Q4 2023 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
Mitchell Pinheiro; Analyst; Sturdivant & Co.
Presentation
Operator
Good day, everyone, and welcome to Fresh Del Monte producers Fourth Quarter and Full Fiscal Year 2023 conference call.
Today's conference call is being broadcast live over the Internet and is also being recorded for playback purposes. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, followed by the number one on your telephone keypad. You withdraw your question, press star one again 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 quality apparel. Please go ahead, Ms. Pope.
Claudia Pou
Thank you, Regina, and good morning, everyone, and thank you for joining our fourth quarter and full fiscal year 2023 conference call. As Ian mentioned, I'm sorry, I know 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 recent 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 IR website at investor relations at 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 we 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 and the other required disclosures are set forth in the press release and earnings presentation, which is available on our website.
I would like to remind you that much 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 laws safe harbor 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. Our statements are as of today, February 25th, and we have no obligation to update any forward-looking statement we may make. During the call, we will provide a business update along with an overview of our fourth quarter and full year 2023 results 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 good morning, everyone. As you have read in our press release, our strong gross margins and cash flow enabled us to have strong adjusted earnings. Fischer-zoth. It allows us to reduce our long-term debt by $140 million and the year with an adjusted leverage ratio of 1.7 times and allowed us to continue returning value to shareholders and increased our quarterly dividend by 25% for the 2nd year in a row. And therefore, 20,020 '23, we conducted a strategic review and assess our operational priorities of our North America operations, including manufacturing. Preliminary findings of this review were finalized in the fourth quarter as a result of this strategic review and other factors, we recorded a noncash impairment of $131.2 million in the quarter related to our Mann Packing operations. We are exploring strategic alternatives for this business, all while continuing to focus on our long-term drivers for enhancing shareholder shareholder platform.
2024 Fresh Del Monte has been leading pineapple innovation since the 1990s with the debut of the Del Monte Gold Extra Sweet pineapple, the first of its kind at that time since then, our robust pipeline program has released dipping below final, say, on a gross financial debt amounted zero.
Fair enough. And just a few weeks ago, there will be global finance, a new premium hybrid finance in 2023, we saw continued strong demand for our honey group and pink glow pineapples, with sales growing by approximately 25% for these varieties and the '23 compared with '22 in 2024 we will continue to focus on our pineapple program by working to expand the reach of our existing varieties and our new Ruby global rate.
During 2023, we made significant progress on our asset optimization program and sold underutilized and nonstrategic assets, which generated cash proceeds of $120 million. This included two distribution center centers and related assets in Saudi Arabia and idle production facility in North America, our plastic business subsidiary in South America, idle assets in South and Central America and two carrier vessels. This combined with our strong operating cash flow fit into our ability to reduce our long-term debt to $400 million at the end of '23 compared to $450 million at the end of '22. We also raised our quarterly dividend sorry, $500 million at the end of '22. We also raised our quarterly dividend to $0.25 per share. It was a 5% increase from the previous quarter. Fresh-cut fruit business strength that we are leaning into this year. Our fresh-cut fruit top line has grown more than 15% in the past three years. We attribute this to innovating around product packaging and forming strategic partnerships with customers and brands. We will focus on further expanding this category in North America, Europe and Asia, and also by focusing on increasing the mix from the higher-margin value-added products in our portfolio. In 2023, we achieved the highest adjusted gross margin since 2016, coming in at 8.2%, which was driven by our ability to control costs, optimize our assets and focus our profitable growth. We are laser focused on our vision and strategy, which is rooted in enhancing shareholder value. While our bananas play an important part in generating strong cash flow to fuel our innovation, we believe we will get there by focusing our spend on pineapples, fresh-cut under the News areas where we have the capability to have a base and the leaders, we see tremendous opportunities for our Company to drive growth through innovation.
With that, I would like to turn the call over to Monica Vincent, our Chief Financial Officer for digital business. Monica?
Monica Vicente
Thank you, Mohammad, and good morning and thank you for joining us on today's call. As a reminder, there is a seasonality in the cadence of our earnings. The first and second quarters are seasonally our stronger quarters. While our third and fourth quarters are our seasonally softer. Our 2023 results are consistent with historical trends as we realized a greater portion of our net sales and gross profit during the first half of the year. Please keep in mind when looking at the year-over-year results that our results in 2022 did not follow that same seasonality due to the high inflationary environment and a lag in price increases leading to an unusually soft first half and stronger second half, as Mohammad mentioned. And you will also see in our 10 K filing later today.
In the fourth quarter, we took an impairment charge of $131 million, of which $110 million relates to customer list and trade name intangibles as well as building land and land improvement assets related to the fresh and value-added product segment in North America, and also $22 million related to goodwill in our Prepared Foods reporting unit. These impairments were related to our Mann Packing business acquired in 2018. We are currently exploring strategic alternatives for this business, and we will provide updates as they become available.
