FRESH DEL MONTE PRODUCE INC. Overview
We are one of the world's leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and marketer of prepared fruit and vegetables, juices, beverages and snacks inEurope ,Africa and theMiddle East . We market our products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability since 1892. Our major sales markets are organized as follows:North America ,Europe (which includesKenya ), theMiddle East (which includesNorth Africa ) andAsia . Our global sourcing and logistics system allows us to provide regular delivery of consistently high-quality produce and value-added services to our customers. Our major producing operations are located in North, Central andSouth America ,Asia andAfrica . Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses. •Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables, melons, vegetables, non-tropical fruit (including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis), other fruit and vegetables, avocados, and prepared foods (including prepared fruit and vegetables, juices, other beverages, and meals and snacks). •Banana •Other products and services - includes our ancillary businesses consisting of sales of poultry and meat products, a plastic product business, and third-party freight services.
Our vision is to inspire healthy lifestyles through wholesome and convenient products. Our strategy is founded on six goals:
[[Image Removed: fdp-20211001_g1.jpg]]COVID-19 Pandemic Impact
InMarch 2020 , theWorld Health Organization declared the current outbreak of coronavirus ("COVID-19") a global pandemic. In response to the COVID-19 pandemic, we have taken various preventative and protective measures to support our team members, customers, suppliers, and local communities. These measures included additional operating procedures and safety protocols at our production facilities, continuous monitoring of our supply chain contingency plans to mitigate service disruptions, and staying abreast of guidance from health officials and governmental authorities to determine any additional restrictions to put in place at each of our locations. These measures have allowed us to maintain our commitment to providing healthy, convenient and safe Del Monte® branded products around the world during this critical time. The COVID-19 pandemic began having a material adverse impact on our results of operations during the first quarter of 2020 which has continued into the third quarter of 2021. Government imposed mandatory closures and restrictions across various of our key global markets have resulted in volatile supply and demand conditions for certain of our products as well as reduced demand in our foodservice distribution channel, factors which continue to persist through the date of this report. During fiscal 2020, we were also negatively impacted by service cancellations and containers that could not clear at certain ports inAsia as well as increased expenses, particularly in our farming operations inCentral America where we incurred incremental costs to implement social distancing protocols and more frequent cleaning cycles. While service at the ports have improved during the 27
--------------------------------------------------------------------------------
Table of Contents current year, to the extent that various regions of the world implement significant shut-downs we could experience similar delays in a future period.
Furthermore, during fiscal 2021, the recovery from the COVID-19 pandemic and the current economic climate have resulted in inflationary and cost pressures that have significantly increased our production and distribution costs, including costs of packaging materials, fertilizer, labor, fuel, and inland freight. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. These factors have led to increased costs in our banana and fresh and value-added products business segments, causing a decline in gross profit for the third quarter of 2021 when compared to the prior-year period. Subsequent to the end of the third quarter and in response to these inflationary and cost pressures, we announced to our customers that we will be raising prices on bananas, pineapples and fresh-cut fruit effectiveNovember 1, 2021 . While we expect that these inflation-justified price increases will partially mitigate our increased costs, we believe these unfavorable market conditions will continue to negatively impact our net sales and gross profit in future periods. The COVID-19 pandemic continues to evolve and accordingly, the pace of the recovery from the pandemic as well as the potential impact of new variants or significant resurgences are not presently known. Although we believe that we will ultimately emerge from these events well positioned for long-term growth, the uncertainties with respect to the COVID-19 pandemic remain and, as such, we cannot reasonably estimate the duration or extent of its adverse impact on our business, operating results, and long-term liquidity position.
Refer to the "Results of Operations" and "Liquidity and Capital Resources" sections below for further discussion.
Optimization Program
During fiscal 2020, we performed a comprehensive review of our asset portfolio aimed at identifying non-strategic and underutilized assets to dispose of while reducing costs and driving further efficiencies in our operations (hereon referred to as the "Optimization Program"). As a result of the review, we identified assets across all of our regions which we plan to sell for total anticipated cash proceeds of approximately$100.0 million . These assets primarily consist of underutilized facilities and land, and those pending to be sold are currently reflected in assets held for sale on our Consolidated Balance Sheet. As of the quarter endedOctober 1, 2021 , we have received cash proceeds of$52.0 million in connection with asset sales under the Optimization Program (approximately$40.0 million of which was received in our 2020 fiscal year). Due to challenging market conditions which have resulted in delays of some of the asset sales, in part driven by COVID-19 travel restrictions, we anticipate that the completion of the program will extend beyond the originally anticipated timeframe of the first quarter of 2022. Included as part of this Optimization Program is the consolidation of our Mann Packing operations from four facilities into one facility inGonzales, California . The consolidation of Mann Packing allowed us the advantage of processing fresh-cut fruit and fresh-cut vegetables in one facility in theSalinas Valley and will enable us to continue to optimize labor and distribution costs. While we have realized cost savings in connection with the consolidation of our Mann Packing operations as of the quarter endedOctober 1, 2021 , our financial results for this business continue to be negatively impacted by reduced demand in our foodservice distribution channel and increased production and distribution costs which have adversely affected gross profit in our fresh and value-added products business segment.
