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-20210702_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, activation of our supply chain contingency plans to mitigate service disruptions, and the continuous monitoring of guidance from health officials and governmental authorities in determining the appropriate 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, to a lesser extent, into the second 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 27 -------------------------------------------------------------------------------- Table of Contents ports have improved during the current year, to the extent that various regions of the world implement significant shut-downs we could experience similar delays in 2021. In early 2021, health agencies in certain regions where we operate, includingNorth America andEurope , approved vaccines for combating the COVID-19 virus. While administration of the vaccines is currently underway, mass distribution is unlikely to occur until late 2021 or, in the case of certain other major countries we operate in, 2022. However, actual vaccination results are ultimately dependent on, among other factors, vaccine availability and their acceptance by individuals which are difficult to predict. Accordingly, the pace of the recovery from the COVID-19 pandemic as well as the potential for significant resurgences of the virus are not presently known. While we believe that we will ultimately emerge from these events well positioned for long-term growth and have seen a lesser negative impact on our financial results thus far in fiscal 2021 when compared to prior-year, 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 through the first quarter of 2022 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 endedJuly 2, 2021 , we have received cash proceeds of$50.5 million in connection with asset sales under the Optimization Program (approximately$40.0 million of which was received in our 2020 fiscal year). 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 will allow us the unique advantage of processing fresh-cut fruit and fresh-cut vegetables in one facility in theSalinas Valley and will optimize labor and distribution costs. We completed our move toGonzales in the third quarter of 2020, which we anticipate will enable us to improve gross profit in our fresh and value-added products segment by approximately$10 million on an annual basis, once volumes return to pre-pandemic activity. While we have realized cost savings in connection with the consolidation of our Mann Packing operations as of the quarter endedJuly 2, 2021 , our financial results for this business continue to be negatively impacted by reduced demand in our foodservice distribution channel and increased production, labor, and logistical 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$147.0 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 years 2012-2015, and likewise onDecember 21, 2020 for the audit year 2016. For the 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. We intend to follow the same procedure for the year 2016.
In the other foreign jurisdiction, the administrative process has been completed
and we filed a case in judicial court on
We strongly believe we will prevail at the judicial level in both jurisdictions. If not, we will appeal to the relevantSupreme Court . We will continue to vigorously contest the adjustments and expect to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process. We regularly assess the likelihood of adverse outcomes resulting from examinations such as these to determine the adequacy of our tax reserves. Accordingly, we have not accrued any additional amounts based upon the proposed adjustments. There can be no assurance that these matters will be resolved in our favor, and an adverse outcome of either matter, or any future tax 28 -------------------------------------------------------------------------------- Table of Contents examinations involving similar assertions, could have a material effect on our financial condition, results of operations and cash flows. Member States of theEuropean Union in which our European distributors operate have enacted, or are in the process of drafting, anti-hybrid legislation which may impact our ability to deduct the cost of certain purchases in those jurisdictions. We have analyzed the enacted and proposed draft legislation and have determined that the impact is not material to our consolidated financial results. In theU.S. , the new administration may implement substantial changes to fiscal and tax policies, which could include comprehensive tax reform. We cannot predict the impact, if any, of these potential changes to our business. However, it is possible that these changes could adversely affect our business, financial position and results of operations. 29 -------------------------------------------------------------------------------- Table of Contents 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 endedJuly 2, 2021 (also referred to as the "second quarter of 2021" and "first six months of 2021," respectively) andJune 26, 2020 (also referred to as the "second quarter of 2020" and "first six months of 2020," respectively). Quarter ended Six months ended July 2, June 26, July 2, June 26, 2021 2020 2021 2020 Net sales$ 1,141.6 $ 1,092.3 $ 2,229.9 $ 2,210.3 Gross profit 110.0 78.7 215.1 147.2 Selling, general and administrative 51.4 expenses 45.6 100.3 98.3 Operating income 59.3 33.1 119.0 50.9Net Sales - Net sales for the second quarter of 2021 increased$49.3 million , or 5%, when compared with the second quarter of 2020, and increased$19.6 million , or 1%, for the first six months of 2021 when compared with the first six months of 2020. The increase in net sales for the second quarter and first six months of 2021 was attributable to (i) higher net sales in our fresh and value-added products segment, primarily driven by higher per unit sales prices, and (ii) higher net sales of non-produce services and poultry and meats within our other products and services segment, (iii) partially offset by a slight decrease in net sales in our banana segment as a result of lower sales volumes offset by higher per unit sales prices. The