With that, I will now turn to our results. Net sales for the fourth quarter were $1.9 billion compared with 1,000,000,040 in the prior year the decrease in net sales in the fourth quarter were driven by lower net sales of bananas and lower global demand for our third party ocean freight business, partially offset by higher net sales in the fresh and value-added product segments in Europe and Asia. For the full year, net sales were $4.3 billion compared with $4.4 billion in 2022. Lower net sales for the year for the year were driven by lower overall sales volumes combined with lower demand of our third party ocean freight business, partially offset by higher per unit sale prices of bananas and fresh and value added products in Europe and Asia. Despite a weaker Japanese yen, Korean won and British pound gross profit for the fourth quarter of 2023 was $63 million compared with $82 million in the prior year. The decrease in gross profit was driven by lower net sales, coupled with higher per unit production costs, partly due to the negative impact of a stronger Costa Rica. Cologne gross profit benefited by lower per unit for distribution and ocean freight costs. Gross margin for the fourth quarter of 2023 was 6.2% compared to 7.9% in the prior year. For the full year, gross profit increased 3% to $351 million from $340 million in the prior year. The increase was primarily driven by higher selling prices of bananas and fresh and value-added products combined with lower distribution costs, partially offset by higher price per unit production costs, partly driven by the negative impact of a stronger Costa Rica Cologne, where we source the majority of our pineapple gross margins increased to 8.1% for 2023 compared to 7.7% in the prior year. Adjusted gross profit for the full year of '23 was $355 million compared with $340 million in the prior year. Adjusted gross profit for full year '23 excludes $4 million of other product related charges, primarily related to $1.5 million of inventory write-off due to the sale of two distribution centers in Saudi Arabia in the first quarter and $1.4 million of inventory write-offs and cleanup costs, net of insurance recoveries tied to the flooding of our seasonal production facility in Greece. In the third quarter, there were no other product related charges in '22.
Operating loss for the fourth quarter of '23 was $113 million compared with operating income of $31 million in the prior year. The loss was driven by the $134 million asset impairment charge already discussed as adjusted operating income for the fourth quarter of '23 was $12 million compared with $34 million in the prior year. Adjusted operating income excludes the above-mentioned asset impairment and $6 million of other product related credits due to the floods in Greece in the third quarter as well as a gain on asset sale of $2 million related to the sale of a vessel in the first quarter fourth quarter of '22. Adjusted operating income excludes $3 million of asset impairment charges, principally due to Banana related fixed assets in the Philippines due to flooding for the fiscal full year '23 operating income was $59 million compared with $156 million in the prior year. And adjusted operating income, which excludes product related charges, asset impairment and gain on asset sales was $165 million compared with $149 million in the prior year. The year-over-year adjusted operating income increase was primarily driven by higher gross profit as CP. net loss for the fourth quarter of 2023 with $106 million compared with SDP. net income of $18 million in the prior year. Adjusted FTP net income for the fourth quarter was $12 million compared with $22 million in '22. For the full year SDP. net loss was $11 million compared with FTP net income of $99 million. Adjusted SEP net income was $102 million compared with $94 million in the prior year.
Our diluted earnings per share in the fourth quarter of '23 was a loss of $2.22 compared with $0.38 in the prior year. Adjusted diluted earnings per share was $0.25 compared with $0.45 in Q4 2022. For the full year, diluted earnings per share was a loss of $0.24 compared to $2.6 per share in the prior year. Adjusted earnings per share was $2.12 compared to $1.97 per share in the prior year. Adjusted EBITDA for the fourth quarter was $38 million compared with five $59 million in 2022. For the full year, adjusted EBITDA increased to $239 million compared to $235 million in the prior year.
I will now go into more detail on the full year performance for each of our segments.
Beginning with our fresh and value-added product segment, net sales for the fiscal year 2023 were down approximately 4%, $2.5 billion compared to $2.6 billion in the prior year due to lower sales volume growth across most products in this category, except for pineapples and avocados, combined with lower sales prices of avocados due to prior year volatility and lower sell prices in our prepared and vegetable product categories, partially offset by higher per unit selling prices across all other products. In this segment. As Mohammad mentioned, over the past few years, we have successfully released several new pineapple varieties during 2023. We saw 25% year over year volume growth in our higher-margin high-need law and FindLaw pineapples. We grew our avocado program this past year by expanding our customer base, increased increasing sales volume by 16% and also further diversifying our sourcing origins to include Colombia, Dominican Republic and Peru, as well as continuing to refine our pricing and sourcing strategies.
