

We expressed -- we expect progress toward achieving our target of $100 million in cash proceeds to continue in 2022. As it relates to capital spending, we invested $99 million in capital expenditures in 2021, compared with $150 million in 2020. The lion's share of the spend relates to the last two new container vessels added to our fleet, investments in Asia, North America, and Europe, and improvements to our banana and pineapple operations in Central America. As mentioned by Mohammad, our capex investments are heavily focused on automation.

Turning to long-term debt, we repaid approximately $23 million, bringing our balance from $542 million at the end of 2020 to $519 million in 2021. Based on a trailing 12-month period, our total debt stands at 2.5 times adjusted EBITDA. As announced this morning in our financial results press release, we declared a quarterly cash dividend of $0.15 per share, payable on April 1st, 2022, to shareholders of record on March 9th, 2022. For full fiscal year 2021, we declared four quarterly cash dividends totaling $0.50 per share.

This concludes our financial review. We can now turn the call over for Q&A. Chantal?

Questions & Answers:

Operator

[Operator instructions] There are no questions at this time. Abu-Ghazaleh, I'll turn the call back over to you.

Mohammad Abu-Ghazaleh -- Chairman and Chief Executive Officer

Thank you very much. I appreciate the attendance of our investors and whoever is on the call and look forward to speak to you on our next quarterly call. 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

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