Del Monte Corporation (FDP) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Del Monte Corporation Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now hand the conference over to Christine Cannella, Vice President, Investor Relations. Christine, please go ahead.

Thank you, Trevor. Good day, everyone, and thank you for joining our third quarter 2026 conference call. Joining me for today's discussion are Mr. Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Ms. Monica Vicente, Senior Vice President and Chief Financial Officer. I hope that you've had a chance to review the press release that was issued earlier via Business Wire. You may also visit the company's IR website at investorrelations.freshdelmonte.com to access today's earnings materials and to register for future distributions. This conference call is being webcast live on our website and will be available for replay after this call. Please note that our press release and our call today include non-GAAP measures. Reconciliations of these non-GAAP financial measures are set forth in the press release and investor supplemental slide deck, which is available on our website. I would like to remind you that much of the information we will be speaking to today, including the answers we give in response to your questions, may include forward-looking statements within the safe harbor provisions of the federal securities laws. In today's press release and in our SEC filings, we detail risks that may cause our future results to differ materially from these forward-looking statements. Our statements are as of today, October 28, 2026, 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 financial results, followed by a question-and-answer session. With that, I will turn today's call over to Mr. Mohammad Abu-Ghazaleh. Please go ahead, sir.

Thank you, Christine. Good morning, everyone, and thank you for joining us. When we acquired Del Monte Foods earlier this year, we saw an opportunity to do much more than expand our portfolio. we saw the potential to bring together the strengths of 2 iconic businesses that had operated separately for decades, creating a stronger foundation for long-term growth. Today, with our second full quarter of the expanded portfolio behind us, that opportunity is beginning to take shape. Our third quarter performance reflects the contribution of our foods business and the progress that we are making toward building a stronger, more diversified company. While our fresh operations continue to navigate a challenging global environment. Foods is broadening our earnings base and adding greater balance to our business. But what is most important to me is not simply what the acquisition is contributing today. It is what these businesses can accomplish together. For the first time, we can fully connect our agricultural expertise, global infrastructure, manufacturing capabilities and the strength of the Del Monte brand under one strategy. And we believe that this creates opportunities for growth that neither businesses could have pursued as effectively on its own. An important part of realizing that potential is strengthening the foundation of our foods business, where our teams have made significant progress in a relatively short period of time. Customer fill rates have improved from 87% in the prior year period to approximately 98% ahead of the upcoming holiday season, representing our best improved service levels and helping restore confidence among retail partners in our Del Monte Foods division. These improvements reinforce our confidence in the underlying strength of the business and the Del Monte brand. We hold strong positions in our core categories, including approximately 25% market share in canned vegetables and in refrigerated fruits. And importantly, we have plans in place to leverage the capabilities of our integrated company to build on those positions through innovation and growth. Beyond the progress we are making in our foods division, what truly distinguishes Del Monte Corporation is the combination of 5 complementary strengths that we believe position us well competitively. These include our global pineapple franchise, fresh-cut capabilities, the unified Del Monte brand, our vertically integrated supply chain and a global shelf-stable manufacturing platform. Individually, these are valuable assets. Our food business can fully leverage our global agricultural sourcing, fresh and frozen processing capabilities and broader resources. At the same time, our fresh business has new opportunities to extend into additional product categories, formats and consumer occasions. Our long-term growth strategy is built around making the most of these complementary strengths guided by our new North Star created by this union. More servings, more consumers, more occasions. Our ambition is to make fruits and vegetables a greater part of consumers' everyday lives with consumption remaining below recommended levels worldwide, we see a tremendous opportunity to put our unique capabilities to work, making nutritious foods more accessible, convenient and relevant to consumers everywhere. Innovation will be central to realizing that opportunity. We are developing an ambitious pipeline of products with new formulations, modern packaging and convenient formats designed to attract younger consumers while continuing to serve the household that have trusted Del Monte for generations. We currently anticipate initial launches of the phase products beginning in the second half of '27 and throughout 2028. As we expand our prepared foods business and introduce higher-value products, we see opportunities to improve our sales mix and support margin expansion while remaining disciplined in how we invest. We have a clear vision for the future, a remarkable team and the capability to take Del Monte into its next chapter. There is still much work ahead, but I have tremendous confidence in the direction we are taking. Our history is what brought us here. What we built together will define our future. Thank you for your continued interest in Del Monte Corporation. With that, I will turn it over to Monica Vicente, our Chief Financial Officer, to discuss our financial results. Monica?