Gross profit for fiscal year 2023 was $167 million compared with $183 million in the prior year. The decrease was primarily due to lower sales volumes and higher product costs due partially to the impact of the strengthening of the Costa Rica, Cologne and the Mexican peso, somewhat offset by lower distribution, ocean and inland freight costs. As a result, gross margin was 6.8% in 2023 compared to 7.1% in 2022. Adjusted gross profit for fiscal year '23 was $171 million compared to $183 million in the prior year. Adjusted gross profit excludes $4 million of other product related charges due to inventory write-offs from the sale of two distribution centers in Saudi Arabia and inventory write-offs and cleanup costs. Net of insurance recoveries tied to the flood of our seasonal production facility increased for 2024. We expect higher margins in this segment driven by favorable product mix.
Moving to our banana segment, net sales for fiscal year '23 increased 1% to $1,638 million compared to 1,620 million in the prior year. The increase was driven by higher per unit selling prices in Europe, partially offset by lower sales in North America due to lower volumes and a slight decrease in sales prices.
Banana gross profit for fiscal year '23 increased 35% to $163 million compared to $121 million in the prior year. The increase in gross profit was due to higher net sales and lower distribution costs, including ocean and inland freight. Partially offsetting the increase was higher per unit production costs, mainly due to negative fluctuation in the exchange rates in Costa Rica. As a result, gross margin increased to 10% in 2023 from 7.5% in 2022. The increase in gross margin in the banana segment reflects our continuing efforts to match supply and demand more rationally in 2024, we expect to have similar volumes as compared to 2023. And as you know, sale prices are difficult to predict for this segment due to supply and demand volatility and other factors.
Lastly, our full year results for the other products and service segments. Net sales for fiscal year '23 were $205 million compared to $241 million in the prior year, mainly due to lower net sales of third party ocean freight services as a result of lower rates and volumes driven by softening global demand.
Gross profit was $20 million compared with $37 million in the prior year due to lower net sales. Gross margin was 9.8% compared to 15.2% in the prior year. As a reminder, ocean freight rates were elevated last year because of the supply constraints, and we saw an increase in availability of <unk> over the course of 2023, which caused pricing to come back to more normalized levels for 2024, we expect to see a more balanced ocean freight market in the Americas, which is where we provide these services.
Now moving to selected financial data for the full year, net interest expense was flat compared to 2022 due to higher interest rates, partially offset by the impact of lower average debt balances.
Income tax provision was $18 million compared to $20 million in 2022 the decrease in income tax provision is primarily due to decreased earnings in certain higher tax jurisdictions, partially offset by the tax effect related to asset sales throughout the year.
Now turning to our financial position for the year, we generated $178 million in cash from operating activities compared to $62 million in 2022 in 2023, we reduced our inventory balances, which were impacted in the prior year by the inflationary cost pressures. Also in 2022, we strategically increased our levels of key raw materials and packaging supplies in order to secure cost and availability. As Mohammad mentioned, we ended the year with about $400 million of long-term debt, a $140 million or 26% reduction from $540 million in the end of fiscal year '22 and also a 23% reduction from the end of fiscal year 2021 by lower by lowering our debt. Our adjusted leverage ratio now stands at 1.7 times adjusted EBITDA compared to 2.2 times in the prior year. Our full year CapEx investment was $58 million compared with $48 million invested in 2022. For 2024, we expect CapEx to be slightly higher at a range between $65 million and $75 million due to our continued effort on focus on expanding production in certain key global operations, such as fresh set production facility in the UK. During Q4, we announced and completed a 500,000 share buyback. And as previously announced, we declared in Q4, we recently declared an increase in our quarterly dividend from $0.2 to $0.25 per share as we stay committed to returning cash to our shareholders.
Finally, our credit facility was due to expire later this year, and therefore, we recently refinanced our facility for a five-year term with a borrowing capacity of $760 million. And our strong free cash flow projections allowed us to decrease our facility from the previous borrowing capacity of $900 million.
This concludes our financial review. We can now turn the call over to Q&A.
Question and Answer Session
Operator
Regina, at this time, I would like to remind everyone in order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of Mitch Pinheiro with Sturdivant & Company. Please go ahead.
Mitchell Pinheiro
Yes, good morning. And so a question for some on banana UBM for the year, the 10% gross margin was this the best I've seen going back to 2012, and I heard some of the reasons that you're in your script, as you know, but what else is driving this margin is this margin is a higher level of the net of margin sustainable. What's your outlook here in near term and what have you been doing internally to improve the margin as opposed to just pricing?
Mohammad Abu-Ghazaleh
Good morning, Mitch. And the reason for several reasons. One of them was Europe was the strong market last year and then the consumption was higher than normal and the volumes were more in line with the demand. That was number one.