Income Taxes
In connection with a current examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately$147.4 million (including interest and penalties) for tax years 2012 through 2016. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as we believe that the proposed adjustments are without technical merit. In one of the foreign jurisdictions, we filed an appeal in judicial court onApril 30, 2020 . OnSeptember 10, 2020 , we were notified that we lost our final appeal at the administrative level for the audit years 2012-2015, and likewise onOctober 7, 2021 for the audit year 2016. We intend to file an appeal in the judicial court inNovember 2021 with respect to the administrative ruling for the audit year 2016. For the audit years 2012-2015, we have filed a request for an injunction in judicial court which would defer payment, if any, until the end of the judicial process, and we intend to do the same for the audit year 2016.
In the other foreign jurisdiction, the administrative process has been completed
and we filed a case in judicial court on
28
--------------------------------------------------------------------------------
Table of Contents
We expect to continue to vigorously contest the adjustments and to exhaust all
administrative and judicial remedies necessary in both jurisdictions to resolve
the matters, which could be a lengthy process.
RESULTS OF OPERATIONS
Consolidated Financial Results
The following summarizes the more significant factors impacting our operating results for the 13-week and 39-week periods endedOctober 1, 2021 (also referred to as the "third quarter of 2021" and "first nine months of 2021," respectively) andSeptember 25, 2020 (also referred to as the "third quarter of 2020" and "first nine months of 2020," respectively). Quarter ended Nine months ended October 1, September 25, October 1, September 25, 2021 2020 2021 2020 Net sales$ 1,004.8 $ 989.7 $ 3,234.6 $ 3,200.0 Gross profit 48.9 67.3 264.0 214.5 Selling, general and administrative 48.0 expenses 44.1 148.3 142.4 Operating income 1.3 26.6 120.2 77.4Net Sales - Net sales for the third quarter of 2021 increased$15.1 million , or 2%, when compared with the third quarter of 2020. The increase in net sales for the third quarter of 2021 was attributable to higher net sales in all of our segments, particularly our other products and services segment including third-party freight services and poultry and meats category.Net Sales for the first nine months of 2021 increased$34.6 million , or 1%, when compared with the first nine months of 2020. The increase in net sales for the first nine months of 2021 was attributable to higher net sales within our other products and services and fresh and value-added products segments, partially offset by a decrease in net sales in our banana segment.
Net sales in both the third quarter and first nine months of 2021 were also positively impacted by fluctuations in exchange rates versus the euro, British pound, and Korean won.