Thank you, Mr. Abu-Ghazaleh, and good morning, everyone. Before I review our third quarter results, I want to focus on 3 priorities that continue to shape our performance: advancing the integration and financial contribution of Del Monte Foods; improving returns across our global operating network; and maintaining disciplined capital allocation as we invest for growth and strengthen cash generation. Together, these priorities are improving operating efficiency, expanding our margin potential and strengthening the Del Monte portfolio across fresh and prepared foods. Starting with Del Monte Foods. The third quarter marked 6 full months of ownership. Integration continues to progress well, and we remain on track to deliver approximately $9 million of annual margin expansion through the pricing portfolio and trade spend initiatives discussed last quarter. We are increasing our outlook for net sales to approximately $650 million and adjusted EBITDA to approximately $45 million, up from our previous expectations of $625 million and $35 million, respectively. This increase reflects stronger-than-expected performance to date. Our integration work remains focused on procurement, logistics, commercial execution and trade spend efficiency. These actions are designed to expand margins and strengthen cash generation. Across our global fresh platform, we continue to take decisive actions to build a more agile and cost-effective production network. In Costa Rica, we advanced the previous announced closure of banana farms and continues repurposing a significant portion of the land to expand production of our premium pineapple varieties, therefore, shifting resources toward higher return opportunities and strengthening returns over time. Turning to our third quarter financial performance. Net sales were $1.1 billion, an increase of 7% year-over-year. Adjusted net sales increased by 14%. Gross profit increased 27% to $103 million, significantly outpacing sales growth. Gross margin was 9.4%, an expansion of 150 basis points. Adjusted operating income was $35 million, adjusted net income attributable to Del Monte Corporation was $24 million and adjusted diluted EPS was $0.50. Adjusted EBITDA increased 5% to $61 million, representing a margin of 5.6%. The prepared foods segment delivered a 17.5% gross margin, the highest among our reportable segments and contributed meaningful scale and profitability during the quarter. In our global fresh platform, favorable pricing across portions of the portfolio partially offset lower volume in certain categories and higher production, procurement, freight, distribution and fuel costs. Results also reflected adverse currency movements, primarily from the stronger Costa Rica colon. Against that backdrop, we are focused on 3 areas. First, we are optimizing supply and logistics by realigning our production and distribution network to improve asset utilization, lower costs and expand margins. Second, we are focused on improving returns on our product portfolio, directing capital and operating resources to our premium products and opportunities with the strongest potential to generate earnings and cash. Third, we are advancing pricing, sourcing and productivity by maintaining pricing discipline, expanding sourcing flexibility and protecting service levels for our customers. Turning now to capital allocation and our full year outlook. Net cash provided by operating activities for the first 9 months was $53 million, which supported integration, strategic inventory buildup and working capital requirements while preserving financial flexibility. We continue to expect full year capital expenditures of $85 million to $95 million, focused on integration, productivity, premium fresh capacity, fresh-cut growth in Europe and technology-enabled efficiency. On shareholder returns, our Board declared a quarterly cash dividend of $0.30 per share or $1.20 annualized, payable on December 4, 2026, to shareholders of record as of November 11, 2026. Looking at our full year '26 outlook. We are reiterating our outlook for adjusted net sales growth of 13% to 15% and adjusted EBITDA of approximately $230 million to $240 million. We continue to expect gross margins of 11% to 12% for fresh and value-added products, 14% to 15% for prepared foods and 10% to 11% for other products and services, consistent with our prior outlook. For bananas, we now expect full year gross margins of 2% to 3% compared with our prior expectation of 3% to 4%. The revision reflects weather-related volume impacts, production costs, distribution and currency pressures. Bananas remains strategically important to our integrated fresh platform, and we are addressing the factors within our control through footprint optimization, pricing and sourcing to build a more efficient business with stronger long-term economics. We now expect full year inflationary pressures of approximately $55 million to $65 million, with more than half impacting bananas. The primary drivers are higher fuel and energy costs, foreign currency movements, including the Costa Rica colon and fertilizer and other raw material costs. Weather-related impacts associated with El Nino conditions and ongoing geopolitical instability have contributed to the cost pressures during the year. Despite these pressures, we continue to expect adjusted net sales and adjusted EBITDA within our previously communicated ranges and are addressing them through pricing discipline, sourcing flexibility and network actions. In summary, the quarter provides clear evidence that our strategy is working. Del Monte Foods performance to date has exceeded our initial outlook, and we are reallocating resources toward higher return opportunities across our global fresh platform. We believe these actions are creating a more balanced Del Monte with stronger earnings and cash generation potential. That concludes my remarks. Operator?