And number two, our management of supply and demand was more synchronized in a way that we did not have to have very high inventories at times when we don't need them and that might be and it has helped a lot in controlling our costs. Let's put it that way. As I said, we were focusing on a more, let's say, on the cost structure of our banana pump units. And that's where we are working very hard in order to really keep our plantations, which are within a year of normal cost structure. I wouldn't say we are going to shut down our plantation. That's not the case, but we are going to be looking at every farm and every plantation and make sure that we are having the best most efficient plants in operation and production. And that all these actually factors together have helped in order to improve the gross margins as you would have seen and the announcement and this is something that we will continue to do match, hopefully in all and despite all the other, you know, negative impacts that we have in the market competition and retail force influence, be it in Europe or North America to reduce prices selling prices. But all in all, we are very much in a I'm kind of pleased with what we are doing and where we are going. But as like one I can mention is like our cash flow generation and this entails, but really our focus would be on more value added products and more value added the operation that will it really puts the company in a much different place yet.
Monica Vicente
I mentioned as I just mentioned, the banana pricing is difficult to predict because there's a lot of variables including supply and demand.
Mitchell Pinheiro
So just keep that in mind, we would look to carry most of your Burger in volume is contracted. So Tom, how does that look like are contracted prices relative to them 2023, the contracted of this on the supply side or on the selling side or the selling side?
Mohammad Abu-Ghazaleh
Selling side is a little bit in North America is tough because competition is very tough as we speak, and the players are trying to position themselves for a market share additional market share. But we really focus on on on margin, which I don't mind sacrificing some volume for a better module rather than just going for volume and selling, you don't have to low very low margins.
Mitchell Pinheiro
Okay. And then them in terms of pineapples, you've been you've done very well innovating in pineapples and then you talked about 25% growth in Europe. I guess it's your M and the pink loan honey glow on how how big is are these two? And I guess you're going to start Ruby glow, how big is that as a percentage of your overall pineapple sales and then, you know, we're just distribution stand. I know when I when I look for the honey glow, it's not in every supermarket. So that looks like an opportunity for you and I'm curious what your ACV is on on these products.
Mohammad Abu-Ghazaleh
Yes, I didn't know that Chinese law cannot be a cap of 100% of our production and pending rule because it is very selected items that we have to work very diligently in the field to play this hand growing in all segments, which is a certain percentage of our production. I will not disclose it publicly, but we are working in a way that do increase our and ratio of honey growth compared to the total production as well as increasing our production in general to create more volumes on this. And this segment, which side it's something that is an operation and ongoing as we speak. So I mean, hopefully in all going forward, we will see continuous improvement in terms of volume and the growth of this segment general were very, very close. We're at the very early stages for the Ruby there, which has just been announced zero and there will be only a few thousand pieces. This will be a limited edition, let's say, variety that we are not going to produce a big volumes, but certainly limited volume, but with very high prices and very high margins.
Mitchell Pinheiro
Okay. And then looking at Mann Packing, I know what you bought it a couple of years ago, but I guess maybe five years ago, the pre pandemic, and it really hasn't it really hasn't regains its footing since then. I'm just curious what's changed in your thinking about man as you did your strategic review?
Mohammad Abu-Ghazaleh
What I meant was that Canadian redline to look at the best ways to first of all, I'd like to minimize or eliminate any losses coming from that operation. Secondly, where we look what's best for the Company at all. And thirdly, it on this segment of vegetables. Leaks in particular has been extremely competitive with very low margins. The last couple of years, weather hasn't been as big as well. So it's a combination of reasons and factors that have it led to this situation. But as I said I mentioned earlier, we are going to take some strategic decisions in order to improve our business agenda. And I hope that in the next few months we've got analysis on where we go and what are the sales of MAN?
Monica Vicente
We don't disclose that, Mitch.
Mitchell Pinheiro
Okay. And then I guess just final question is some you've done well, reducing debt and especially with some asset sales, what are the plans in asset sales for the coming year, but as I mentioned, we are not selling for the sake of selling.
Mohammad Abu-Ghazaleh
We are selling leads that either of not suitable for our purposes zero, secondly, facilities that have no use for us as we can operate general, by the way, these facilities that we sold in sort of Arabia, we at least part of it for our operations. So we did not get out of operations in this country. However, what we did, we de-leveraged our our exposure to assets and the better cash flow as well as a better operating model, let's say so at other assets that we sold in South America with assets that really does not fit like the plastic operation or dividends. It fit well in our today, let's say, well, so that was a good opportunity to sell, and that's why we did dispose or dispose of it other labs or facilities as well with the right time to sell and to optimize our operations in certain countries. So what we are doing really we are optimizing and it's creating efficiencies and creating opportunities.
Mitchell Pinheiro
Okay. Yes. Thank you for taking the questions I do.
Operator
And with that, I'll hand the call back to Mr. Mohammad Abu-Ghazaleh with for closing remarks.
Mohammad Abu-Ghazaleh
I would like to thank everyone for attending this call today. Hopefully, you know, we can give you better news because we should a do.
Operator
Thank everyone.
That now concludes our call for today. Thank you all for joining. You may now disconnect and.