overall increase was also partially offset by the negative impact of the COVID-19 pandemic on the first six months of 2021 which reduced net sales by an estimated$19.4 million in January and February when compared to the corresponding prior-year period which was not significantly affected by the pandemic, primarily based on historical trends in our foodservice distribution channel. Gross Profit - Gross profit for the second quarter of 2021 increased$31.3 million , or 40%, when compared to the second quarter of 2020, and increased$67.9 million , or 46%, for the first six months of 2021 when compared to the first six months of 2020. The increase in gross profit for the second quarter and first six months of 2021 was driven by higher gross profit in all of our business segments. Specifically, the increase relates to (1) growth in our fresh and value-added products segment driven by pineapples, which realized a robust increase in gross profit both sequentially and compared to the prior-year period mainly due to less restrictions on social gatherings in certain key markets which had a positive impact on demand, (2) higher per unit sales prices and lower per unit ocean freight costs in our banana segment, and (3) higher non-produce services net sales. The overall increase in gross profit was partially offset by higher per unit fuel, labor, inland freight, packaging, production and procurement costs which were negatively impacted by inflationary market pressures and other unfavorable economic conditions, including lack of sufficient labor availability, in the current year. We expect these cost pressures to continue to negatively impact our gross profit in future periods. Gross margin increased 240 basis points from 7.2% in the second quarter of 2020 to 9.6% in the second quarter of 2021, and increased 290 basis points from 6.7% in the first six months of 2020 to 9.6% in the first six months of 2021. Selling, General and Administrative Expenses - Selling, general and administrative expenses increased$5.8 million , or 13%, in the second quarter of 2021 when compared with the second quarter of 2020, and increased$2.0 million , or 2% in first six months of 2021 when compared with the first six months of 2020. The increase in both periods was primarily due to higher administrative expenses in the current year, including higher employee benefit, travel, and legal costs. Gain on Disposal of Property, Plant and Equipment, Net - The gain on disposal of property, plant and equipment, net of$1.1 million during the second quarter of 2021 primarily related to a gain on the sale of vacant land in theMiddle East . For first six months of 2021, gain on disposal of property, plant and equipment, net also included a$2.4 million gain on the sale of a refrigerated vessel. Gain on disposal of property, plant and equipment, net for the first six months of 2020 primarily related to gains on the sale of surplus land inChile and marine equipment. 30 -------------------------------------------------------------------------------- Table of Contents Asset Impairment and Other Charges (Credits), Net - Asset impairment and other charges (credits), net were$0.4 million during the second quarter of 2021, as compared with$1.4 million during the second quarter of 2020. Asset impairment and other charges (credits), net for the second quarter of 2021 were primarily related to severance expenses incurred in connection with the exit from a facility inEurope . For the second quarter of 2020, asset impairment and other charges (credits), net primarily consisted of asset impairments related to certain of ourNorth America and European production facilities and low-yielding banana plants inthe Philippines , offset by an insurance recovery related to the 2019 voluntary product recall. Asset impairment and other charges (credits), net were$(0.4) million during both the first six months of 2021 and the first six months of 2020. The first six 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 severance expenses discussed above. Asset impairment and other charges (credits), net for the first six months of 2020 primarily consisted of an insurance recovery related to the 2019 voluntary product recall, partially offset by asset impairments, mainly related to certain of ourNorth America and European production facilities and low-yielding banana plants inthe Philippines , and a legal settlement charge. Operating Income - Operating income increased by$26.2 million , or 79%, in the second quarter of 2021 when compared with the second quarter of 2020, and increased by$68.1 million , or 134%, in the first six months of 2021 when compared with the first six months of 2020. The increase in both periods was primarily due to higher gross profit, partially offset by higher selling, general and administrative expenses. Interest Expense - Interest expense decreased by$0.4 million in both the second quarter and first six 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 decreased by$3.6 million in the second quarter of 2021 when compared with the second quarter of 2020 primarily as a result of lower foreign exchange losses in the current year period. Other expense, net decreased$0.7 million in the first six months of 2021 when compared with the first six months of 2020 mainly due to gains in the current year period associated with fuel derivatives no longer designated as hedging instruments, partially offset by higher foreign exchange losses. Provision for Income Taxes - Provision for income taxes increased$0.6 million in the second quarter of 2021 when compared with the second quarter of 2020 and increased$11.3 million in the first six months of 2021 when compared with the first six months of 2020. The increase in both periods was primarily due to increased earnings in certain jurisdictions, partially offset by return-to-provision adjustments related to a change in estimate recognized in the second quarter of 2021 which included a$0.8 million benefit relating to the NOL carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted onMarch 27, 2020 . The tax provision for the first six months of 2020 also included a$1.7 million benefit relating to the NOL carryback provision of the CARES Act.