[Operator Instructions] Our first question comes from the line of Mitch Pinheiro with Sturdivant.

Mohammad, I wanted to ask was this first is obviously on Del Monte Foods, your acquisition, you've had it for 6 months. And you've talked a little bit about your learnings and the integration. But I'm just curious if you could just dive a little deeper into what you've learned, what maybe new potential growth avenues that maybe you didn't or weren't aware of when you first purchased it? I'd like to know where you are in the integration? Are we in the early stages? Or how far along are we? And if you'd be willing to share perhaps where you think the gross margins could be as you look out when you're sort of fully integrated?

Yes. I think all in all, Mitch, we really overshot our expectation. You know that we were expecting that it will take us longer to integrate that it will be with so much barrier or difficulties. Fortunately, this has not been the case. We really integrated our businesses much more rapidly than anticipated as well as the kind of integration between the fresh and the interrelationship between the fresh and the food was really quite smooth and constructive, I would say. So our 2 divisions, I would say, work together in a very, very fluid and effective way. That's on the integration where we are very, very satisfied with the way it's going. I can say that we are almost 60% or more in that road. We have a little more to -- in terms of utilizing our infrastructure and maximizing that potential where we have a lot of room to improve. As far as the -- like I mentioned in my script, there is so many new offerings that will be coming into the market in the next 6 to 7 months, which will make a huge significant addition to the portfolio that we have right now. And most importantly really is leveraging our fresh with the food. There will be new like pineapple pink that will go into the fresh produce, that fruit category where I mentioned that we will hold about 90% market share into that area. That's where we're focusing now. We are very strong into great fruit and oranges. You see it in the retail shops all over the place, we are going to be going, hopefully, in a few months into the pineapple as well, the gold as well as the pink. And these will be really significant in terms of value and penetration in the market. So we have so many other as well, which we cannot disclose at this time, but they will be coming throughout '27 and '28. We are extremely confident. We are extremely encouraged and excited actually about the potential that we will create by -- through the combination of food and fresh together to cross-merchandise, cross-promote and enter in a different format. We are right now and consider ourselves as a consumer goods company rather than a fresh fruit or produce company. I'm not thinking anymore that we are a fresh produce only fresh produce company. We are a consumer goods company with 2 divisions, one is fresh and one is food and each supplement and support the other. That's how we look at the business today.

And then, Mitch, on your question about margins, we find that these products have very strong margins. So we do expect our margins to be in the mid- to low-20% for those products.

Okay. And then speaking of margin and relating that to your full year outlook, if you -- you're talking prepared foods as a gross margin target for the full year of 14% to 15%. And you came in your first quarter of ownership, you had almost 19% and then this past quarter was 17.5%, excellent margins. But for it to drop to that 14% to 15% for the full year, we'd see -- it would have to have a meaningful falloff in Q4. Am I calculating that correct? Or is there something that you're factoring in that we're unaware of?

We are factoring this -- where we are going -- the environment we are in today with the increased cost every day that's happening on steel, on fuel, on everything that you can think of. So we don't know what's going to happen even next week or next month. So we need to be kind of cautious in terms of our expectation. Hopefully, that would be better than what we expect.

And to add to that, remember that our sales in the fourth quarter due to the holiday season on the food products, our sales increased significantly, but so does our trade spend. So that dilutes our margin a little bit. So that's part of it.

