Earnings Call Transcript - DOLE Q3 2022

James O'Regan, Head of Investor Relations

Thank you, Alex. Welcome, everybody, and thank you for taking the time to join our third quarter 2022 earnings conference call. Joining me on the call today is our Chief Executive Officer, Rory Byrne; our Chief Operating Officer, Johan Linden; and our Chief Financial Officer, Jacinta Devine. During this call, we will be referring to presentation slides and supplemental remarks, and these, along with our earnings release, financial statements and other related materials are available on the Investor Relations section of Dole plc website. Please note, our remarks today will include certain forward-looking statements within the provisions of the Federal Securities Safe Harbor Law. These reflect circumstances at the time they are made and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings and press releases. Information regarding the use of non-GAAP financial measures may also be found in the press release, which also includes reconciliation to the most comparable GAAP measures. Our financial statements for the third quarter were also filed with the SEC earlier today and contain reported financial information for the quarter ended 30 September, 2022, and 30 September, 2021, and the nine months ended September 30, 2022 and 2021. Our earnings press release and investor presentation also referenced pro forma comparative financial information. This pro forma information illustrates Dole plc’s results for the third quarter and first nine months of 2021 and that the merger IPO and refinancing had occurred on January 1, 2020. This is consistent with the pro forma financial information presented in the Form F-1 filed with the SEC in connection with the IPO. With that, I am pleased to turn today’s call over to Rory.

Rory Byrne, CEO

Thank you, James. Welcome, everybody, and thank you for joining us today. While we are very pleased that the Group has delivered strong results for the third quarter. On a pro forma comparative basis, excluding the impact of currency translation and Nash M&A activity, revenue increased by approximately 5% as compared to the third quarter of 2021. Adjusted EBITDA of $73 million was ahead of expectations and significantly ahead of the prior year. The significant increase in adjusted EBITDA was driven by a strong performance in our Fresh Fruit segment, offset in part by the ongoing recovery in our Vegetables business and a specific challenge in our Diversified Americas segment in the quarter. Adjusted net income and EPS also increased significantly compared to the prior year, driven by the increase in adjusted EBITDA. In the third quarter, we continue to have a strong focus operationally on cash flow and we are pleased to announce today a cash dividend for the third quarter of $0.08 per share. This continues our commitment to return cash to shareholders. So turning to slide eight for our operational highlights. In our Fresh Fruit segment, we delivered a strong result for the quarter. North America and commercial cargo operations continue to perform very well with healthy demand, positive market pricing, and good shipping rates. In Europe, high shipping rates and adverse currency movements continue to impact performance; however, we are making good progress in managing these challenges. Supply and demand dynamics in the banana market overall have been unprecedented in 2022 and this remains a key factor as we work towards the end of this year and continue with negotiations for 2023. Overall, with our diverse sourcing base and our leading customer profile, we believe we are well placed to have a strong finish to 2022 and a positive outlook for 2023 in this division. Our Diversified EMEA segment continued to trade well on a like-for-like basis in Q3, despite increasing inflationary pressures in our core markets, again demonstrating the ability to price dynamically and benefit from product and geographic diversity. Our Diversified Americas segment was impacted by a specific issue at the end of the Chilean grape season in North America; significant supply chain disruptions led to exceptional volume disposals that impacted profitability. The overall scale and range of activity in our Diversified segment reduce the impact of the Chile grape issue when we look at our results on a full year basis, demonstrating again the benefit of a wide range of products and geographies. Our third quarter performance in Fresh Vegetables remained disappointing and while we are making progress on our turnaround plan, it is slower than we would like. Category demand was softer in Q3, and ongoing inflation continues in important cost areas. In addition, we faced higher sourcing costs due to weather-related events in key California and growing regions, which impacted the entire industry. More positively, however, our detailed turnaround plan is beginning to yield benefits. From a volume perspective, we recently achieved a number of important customer wins as we look to build back up our volume base for 2023. In all major areas of operation, we have developed detailed profit improvement plans, and we are monitoring these closely. We continue to explore all strategic alternatives for this segment and expect to see recovery in 2023. With that, I will hand you over to Jacinta to give the financial review.

Jacinta Devine, CFO

Thank you, Rory. Good morning and good afternoon. Please turn to slide 10. As Rory mentioned, we delivered a strong performance for the third quarter when compared to the prior year. Revenue for the third quarter decreased marginally against the pro forma comparative, driven by negative FX movements and the impact of M&A in our Diversified EMEA segment, and lower volumes in our Vegetable segment. On a like-for-like basis, revenue increased 5%, driven by inflation justified price increases. Adjusted EBITDA for the third quarter increased 26% to $73 million, with the increase driven by a strong performance in the Fresh Fruit segment. Similar to Q2, foreign currency translation impacted results by $4 million, and stripping this out, adjusted EBITDA increased 32% on a like-for-like basis. Turning to slide 11, adjusted net income was $13.5 million for the third quarter, significantly ahead of the prior year. The increase was driven by higher adjusted EBITDA, which offset an increase in interest expense. Adjusted fully diluted EPS for the quarter was $0.14, compared to $0.07 in the prior year and $0.03 on a pro forma comparative basis, again driven by the increase in adjusted EBITDA.