Financial Results by Segment
The following table presents net sales and gross profit by segment, and in each case, the percentage of the total represented thereby (U.S. dollars in millions): Quarter ended July 2, 2021 June 26, 2020 Segment Net Sales Gross Profit Net Sales Gross Profit Fresh and value-added products$ 674.0 59 %$ 57.3 52 %$ 636.2 58 %$ 37.1 47 % Banana 426.7 37 % 46.7 43 % 429.6 39 % 39.0 50 % Other products and services 40.9 4 % 6.0 5 % 26.5 3 % 2.6 3 % Totals$ 1,141.6 100 %$ 110.0 100 %$ 1,092.3 100 %$ 78.7 100 % 31
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Six months ended
July 2, 2021 June 26, 2020
Segment Net Sales Gross Profit Net Sales Gross Profit
Fresh and value-added
products $ 1,305.0 59 % $ 108.9 51 % $ 1,297.2 59 % $ 79.6 54 %
Banana 844.9 38 % 95.9 44 % 856.6 39 % 63.5 43 %
Other products and services 80.0 3 % 10.3 5 % 56.5 2 % 4.1 3 %
Totals $ 2,229.9 100 % $ 215.1 100 % $ 2,210.3 100 % $ 147.2 100 %
Fresh and value-added products
Second Quarter of 2021 Compared with Second Quarter of 2020
Net sales in the fresh and value-added products segment increased$37.8 million , or 6%, mainly due to higher net sales of pineapples, fresh-cut fruits and fresh-cut vegetables as a result of less restrictions on social gatherings in certain key markets which had a positive impact on demand when compared to the prior-year period. Partially offsetting the increase were decreases in net sales of non-tropical fruit and avocados.
•Pineapple net sales increased in all our regions driven by higher per unit sales prices and sales volumes.
•Fresh-cut fruit net sales increased primarily in
•Fresh-cut vegetable net sales increased primarily in theMiddle East and in our Mann Packing business inNorth America , driven by higher sales volumes and per unit sales prices. •Non-tropical fruit net sales decreased primarily in theMiddle East and, to a lesser extent,North America andAsia . The volume of our non-tropical fruit season was negatively impacted by severe rainstorms inChile which caused damage to certain of our farms in the first quarter of 2021. Additionally, theMiddle East andAsia realized lower per unit sales prices due to lower demand and excess industry supply in certain markets, partially offset by higher per unit sales prices inNorth America due to product mix.
•Avocado net sales decreased primarily due to lower sales volumes and per unit sales prices, mainly as a result of excess supply in the market.
Gross profit of fresh and value-added products increased$20.2 million , or 54%, primarily due to higher gross profit on pineapples, prepared food products, melons, and fresh-cut fruit. Partially offsetting the increase was decreased gross profit on fresh-cut vegetables and avocados. Gross margin increased 270 basis points to 8.5% from 5.8%. Gross profit in the second quarter of 2020 included$9.0 million of inventory write-offs due to the COVID-19 pandemic. •Pineapple gross profit increased across all our regions.North America realized the largest increase due to higher per unit sales prices and sales volumes coupled with lower per unit ocean freight costs. This increase was partially offset by higher per unit fuel, labor, inland freight, packaging, production and procurement costs.
•Prepared food products gross profit increased in
•Melon gross profit increased primarily inNorth America due to higher per unit sales prices of cantaloupes, partially offset by higher per unit product costs primarily as a result of lower volumes due to the negative impact of hurricanes Eta and Iota on our harvest in the fourth quarter of 2020.
•Fresh-cut fruit gross profit increased primarily in
•Fresh-cut vegetable gross profit decreased in our Mann Packing business in
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•Avocado gross profit decreased primarily driven by lower per unit sales prices
coupled with higher per unit distribution costs as a result of lower sales
volume.