Gross Profit - Gross profit for the third quarter of 2021 decreased$18.4 million , or 27%, when compared to the third quarter of 2020 primarily as a result of the impact of inflation, strained transportation capacity, lack of sufficient labor availability and other cost pressures which resulted in higher per unit production and distribution costs, specifically relating to packaging materials, fertilizers, inland freight, labor and fuel. The impact of these cost pressures in the third quarter of 2021 were intensified by our seasonality, as we have historically realized a greater portion of our net sales and gross profit during the first two calendar quarters of the year. These adverse factors were partially offset by higher gross profit in our other product and services segment driven by third-party freight services and poultry and meats. As a result of these factors, gross margin decreased 190 basis points to 4.9% in the third quarter of 2021 from 6.8% in the third quarter of 2020. Gross profit for the first nine months of 2021 increased$49.5 million , or 23%, when compared with the first nine months of 2020. The increase was driven by higher gross profit in all of our business segments. Specifically, the increase relates to (i) higher per unit sales prices in our banana segment, (ii) higher gross profit in our fresh and value-added products segment driven by pineapples, melons, fresh-cut fruits and prepared food products and (iii) higher third-party freight services net sales. These increases more than offset the adverse impact of inflation, strained transportation capacity, lack of sufficient labor availability and other cost pressures experienced in the third quarter. As a result of these factors, gross margin increased 150 basis points to 8.2% in the first nine months of 2021 from 6.7% in the first nine months of 2020. Gross profit in both the third quarter and first nine months of 2021 was also positively impacted by fluctuations in exchange rates versus the euro andCosta Rican colon, partially offset by unfavorable exchange rates versus the Mexican peso. Please refer to information under the caption "Seasonality" provided in Item 1. Business of our Annual Report on Form 10-K for the year endedJanuary 1, 2021 for further details. We expect these cost pressures to continue to negatively impact our gross profit in future periods. Selling, General and Administrative Expenses - Selling, general and administrative expenses increased$3.9 million , or 9%, in the third quarter of 2021 when compared with the third quarter of 2020, and increased$5.9 million , or 4% in first nine months of 2021 when compared with the first nine months of 2020. The increase in both periods was primarily due to higher administrative expenses in the current year, including higher employee benefit and travel costs. 29
--------------------------------------------------------------------------------
Table of Contents
Gain (Loss) on Disposal of Property, Plant and Equipment, Net - The gain (loss) on disposal of property, plant and equipment, net of$0.5 million during the third quarter of 2021 primarily related to sales of assets in theMiddle East andEurope . For the first nine months of 2021, gain (loss) on disposal of property, plant and equipment, net of$4.2 million also included a$2.4 million gain on the sale of a refrigerated vessel and a$1.1 million gain on the sale of vacant land in theMiddle East . Gain (loss) on disposal of property, plant and equipment, net of$(0.1) million for the third quarter of 2020 primarily related to a loss on the disposal of certain production assets inNorth America which was partially offset by a gain on the sale of surplus land inChile . Gain (loss) on disposal of property, plant and equipment, net of$1.5 million for first nine months of 2020 primarily related to gains on the sale of surplus land inChile . Asset Impairment and Other Charges (Credits), Net - Asset impairment and other charges (credits), net were$0.1 million during the third quarter of 2021, as compared with$(3.5) million during the third quarter of 2020. Asset impairment and other charges (credits), net for the third quarter of 2021 primarily related to impairment of low-yielding banana plants inthe Philippines . For the third quarter of 2020, asset impairment and other charges (credits), net primarily consisted of an insurance recovery associated with the 2019 voluntary product recall and severance expense related to the reorganization of ourNorth America sales and marketing function. Asset impairment and other charges (credits), net were$(0.3) million during the first nine months of 2021, as compared with$(3.8) million during the first nine months of 2020. The first nine months of 2021 primarily included a$(0.8) million insurance recovery associated with damages to certain of our banana segment fixed assets inGuatemala caused by hurricanes Eta and Iota in the fourth quarter of 2020, partially offset by the banana plant impairment discussed above and severance expense incurred in connection with the exit from a facility inEurope . Asset impairment and other charges (credits), net for the first nine months of 2020 primarily consisted of an insurance recovery related to the 2019 voluntary product recall, partially offset by (i) asset impairments, mainly related to certain of ourNorth America and European production facilities and low-yielding banana plants inthe Philippines , (ii) a legal settlement charge, and (iii) severance expense related to the reorganization of ourNorth America sales and marketing function. Operating Income - Operating income decreased by$25.3 million in the third quarter of 2021 when compared with the third quarter of 2020, primarily due to lower gross profit and higher selling, general and administrative expenses. Operating income increased by$42.8 million in the first nine months of 2021 when compared with the first nine months of 2020, primarily due to higher gross profit, partially offset by higher selling, general and administrative expenses.
Interest Expense - Interest expense decreased slightly in both the third quarter and first nine months of 2021 when compared with the comparative prior-year periods, principally due to lower interest rates and lower average debt balances.
