Q1 2024 Fresh Del Monte Produce Inc Earnings Call

Participants

Claudia Pou; Vice President, Global Head of Corporate Communications; Fresh Del Monte Produce Inc

Mohammad Abu-Ghazaleh; Chairman of the Board, Chief Executive Officer; Fresh Del Monte Produce Inc

Monica Vicente; Chief Financial Officer, Senior Vice President; Fresh Del Monte Produce Inc

Mitch Pinheiro; Analyst; Sturdivant & Co.

Presentation

Operator

Good day, everyone, and welcome to Fresh Del Monte Produce first-quarter 2024 earnings 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 the Vice President, Corporate Communications with Fresh Del Monte Produce, Claudia Pou. Please go ahead, Ms. Pou.

Claudia Pou

Thank you, Audra. Good afternoon, everyone, and thank you for joining our first-quarter 2024 conference call. I'm Claudia Pou, Vice President, Corporate Communications with Fresh Del Monte Produce. Joining me in today's discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Monica Vicente, the Senior Vice President and Chief Financial Officer.
I hope you've had a chance to review the press release that was issued earlier via BusinessWire. You may also visit the company's IR website at investorrelations.freshdelmonte.com to access today's earnings materials and 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 and earnings presentation, which is available on our website.
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 Safe Harbor provisions of the Federal Securities laws. In today's press release and in our SEC filings, we detail risks that may cause our future results to differ materially from these forward-looking statements.
All our statements are as of today, May 2, and we have no obligation to update any forward-looking statements we may make.
During the call, we will provide a business update along with an overview of our first-quarter 2024 financial results, followed by a question-and-answer session.
With that, I'm pleased to turn today's call over to Mr. Abu-Ghazaleh.

Mohammad Abu-Ghazaleh

Thank you, Claudia, and thank you for joining us for first-quarter 2024 results. We continue to see strong momentum in our higher-margin, fresh and value-added products segment, which is a key driver of our long-term growth strategy.
Revenue in this segment grew by 5% year over year, fueled by strong sales of our pineapples and avocados as well as our prepared food. Segment adjusted gross margins also expanded by 50 basis points as we realize production efficiencies and cost savings from our tightly integrated supply chain. Our strong cash flow allowed us to simultaneously reinvest in the business, increase our dividend while paying down our debt.
During the quarter, we reduced total debt by 15% when compared to the prior-year period, further demonstrating our commitment to maximizing shareholder value through disciplined capital allocation. We believe we will unlock further shareholder value by focusing on our strengths in pineapple, fresh-cut, and value-added projects, which is exactly what we did in this first quarter.
Taking a closer look at some of the drivers behind our fresh and value-added segment growth. We saw particularly strong demand for our pineapples. As the leading grower and distributor of this fruit, we continue to look for new and different ways to lead and define our bridge category.
In the first quarter of 2024, we launched to pineapple innovations that will truly lower pineapple our direction pineapple, which is being produced in a limited volume at a very high price point due to high demand and enters the North America Groovy Glowpoint happens are now available to consumers in the United States. Our other newly released by UP is innovation. This quarter is the precious having glow pineapple at personal sites fresh by the build out of our popular line of honey glow finances. Our previously launched FindLaw and honey growth plan have been innovations continued to perform very well in Q1, net sales for the bank group and others were up 62% compared with the same period last year, while net sales for the housing loan balance was approximately 13% higher compared with the same period last year. Pineapples represent just one growth driver within our fresh and value-added product segments. We also see tremendous opportunity in fresh-cut category. We are pleased to share this story where we are pleased to share that this quarter, we further expanded our fresh scrub product distribution, North America, cementing our position as the market leader in Fresh Cut products for the convenience store channel. Also on the horizon within our fresh-cut program, our new premium fruit traits featuring specialty growth not seen before in our program. This year, we will continue to take advantage of our robust U.S. footprints of company owned fresh-cut facilities to further grow market share and raise new value, add new value added products to our consumers driving shareholders' value. Our fresh-cut growth strategy extends into our other regions outside of North America. In our European region, we recently completed the expansion of our primary fresh-cut production facility in the UK, which will our which will allow us for a significant increase in capacity. And in Asia, we saw a 30%, 36% increase in sales in quarter one from our fresh-cut operations in Korea compared with the same quarter last year.
Shifting to our avocado category, the category performed well this quarter with revenue up 23% year over year. One of our newest innovation is our fresh guacamole products. Our fresh guacamole made without preservatives as with Del Monte avocado, is a new product for us and is growing rapidly in quarter one were commodity distribution expanded to two major retail retailers in the Southeast and Northeast regions of the U.S. We plan to continue this expansion throughout the course of the year.
Looking toward the remainder of 2024, we plan to continue our investments in value-added products and in expanding our pineapple and fresh-cut operations as well as maximizing our throughput through the residuals utilization as one of the world's largest producers of fruits. We see tremendous untapped potential in this space and have identified several profitable use cases of our SKUs, including BioCryst, the latest. This venture leverage our strengths as a business and allow us to be at the forefront of the fresh produce industry.
With that, I would like to turn the call over to Monica fields.