First Six Months of 2021 Compared with First Six Months of 2020
Net sales in the fresh and value-added products segment increased$7.8 million , or 1%, in the first six months of 2021 principally as a result of increased net sales of pineapples, fresh-cut fruits and prepared food products. This improvement was primarily the result of fewer restrictions on social gatherings in certain key markets which had a positive impact on demand when compared to the prior-year period. Partially offsetting the increase were decreases in net sales of non-tropical fruit, melons, avocados, vegetables and fresh-cut vegetables.
•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, primarily
•Prepared food product net sales increased in theMiddle East andEurope . The increase in theMiddle East was due to higher sales volumes while the increase inEurope was due to higher per unit sales prices. •Non-tropical fruit net sales decreased primarily in theMiddle East ,North America andAsia , mainly due to lower sales volumes. 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. •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 due to lower per unit sales prices mainly as a result of excess supply in the market, partially offset by higher sales volumes. •Vegetable and fresh-cut vegetable net sales decreased primarily due to lower sales inNorth America , including our Mann Packing operations. The decrease was driven by lower sales volumes partially offset by higher per unit sales prices. Gross profit in the fresh and value-added products segment increased$29.3 million , or 37%, principally due to increased gross profit on pineapples, prepared food products, melons and fresh-cut fruit. Partially offsetting the increase were decreases in gross profit on fresh-cut vegetables, non-tropical fruit, and vegetables. Gross margin increased 220 basis points to 8.3% from 6.1%. Gross profit in the first six months of 2020 included$16.6 million of inventory write-offs driven by the COVID-19 pandemic. •Pineapple gross profit increased across all our regions. The overall increase was primarily driven by higher per unit sales prices and sales volumes coupled with lower per unit ocean freight costs. This increase was partially offset by higher per unit fuel, labor, inland freight, packaging, production and procurement costs. •Prepared food products gross profit increased inEurope andNorth America . The increase inEurope was driven by higher per unit sales prices while the increase inNorth America was driven by higher sales volumes coupled with lower per unit production costs driven by product mix. •Melon gross profit increased primarily inNorth America due to higher per unit sales prices of cantaloupes and lower ocean freight costs, partially offset by higher per unit distribution costs and higher per unit product costs 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.
•Fresh-cut fruit gross profit increased primarily in
•Fresh-cut vegetables and vegetables gross profit decreased primarily in our Mann Packing business inNorth America , driven by higher per unit product costs as a result of lower sales volume, partially offset by higher per unit sales prices. •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 a combination of lower demand and excess industry supply, partially offset by lower per unit distribution and production costs. The decrease was also partially offset by an increase in gross profit inNorth America . 33
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Banana
Second Quarter of 2021 Compared with Second Quarter of 2020
Net sales of bananas decreased by$2.9 million , or 1%, principally due to lower net sales in theMiddle East , and, to a lesser extent,North America , partially offset by higher net sales inEurope andAsia . Gross profit in the banana segment increased$7.7 million , or 20%, 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 and lower per unit ocean freight costs. These improvements were partially offset by higher fuel, labor, inland freight, packaging, production and procurement costs. Gross margin increased 180 basis points to 10.9% from 9.1%. Gross profit in the second quarter of 2020 included$1.6 million of inventory write-offs attributable to our banana segment as a result of the COVID-19 pandemic.
First Six Months of 2021 Compared with First Six Months of 2020
Net sales of bananas decreased by$11.7 million , or 1%, principally due to lower net sales in theMiddle East andNorth America , partially offset by higher net sales inAsia andEurope . Gross profit in the banana segment increased by$32.4 million , or 51%, 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 and lower per unit ocean freight costs. These improvements were partially offset by higher fuel, labor, inland freight, packaging, production and procurement costs. Gross profit in the banana segment for the first six 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. Gross margin increased 390 basis points to 11.3% from 7.4%. Gross profit in the first six months of 2020 included$1.8 million of inventory write-offs attributable to our banana segment as a result of the COVID-19 pandemic. Other products and services Second Quarter of 2021 Compared with Second Quarter of 2020
Net sales of other products and services increased
Gross profit increased
First Six Months of 2021 Compared with First Six Months of 2020
Net sales of other products and services increased
Gross profit increased
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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 (
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