FRESH DEL MONTE PRODUCE INC.

(FDP)
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Delayed Nyse  -  04:00 2022-06-29 pm EDT
29.22 USD   +4.17%
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FRESH DEL MONTE PRODUCE INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/04/2022 | 04:37pm EDT

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 in Europe, Africa and the Middle 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 includes Kenya), the Middle
East (which includes North Africa) and Asia. 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 and South America, Asia and Africa.

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 (which includes fresh-cut salads), 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-20220401_g1.jpg]]

COVID-19 Pandemic and Current Economic Environment


In March 2020, the World Health Organization declared the outbreak of
coronavirus ("COVID-19") a global pandemic. The COVID-19 pandemic has negatively
impacted the global economy, disrupted global supply chains and created
significant volatility and disruption of financial markets. These factors have
resulted in inflationary and cost pressures that have significantly increased,
and continue to adversely impact, our production and distribution costs,
including costs of packaging materials, fertilizer, labor, fuel, and ocean and
inland freight. We are also experiencing pressure on our supply chain due to
strained transportation capacity and lack of sufficient labor availability. In
addition, the invasion of Ukraine by Russia in early 2022 has led to further
economic disruption. While we do not operate in Ukraine and while our operations
in Russia are not material, the conflict has exacerbated inflationary cost
pressures and supply chain constraints which have negatively impacted the global
economy and our business.


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In response to these ongoing inflationary and cost pressures, we began
instituting price increases on the majority of our products during the latter
part of 2021. Additionally, certain of our contracts for key products include
contractually indexed fuel and freight surcharges that vary depending on
commodity pricing. While we expect that these inflation-justified price
increases and surcharges will continue to help mitigate our increased costs, our
gross profit continues to be negatively impacted by these unfavorable market
conditions as reflected in our first quarter of 2022 financial results. We
believe these factors will continue to adversely impact our financial
performance in future periods.

The recent events surrounding the global economy and COVID-19 pandemic continue
to evolve. Although we believe that we will ultimately emerge from these events
well positioned for long-term growth, uncertainties remain and, as such, we
cannot reasonably estimate the duration or extent of these adverse factors on
our business, operating results, and long-term liquidity position.

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, primarily consisting of
underutilized facilities and land, which we made a strategic decision to sell
for total anticipated cash proceeds of approximately $100.0 million. As of the
quarter ended April 1, 2022, we have received cash proceeds of $58.6 million in
connection with asset sales under the Optimization Program (approximately $57.0
million of which was received during fiscal years 2020 and 2021). Due to
challenging market conditions which have resulted in delays of some of the asset
sales, in part driven by COVID-19 travel restrictions, the completion of the
program has extended beyond the originally anticipated timeframe of the first
quarter of 2022.

Income Taxes

In connection with the examination of the tax returns in two foreign
jurisdictions, the taxing authorities have issued income tax deficiencies
related to transfer pricing aggregating approximately $156.5 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 are currently contesting tax assessments
related to the 2012-2015 audit years and the 2016 audit year in both the
administrative court and the judicial court. During 2019 and 2020, we filed
actions contesting the tax assessment in the administrative office. Our initial
challenge to each of these tax assessments was rejected and we subsequently lost
our appeals at the administrative court. We have subsequently filed actions to
contest each of these tax assessments in the country's judicial courts. In
addition, we have filed a request for injunction to the judicial court to stay
the tax authorities collection efforts for these two tax assessments, pending
final judicial decisions. The court has granted our injunction with respect to
the 2016 audit year and has not yet ruled with respect to the 2012-2015 audit
years. Pursuant to local law, we registered real estate collateral with an
approximate fair market value of $5.7 million in connection with the grant of
the 2016 audit year injunction. This real estate collateral has a net book value
of $4.1 million as of the quarter ended April 1, 2022. To the extent that we are
granted the injunction for the 2012-2015 audit years, we currently anticipate
that additional collateral of approximately $25.0 million would be required to
be posted. The registration of this real estate collateral does not affect our
operations in the country.

In the other foreign jurisdiction, the administrative court denied our appeal,
and on March 4, 2020 we filed an action in the judicial court to contest the
administrative court's decision. The case is still pending.

We will 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.

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RESULTS OF OPERATIONS

Consolidated Financial Results


The following summarizes the more significant factors impacting our operating
results for the quarter ended April 1, 2022 (also referred to as the "first
quarter of 2022") and April 2, 2021 (also referred to as the "first quarter of
2021").

                                                              Quarter ended
                                                         April 1,       April 2,
                                                           2022           2021
        Net sales                                       $ 1,136.9      $ 1,088.3
        Gross profit                                         89.8          105.0
        Selling, general and administrative expenses         45.2           48.9
        Operating income                                     39.8           59.7



Net Sales - Net sales for the first quarter of 2022 increased $48.6 million, or
approximately 5%, when compared with the first quarter of 2021. Net sales
benefited from the inflation-justified price increases we implemented in the
fourth quarter of 2021. Partially offsetting the increase in net sales was the
negative impact of fluctuations in exchange rates primarily versus the euro and
Japanese yen compared with the prior-year period. Additionally, lack of
availability of third-party shipping capacity on certain shipping routes
substantially limited the sales of various products. However, due to fluctuating
market conditions, the impact cannot be quantified.

Gross Profit - Gross profit for the first quarter of 2022 was $89.8 million
compared with $105.0 million in the first quarter of 2021. Despite higher net
sales, gross profit was negatively impacted by worsening inflationary and other
cost pressures compared to the prior-year period. Higher costs across-the-board
including costs of packaging materials, fertilizers, ocean and inland freight,
fuel and labor offset our higher net sales. Additionally, fluctuations in
exchange rates were also unfavorable.

Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased $3.7 million, or 8%, in the first quarter of
2022 when compared with the first quarter of 2021. The decrease was primarily
due to lower administrative expenses in the current period.

(Loss) Gain on Disposal of Property, Plant and Equipment, Net - The loss on disposal of property, plant and equipment, net of $(3.8) million during the first quarter of 2022 primarily related to the disposal of low-yielding banana plants in Central America. The gain on disposal of property, plant and equipment, net of $2.7 million during the first quarter of 2021 primarily related to a gain on the sale of a refrigerated vessel.


Asset Impairment and Other Charges (Credits), Net - Asset impairment and other
charges (credits), net were $1.0 million during the first quarter of 2022, as
compared with $(0.9) million during the first quarter of 2021. Asset impairment
and other charges (credits), net for the first quarter of 2022 primarily related
to severance expenses in connection with the departure of our former President
and Chief Operating Officer. For the first quarter of 2021, asset impairment and
other charges (credits), net primarily consisted of an insurance recovery
associated with damages to fixed assets in Guatemala caused by two hurricanes in
the fourth quarter of 2020.

Operating Income - Operating income decreased by $19.9 million in the first quarter of 2022 when compared with the prior-year period. The decrease in operating income was primarily driven by lower gross profit and the net impact of disposals of property, plant, and equipment, partially offset by lower selling, general and administrative expenses.

Interest Expense - Interest expense in the first quarter of 2022 was relatively flat when compared with the prior-year period.


Other Expense, Net - Other expense, net increased by $1.9 million in the first
quarter of 2022 when compared with the first quarter of 2021 primarily as a
result of the prior-year period including a gain related to fuel derivatives
that were no longer designated as hedging instruments, partially offset by lower
foreign exchange losses in the current year period.

Income Tax Provision - Income tax provision was $5.8 million for the first
quarter of 2022 when compared with $11.0 million for the first quarter of 2021.
The decrease in the income tax provision was primarily due to decreased earnings
in certain higher tax jurisdictions.

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Table of Contents

Financial Results by Segment


The following table presents net sales and gross profit by segment (U.S. dollars
in millions), and in each case, the percentage of the total represented thereby
and gross margin percentage:

                                                                                                          Quarter ended
                                                             April 1, 2022                                                                            April 2, 2021
 Segment                            Net Sales                        Gross Profit                Gross Margin                Net Sales                        Gross Profit                Gross Margin
Fresh and value-added
products                   $   672.7             59  %       $      44.4             49  %             6.6  %       $   631.0             58  %       $      52.2             50  %             8.3  %
Banana                         406.0             36  %              37.7             42  %             9.3  %           418.2             38  %              50.0             47  %            12.0  %
Other products and
services                        58.2              5  %               7.7              9  %            13.1  %            39.1              4  %               2.8              3  %             7.3  %
Totals                     $ 1,136.9            100  %       $      89.8            100  %             7.9  %       $ 1,088.3            100  %       $     105.0            100  %             9.7  %


First Quarter of 2022 Compared with First Quarter of 2021

Fresh and value-added products


Net sales for the first quarter of 2022 increased by $41.7 million, or 7%, when
compared with the prior-year period, as a result of increased net sales across
most product categories primarily due to higher pricing.

Gross profit for the first quarter of 2022 was $44.4 million compared with $52.2
million in the first quarter of 2021. Despite higher net sales, gross profit in
the segment continued to be negatively impacted by inflationary and other cost
pressures, which resulted in higher per unit production and distribution costs.
Specifically, the cost of packaging materials, fertilizers, ocean and inland
freight, labor, and fuel increased compared with the prior-year period. In
addition, lower gross profit of melons, a seasonal product, negatively impacted
segment performance. As a result, gross margin decreased to 6.6% compared with
8.3% in the prior-year period.

Gross profit in the fresh and value-added products segment included $3.1 million
of other product-related charges in the first quarter of 2021 related to
inventory write-offs of non-tropical fruit caused by severe rainstorms in Chile.
There were no other product-related charges in the first quarter of 2022.

Banana


Net sales for the first quarter of 2022 decreased by $12.2 million, or 3%, when
compared with the prior-year period, primarily as a result of lower sales volume
in North America, partially offset by increased pricing.

Gross profit for the first quarter of 2022 was $37.7 million compared with $50.0
million in the first quarter of 2021. Despite higher pricing compared to the
prior-year period, higher cost and lower sales volume negatively impacted gross
profit. Specifically, the cost of packaging materials, fertilizers, ocean and
inland freight, fuel, and labor increased compared with the first quarter of
2021. As a result of these factors, gross margin decreased to 9.3% compared with
12.0% in the prior-year period.

Gross profit for the banana segment included a $1.5 million net insurance recovery in the first quarter of 2021 associated with hurricane damages in Central America in the fourth quarter of 2020. There were no other product-related charges in the first quarter of 2022.

Other products and services


Net sales for the first quarter of 2022 increased $19.1 million, or 49%, when
compared with the prior-year period mainly due to higher net sales of
third-party freight services. Our fleet of vessels has enabled the expansion of
our commercial cargo services, which are benefiting from elevated shipping rates
and demand due to current supply chain constraints and inflationary pressures.

Gross profit increased $4.9 million as a result of higher net sales. Gross margin increased to 13.1% from 7.3%.

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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 (U.S. dollars in millions):

© Edgar Online, source Glimpses

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