Monica Vicente

Thank you, Mohammad, and good afternoon, everyone, and thank you for joining us on the call today. Net sales for the first quarter of 2024 were $1,108 million compared with $1,129 million in the prior year. The decrease in net sales in the first quarter was due to lower net sales of bananas, driven by lower volume and pricing and lower rates in the third party ocean freight business in our other products and service segments. The decrease was partially offset by higher net sales in our fresh and value-added product segments due to overall higher sales volume and pricing.
Gross profit for the first quarter of 2024 was $82 million compared with $97 million in the prior year. The decrease was driven by lower overall net sales, higher per unit production and procurement costs, including the impact of fluctuations in exchange rates, partially offset by lower distribution and ocean freight costs.
Gross profit in the first quarter of 2024 includes a $1 million. Net credit related to insurance recoveries associated with damages tied to the flooding of a seasonal production facility increased during the third quarter of 2023, partially offset by the severance charges from the outsourcing of certain functions at a fresh and value-added production operation.
Gross margin for the first quarter of 2024 was 7.4% compared to 8.6% in the prior year. Excluding the impact from the other product related charges, adjusted gross profit for the first quarter of 24 was $81 million compared with $99 million in the prior year. Operating income was $44 million compared with 75 million last year, and adjusted operating income was 31 million compared with $51 million in the prior year. The adjusted operating income decrease was due to lower gross profit and higher SG&A expenses. SDP. net income for the first quarter of 24 was $26 million compared with $39 million in the prior year. And adjusted FDP. net income was $16 million compared with$ 27 million last year. Our diluted earnings per share in the first quarter was $0.55 per share compared with that $0.81 per share in the prior year. Adjusted diluted earnings per share was $0.34 compared with $0.55 per share in the prior year. Adjusted EBITDA for the first quarter of 2024 was $44 million compared with $65 million in the prior year, primarily driven by lower gross profit and higher SG&A.
I will now go into more detail on the first quarter performance for each of the segments, beginning with our fresh and value-added products segment, net sales for the first quarter of 2024 were up 5% to $677 million compared with $643 million in the prior year due to higher sales volume of pineapples, melons and prepared food products and also higher per unit selling prices of avocados gross profit for the first quarter of 2024 was $56 million compared with $47 million in the prior year. The increase was driven by the overall higher net sales, partially offset by higher production and procurement costs of pineapples and avocados, which were impacted by a stronger Costa Rica, colon and Mexican pesos. Gross profit includes the previously mentioned other product related charges and credits. Gross margin increased to 8.3% compared with 7.3% in the prior year. As Mohamad mentioned, this segment has been an area of intense focus for our team. Over the past few years, we have undertaken a number of strategic initiatives in this segment aimed at enhancing our product mix, improving operational efficiencies and strengthening our distribution channels. We've continued to grow our pineapple program with the release of two new offerings this past quarter as well as well as the continued growth of our popular specialty pineapples, honey low and pink glow, which combined now represent approximately 20% of our pineapple volume. Our avocado program also delivered strong results, with revenue increasing by 23% driven by higher selling prices for the remainder of 2024. We continue to expect strong results in this segment, driven by favorable pineapple product mix, strong fresh-cut fruit sales and non-tropical improvements due to the current market trends.
Moving to our banana segment, net sales for the first quarter were $380 million compared with $425 million in the prior year. The decrease was driven by 5% lower volume, partially due to service level issues in the first two months and lower selling prices due to the competitive market pressures in North America and Europe. Banana gross profit in the first quarter of 2024 was $22 million compared with $43 million in the prior year. The decrease in gross profit was due to lower net sales, higher per unit production and procurement costs, including the negative impact of a stronger Costa Rica Cologne, partially offset by lower distribution and ocean freight costs. Gross margin was 5.7% compared with 10.2% in the prior year. During last earnings call, we mentioned that we expected banana volume to be similar to 2023. However, given the competitive market pressures, we now anticipate for the full year to have approximately 3% to 4% lower volumes versus last year, along with softer selling prices.
And lastly, net sales in our other products and services segment for the first quarter were $52 million compared with $60 million in the prior year due to lower net sales of third party ocean freight services as a result of lower rate driven by the competitive market environment, combined with the impact of the sale of our plastics subsidiary in South America in 2023, gross profit was $5 million compared with $7 million in the prior year as a result of lower net sales gross margin was 8.9% compared with 11.2% last year. Our expectations for the remainder of 2024 for this segment are in line with the first quarter results.
Now moving to selected financial data. Net interest expense was $5 million compared to $8 million in the first quarter of 23 due to lower average debt balances income tax provision was $5 million compared to $10 million in the prior year. The decrease was due to lower earnings.
Turning to our financial position, net cash provided by operating activities for activities for the first three months of 2024 was $19 million compared with $16 million in the prior year. The increase was due to our efforts to optimize our net working capital, partially offset by lower net income.
Long-term debt decreased by 15% to $400 million at the end of the first quarter of 2024 compared with $473 million at the end of the same quarter last year. By lowering our debt, our adjusted leverage ratio is now 1.77 times adjusted EBITDA as it relates to capital spending, we invested $13 million in the first three months of 2024 compared with $10 million in the prior year. For the full year we expect capital expenditures to be in the lower end of the range of 65 to $75 million. As announced in our press release, we declared a quarterly cash dividend of $0.25 per share payable on June seventh, 2024 to shareholders of record on May 16th, 2024.
And lastly, as it relates to Mann Packing and the announcement we made last quarter. We remain actively engaged in exploring strategic alternatives for this operation to determine the best path forward. We intend to make a decision by the third quarter of 2024. However, there can be no assurances that this process will result in any strategic specific strategic outcomes.
This concludes our financial review. We can now turn the call over to Q&A cadre.