Other Expense, Net - Other expense, net increased by$1.0 million in the third quarter of 2021 when compared with the third quarter of 2020 primarily as a result of the prior-year period including a gain related to fuel derivatives no longer designated as hedging instruments, and higher foreign exchange losses in the current year period. Other expense, net increased$0.4 million in the first nine months of 2021 when compared with the first nine months of 2020 mainly due to higher foreign exchange losses partially offset by higher gains on fuel derivatives no longer designated as hedging instruments. Income Tax (Benefit) Provision - Income tax (benefit) provision was$(6.6) million for the third quarter of 2021 when compared with$4.9 million for the third quarter of 2020, and was$9.1 million for the first nine months of 2021 compared with$9.4 million for the first nine months of 2020. The decrease in the income tax provision in both periods was primarily due to decreased earnings in certain higher tax jurisdictions. The income tax provision for the first nine months of 2021 and first nine months of 2020 also include a$0.8 million and$1.7 million benefit, respectively, relating to the NOL carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted onMarch 27, 2020 . 30 -------------------------------------------------------------------------------- Table of Contents Financial Results by Segment The following table presents net sales and gross profit by segment, and in each case, the percentage of the total represented thereby (U.S. dollars in millions): Quarter ended October 1, 2021 September 25, 2020 Segment Net Sales Gross Profit Net Sales Gross Profit Fresh and value-added products$ 601.2 60 %$ 40.9 84 %$ 600.6 61 %$ 54.2 81 % Banana 365.3 36 % 2.4 5 % 361.8 36 % 10.8 16 % Other products and services 38.3 4 % 5.6 11 % 27.3 3 % 2.3 3 % Totals$ 1,004.8 100 %$ 48.9 100 %$ 989.7 100 %$ 67.3 100 % Nine months ended October 1, 2021 September 25, 2020 Segment Net Sales Gross Profit Net Sales Gross Profit Fresh and value-added products$ 1,906.0 59 %$ 149.8 57 %$ 1,897.8 59 %$ 133.8 62 % Banana 1,210.2 37 % 98.2 37 % 1,218.4 38 % 74.3 35 % Other products and services 118.4 4 % 16.0 6 % 83.8 3 % 6.4 3 % Totals$ 3,234.6 100 %$ 264.0 100 %$ 3,200.0 100 %$ 214.5 100 %
Fresh and value-added products
Third Quarter of 2021 Compared with Third Quarter of 2020
Net sales in the fresh and value-added products segment increased by$0.6 million when compared to the third quarter of 2020, principally as a result of increased net sales of pineapples and avocados. Partially offsetting the increase were decreases in net sales of vegetables, prepared food products, and non-tropical fruit.
•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
•Vegetables net sales decreased primarily inNorth America , including in our Mann Packing operations, driven by lower sales volume related to lower demand from the foodservice channel, partially offset by higher per unit sales prices. •Prepared food products net sales decreased primarily inEurope driven by lower availability, mainly of canned pineapple products. The prior-year period benefited from heightened customer demand related to the COVID-19 pandemic as more consumers stocked up on canned goods.
•Non-tropical fruit net sales decreased primarily in the
Gross profit of fresh and value-added products decreased$13.3 million , or 25%, primarily due to lower gross profit on avocados, prepared food products, fresh-cut vegetables and pineapples, partially offset by higher gross profit on vegetables. Segment performance was negatively impacted by inflationary and cost pressures, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland freight, labor and fuel. Gross margin decreased 220 basis points to 6.8% from 9.0%.
•Avocado gross profit decreased in
•Prepared food products gross profit decreased primarily in
31--------------------------------------------------------------------------------
Table of Contents
•Fresh-cut vegetable gross profit decreased in
•Pineapple gross profit decreased primarily in
•Vegetable gross profit increased primarily in the
First Nine Months of 2021 Compared with First Nine Months of 2020
Net sales in the fresh and value-added products segment increased$8.2 million in the first nine months of 2021 principally as a result of increased net sales of pineapples and fresh-cut fruits. Partially offsetting the increase were decreases in net sales of non-tropical fruit, vegetables, melons and avocados.
•Pineapple net sales increased in all our regions, driven by higher sales volumes and per unit sales prices.
•Fresh-cut fruit net sales increased across most of our regions, driven by higher sales volumes and per unit sales prices.
•Non-tropical fruit net sales decreased primarily in theMiddle East andAsia , due to lower sales volumes and per unit sales prices. The volume of our non-tropical fruit season was negatively impacted by severe rainstorms inChile , which caused damage to certain of our farms at the beginning of 2021. •Vegetable net sales decreased primarily due to lower sales inNorth America , including in our Mann Packing operations. The decrease was driven by lower sales volumes related to lower demand from our foodservice channel, partially offset by higher per unit sales prices. •Melon net sales decreased primarily due to reduced sales volumes inNorth America as a result of lower volumes from ourGuatemala harvest, which was negatively impacted by crop damage caused by hurricanes Eta and Iota in the fourth quarter of 2020. The decrease in net sales was partially offset by higher per unit sales prices.