Okay. And then -- and related to Del Monte Foods, the inventories went up in the quarter. And I'm curious when that inventory build unwinds? How does that unwind into the fourth quarter and then, I guess, into the first quarter of next year?

Which inventory, the one that we got from the state or are you talking about the new inventory?

You build inventories during the growing season.

Yes. So at the end of Q3 -- as of Q3, we're almost done season for foods. We actually accumulated less inventory than expected. We do have co-manufacturers that hold some of our inventory. So that was positive on our debt as well. If you look at our working capital and debt, it's better than we expected. So we just finished -- we're almost done with the tax season in the summer now. And obviously, those sales will come in Q4 is a big sales quarter through the rest of the year until our tax season starts again next year.

Okay. Moving on just to the bananas. Obviously, you talked, Mohammad, that it's obviously an integral part of your business and you're working to sort of improve the margins. But I mean, at some point, a 2% to 3% gross margin, I mean, that's not sustainable, obviously. And you're getting rid of underproductive farms and you are avoiding underproductive contracts, low margin, 0 margin contracts. Is there growth in bananas under those circumstances? Or how should we think about the banana business even as -- I know we're not talking 2027. But -- and I know you've experienced a lot of fuel and the black sigatoka, your cost to combat that. But does 2027 normalize? Or are we in a new normal for bananas?

No, I think '27 is going to be kind of a turning point in terms of bananas because like you just said, it's not sustainable for any grower -- I mean, for any marketer. I would say the growers, they are making -- I mean, the prices for -- even the growers have increased by $0.50, $0.60, even $1 more to buy bananas from third-party growers for this coming year. So banana on the market is not cheap, it's not being -- I mean, it's not going down. Cost of bananas is increasing. The growers demanding more money and the marketers are paying more money. When I say marketers, I mean the companies that are distributing this fruit in North America or elsewhere. In our case, when our business, like I mentioned earlier, our business now, we consider the company as a consumer goods company. So our focus will be more on the profitability rather than just volume and revenue. Bananas will become over the years, Mitch, a very small portion of our total, let's say, our total pie. So it will not be the determining factors for our profitability, for our growth and our future plans. Now in my opinion, bananas cannot stay and cannot be sustainable at these prices, at these levels. And if you looked at press releases a few days ago, Chiquita has made, I think, a letter to their customers and retailers seeing that with the cost structure, with the market conditions, be it on the climate side, be it on the market conditions, the cost pressure in terms of packaging and others, this business cannot be sustained. So I believe that every marketer, every company that is trading bananas today realize that fact -- and it's a choice whether they want to survive or go under if they continue on the same path. These prices in the market cannot be sustainable. We, as a company, Del Monte Corporation, we are not going to be -- I mean, driven by such forces because we are determined to make a reasonable, decent margin on our bananas. So we -- our direction and objective is to improve our margins.

Okay. Just 2 more questions. One, I didn't see your -- you haven't seen your 10-Q yet, but I was curious how your fresh-cut fruit business performed. And yes, that would be helpful.

Sure. All right. So fresh-cut for the quarter, we did see some lower volume -- were impacted somewhat by less traffic in the fresh produce area. But obviously, the sale price was strong, but it was definitely impacted by lower volume and the additional cost of in the transportation, production, everything, as we said, the inflationary cost pressures hit all our products. So margins were a little bit lower than last year, but pricing was strong.

Okay. And then lastly, I saw that you received cash about $30 million distribution from unconsolidated companies. I was curious what that may have represented.

That was in Q1. We had it in Q2, it's year-to-date, yes. We had an investment in a fund that exited a company that they were invested in, and that was our profit. So quite a good investment.

Okay. I'm sorry, I didn't see that in the Q2 -- I didn't see that there, but okay. That's all from me.

Our next question comes from the line of Anthony Lebiedzinski with Sidoti.

So I just wanted to follow up on bananas. As far as the closure of the 4 farms in Costa Rica, will that have any meaningful improvement on margins heading into next year? Or how do we think about that as far as perhaps helping out the profitability for bananas, just that initiative alone?