Question and Answer Session

Operator

Thank you, and we will now begin the question-and-answer session.
Mitch Pinheiro, Sturdivant & Co.

Mitch Pinheiro

Yes, hi, good afternoon. Just fine in China and so has he certainly comes to the fresh and value added them had had a So sort of a normal quite a nice quarter and margins look like they're advancing my two questions. One are on the pineapple business. Is the are the new pineapple varieties? Are they just replacing on shelf space of old pineapple, our product or in regular pineapples or are you getting them is our grocery stores starting to increase the shelf set for pineapples?

Mohammad Abu-Ghazaleh

Yes, actually, Matt, you are right. It's not replacing any any the old traditional volume that we have actually it's incremental with a much higher kind of value to these new additions. So we are seeing incremental sales and the incremental demand.

Mitch Pinheiro

And as a matter of fact, you know, in most cases we are not even able to meet with demand for these special varieties and still like where when I'm in your own fields, are these all additional acres of pineapple land or and are you using existing land? And how does that work from the back end?

Mohammad Abu-Ghazaleh

No, it's additional land that we already have. We won. We have enough land to expand our production, Mitch. So any any new varieties with the, let's say, the or the Anglo, which is the high colored by that, but it is within our existing, let's say, funds. It's a different kind of management, our agricultural management, which which which gives us this advantage of producing this type of pineapple, which commands a premium to the, let's say that a month ago. But if we are talking about take pineapple or Ruby glow pineapple, these are all additional new farmland that within our own like properties, you know, we have enough land to grow additional numerators.
Okay.

Mitch Pinheiro

And in like in an order of magnitude, how how how much more profitable are these newer pineapple varieties compared to your regular gold pineapple by far, say huge, huge.