•Avocado net sales decreased primarily in
Gross profit in the fresh and value-added products segment increased$16.0 million , or 12%, principally due to increased gross profit on pineapples, melons, fresh-cut fruit and prepared food products. Partially offsetting the increase were decreases in gross profit on fresh-cut vegetables, avocados, non-tropical fruit, and vegetables. Additionally, the gross profit improvement was partially offset by inflationary and cost pressures, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland freight, labor and fuel. Gross margin increased 80 basis points to 7.9% from 7.1%. Gross profit in the first nine months of 2020 included$18.6 million of inventory write-offs driven by the COVID-19 pandemic. •Pineapple gross profit increased across all our regions. The consolidated increase was primarily driven by higher net sales. The increase was partially offset by higher per unit production and distribution costs. •Melon gross profit increased primarily inNorth America due to higher per unit sales prices of cantaloupes, partially offset by lower sales volume as a result of lower volumes from ourGuatemala harvest, which was negatively impacted by crop damage caused by hurricanes Eta and Iota in the fourth quarter of 2020, coupled with higher per unit production and distribution costs.
•Fresh-cut fruit gross profit increased primarily in
•Prepared food products gross profit increased across all our regions,
particularly in
•Fresh-cut vegetable and vegetable gross profit decreased primarily in our North America Mann Packing operations.
•Avocado gross profit decreased primarily in
•Non-tropical fruit gross profit decreased primarily due to severe rainstorms inChile which caused damage to certain of our farms at the beginning of 2021, resulting in$3.4 million in inventory write-offs. Additionally, gross profit decreased inAsia and theMiddle East mainly as a result of lower per unit sales prices and sales volumes due to lower 32 -------------------------------------------------------------------------------- Table of Contents demand, partially offset by lower per unit distribution and production costs. The decrease was also partially offset by an increase in gross profit inNorth America . Banana
Third Quarter of 2021 Compared with Third Quarter of 2020
Net sales of bananas increased by$3.5 million , or 1%, principally due to higher net sales inEurope primarily related to higher per unit sales prices and higher net sales in theMiddle East due to higher sales volume. Gross profit in the banana segment decreased$8.4 million , or 78%, primarily driven byAsia andNorth America . The consolidated decrease was driven by excess industry supply which lowered per unit sales prices coupled with higher per unit distribution and production costs impacted by inflationary and cost pressures. As a result of these factors, gross margin decreased 230 basis points to 0.7% from 3.0%.
First Nine Months of 2021 Compared with First Nine Months of 2020
Net sales of bananas decreased by$8.2 million , or 1%, principally due to lower net sales inNorth America and theMiddle East , partially offset by higher net sales inEurope andAsia . Gross profit in the banana segment increased by$23.9 million , or 32%, primarily driven byNorth America andEurope , partially offset by lower gross profit inAsia and theMiddle East . The improved gross profit inNorth America andEurope was mainly due to higher per unit sales prices. These improvements were partially offset by inflationary and cost pressures, which resulted in higher per unit production and distribution costs. Gross profit in the banana segment for the first nine months of 2021 also reflects a$2.5 million insurance recovery associated with damages inGuatemala caused by the two hurricanes in the fourth quarter of 2020. As a result of these factors, gross margin increased 200 basis points to 8.1% from 6.1%. Gross profit in the first nine months of 2020 included$2.2 million of inventory write-offs attributable to our banana segment as a result of the COVID-19 pandemic.
Other products and services
Third Quarter of 2021 Compared with Third Quarter of 2020
Net sales of other products and services increased$11.0 million , or 40%, due to higher net sales of third-party freight services and poultry and meats in theMiddle East .
Gross profit increased
First Nine Months of 2021 Compared with First Nine Months of 2020
Net sales of other products and services increased$34.6 million , or 41%, due to higher net sales of third-party freight services and poultry and meats in theMiddle East .
Gross profit increased
33--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Fresh Del Monte Produce Inc. is a holding company with limited business operations of its own.Fresh Del Monte Produce Inc.'s only significant asset is the outstanding capital stock of our subsidiaries that directly or indirectly own all of our assets. We conduct all of our business operations through our subsidiaries. Accordingly, our only source of cash to pay our obligations, other than financings, depends primarily on the net earnings and cash flow generated by these subsidiaries. Our primary sources of cash flow are net cash provided by operating activities and borrowings under our credit facility. Our primary uses of net cash flow are capital expenditures to increase and expand our product offerings and geographic reach, investments to increase our productivity and investments in businesses such as Mann Packing.
A summary of our cash flows is as follows (
© Edgar Online, source