Mohammad Abu-Ghazaleh

I would say I cannot tell you exactly by it in all it's public. It's not for public input that it is. It is a very significant difference in value.
Okay.

Mitch Pinheiro

And was that the primary is that the mix of your higher margin, higher value pineapple? Is there more of an impact on the segment's gross margin than fresh cut or are they contributing equally how that worked out?

Mohammad Abu-Ghazaleh

I think that was both contributing equity and all that are buying at the time that them you know, in terms of at marginality, both of them are commanding high margins. And this is only beginning, you know, well at the very beginning of our journey towards zero transforming and I've been saying this for several quarters, if you remember, Rich, and we said that we are transforming the company to be much and to go into much higher value added products and different avenue, which I believe as we go quarter after quarter, you will start realizing where the Company is going at your eyes. As I mentioned zero in my now script that we have, you know, out of our revenues that we are going to have one utilizes. This is something that we are working very seriously on and very soon. You're all going to be announcing something about this a new segment, you know, so that is there is a lot of new, I would say the avenues that we will be going into that it will change the Company going forward.
Okay.

Mitch Pinheiro

Thank you for that. And then a question on bananas. I guess, Monica, if I heard you correctly, you said that for the year, you expect lower volumes in the 3% to 4% range for bananas that, yes.
A long way to lower selling prices?

Monica Vicente

Yes. Yes, we expect on the no the market is very competitive right now. And we do expect to have the lower volume and low and softer selling prices.

Mitch Pinheiro

And this is the competitiveness in both Europe and North America North America?

Mohammad Abu-Ghazaleh

Yes, it is one on the lower side that it represents.
Yes, I would like to add to that, Scott mentioned that the market the consumption is being going down actually as we have seen statistically, you know, there is about 5% less consumption in the market in North America compared to the year before. So we are seeing a tendency for lower, let's say, volume and sales in North America and actually as well in Europe. We don't know we're not thinking about this, but we don't know why, but this is the trend that we are seeing right now.

Mitch Pinheiro

It sounds like to me, they're eating more more pineapple.
Yes.
Cash flow management so on.

Mohammad Abu-Ghazaleh

Okay. And then as far as so so as we look out into that, you don't have a lot of visibility, but if you look into the next quarter on the second quarter, more of the same for bananas, I would say more or less the same trend that will go on, you know, I mean, unless there is more efficiencies, better service levels and less headwinds that we have faced in the first quarter, you know, and especially in Benelux, you know, we you're always susceptible to some factors or variables that we cannot control, which which happened in the first quarter this year disruption in shipping some quality issues, some service issues solved as we speak. You know, as we going forward, we hope that this will stabilize. We believe it's going to be stabilized we don't want to be too optimistic, but let's take the scenario as today's scenario as being the one for the second quarter and may 10 q. one, we had a 5% decrease in volume.

Monica Vicente

And for the full year, like I said, we expect 3% to 4%. So we do expect to recover a little bit, not as bad as down as of Q1, one of our biggest headwinds really in the quarter was the the exchange rate in Costa Rica has been really decimating the industry. I mean, we're talking about about a year to year of amount once the prolonged and deferrals, I mean 20 points difference between one year to the next. I mean, we were exchanging, let's say, above 520 kilometers. And this year, it's almost around 500 or so for the last few months since the late last year. So it's been really, very big headwinds for us.

Mitch Pinheiro

But what was the driver of the auto pay attention to the the Costa Rican monetary situation?
What's driving on the flip side, the decline so many dollars, I guess in the market which which which put pressure on the dollar and then the local currency became very, very strong.
Right, right.

Monica Vicente

Okay.
So and there's little you can do about it, right?
There's no I guess you're probably able to carve out a land difficult to hedge the Colombian. There's not enough liquidity.

Mitch Pinheiro

So you're right, right.
Okay. That's all I have.
Thanks for the question.
Ncube.

Monica Vicente

Thank you, Mitch.

Operator

And that concludes our Q&A session. I will now turn the conference back over to Mohammad for closing remarks.

Mohammad Abu-Ghazaleh

Thank you very much, everyone, for your attending this call and hope to speak to you next quarter with even brighter news. Thank you, evidently, that includes This concludes today's conference call.

Operator

Again, thank you for your participation. You may now disconnect.