Rory Byrne, CEO

I will now provide some more detail on each of the individual segments, starting with Fresh Fruit on slide 13. We continue to see good momentum in this segment, with revenue for the third quarter increasing 11.7% compared to the pro forma comparative. The increase was driven by higher worldwide pricing and commercial cargo and higher volumes of bananas in North America. This was partially offset by lower volumes for bananas in Europe and Latin America. Adjusted EBITDA increased 200% from $17 million to $51 million for the quarter driven by higher revenue. Moving to Diversified Fresh Produce EMEA on slide 14, as with prior quarters, revenue in this segment continues to be impacted by foreign currency translation. On a like-for-like basis, revenue increased 4%, driven by a strong performance across the division and overall higher pricing. Similarly, adjusted EBITDA decreased on a reported basis due to foreign currency translation. However, on a like-for-like basis, adjusted EBITDA increased slightly by 0.1%. Then turning to Diversified Fresh Produce Americas and Rest of World. Revenue for the third quarter increased 5.8%, continuing the good momentum seen in the first half of the year. The increase was driven by higher overall average selling prices, particularly in the North American market for avocados, potatoes, and onions. Our results in this segment were impacted by a difficult end of the Chilean grape season in North America, leading to a loss in the quarter. Finally, turning to Fresh Vegetables, lower volumes contributed to a 5% reduction in revenue for the quarter. The segment continues to recover from the impact of the value-added salad recall and plant suspensions at the outset of the year, as well as lower category demand. Lower revenue, along with persistent inflation, input costs, and specific industry-wide weather challenges in California growing regions led to an adjusted EBITDA loss of $9 million for the quarter. Now turning to slide 17, capital expenditures for the third quarter were $27 million, and we now have invested $67 million year-to-date spread over reinvestments in farms and glasshouses in our growing regions, the acquisition of an additional farm in Peru, and efficiencies in logistics, warehousing, and processing closer to the markets. We are now expecting capital expenditures of $95 million for the year, a reduction of $15 million from our previous guidance. The reduction follows the reassessment of capital projects within the Group. Working capital remains elevated, mainly due to the precautionary measures taken earlier in the year to build up inventories and also due to the inflationary impact of input costs. We expect to see this unwind due to the normal seasonal working capital effects at this time of the year. However, we do still see a higher underlying level of working capital this year compared to prior years. Our net leverage at the end of the quarter was 3.4 times. We expect leverage to decrease further in the final quarter of 2022 as seasonal working capital outflows unwind.

Jacinta Devine, CFO

Turning to slide 18, we also continue to focus on our disappointing share price and believe that our valuable strategic asset base has not been fully recognized. To highlight this, we have included a slide in our investor presentation, setting out a sum of the parts valuation approach using a two-division structure. The asset division more than covers the total debt, while the operating division currently generates adjusted EBITDA of $230 million to $250 million on a debt-free basis after charging a proxy lease payment to service the debt. This is one example of the real value in Dole that we believe has not been reflected in our current share price. Now I will hand you back to Rory, who will give an update on our full-year outlook and closing remarks.

Rory Byrne, CEO

Thank you, Jacinta. While the economic environment does remain dynamic as we progress towards the end of 2022, and we continue to see positive trends and some ongoing challenges, it’s clear that the global economy is difficult with inflation and interest rates continuing to rise. We remain highly focused on operating efficiencies, capital discipline, and seeking price increases to compensate for cost increases. We believe we are well positioned with a broad portfolio of healthy and nutritious products in an industry that continues to be underpinned by strong fundamentals. However, we now expect our full year adjusted EBITDA to be at the lower end of the previously guided range due to the ongoing challenges in our Fresh Vegetable segment, which has slowed its recovery, as well as the specific Q3 issue at the end of the Chilean grape season in North America. In conclusion, we remain positive on our medium- to long-term outlook and are intensely focused on our short-term priorities for the remainder of 2022 and into 2023. Our principal priorities are clearly the turnaround of our value-added salads business, focusing on cost control and operating efficiencies across all our businesses, including the ongoing synergy projects, continuing with a disciplined approach to capital. Before I conclude, I would like to highlight that in the first nine months of the year, three out of our four segments have performed well, especially considering the complex operating environment, and we are very focused on the turnaround of our Fresh Vegetables business. I want to finish by thanking again our committed team for their ongoing efforts to drive our business forward and also by thanking our critical partners and customers for their ongoing support, which allows us to look to the future with great confidence. So, with that, I will hand back to the Operator and we can open the line for questions. Thank you.

Operator, Operator

Thank you. Our first question today comes from Adam Samuelson from Goldman Sachs. Your line is open.

Adam Samuelson, Analyst

Yes. Thank you. Good morning, everyone.

Rory Byrne, CEO

Good morning, Adam.

Adam Samuelson, Analyst

Good morning. So I guess, first question, as we think about kind of the performance in the quarter and the outlook. In Fresh Vegetables, can we maybe talk about from where we are ending the third quarter with at the EBITDA loss, and help us think about the trajectory and pathway and what has to happen for that to be a positive EBITDA contributor, if not in the fourth quarter and certainly in calendar 2023?

Johan Linden, COO

Yeah. Maybe I can take that one, Rory. So we are very happy with the work that the division is doing right now. We are focusing on servicing the customers because we know good service leads to new customer contracts and much easier pricing discussions, and we are focusing and doing good progress on our turnaround plan and we are executing on that plan. There are a lot of different facets to that plan. It’s about reviewing all the costs that we have. It’s reviewing all the pricing we have with customers. We are looking at our SKUs, so we have the right SKUs considering that we are potentially entering into a recession. We know it’s high inflation out there, so people are looking for more value, high value or affordable products. We are looking at discussions with the customers to see if we can increase some of the volumes, but we are also looking at the structure, including our own capacity. What has happened at the end of Q3, which will impact Q4 is that there has been a complete crop failure in the industry. This is not a Dole isolated incident. This goes across the whole industry, where almost 30% to 40% of all the iceberg lettuce has failed due to an extreme heat that we had at the end of summer, followed by rain. That crop failure, combined with the market being somewhat soft for value-added products, has made the quarter challenging. But this doesn’t change how we look at 2023 going forward.

Adam Samuelson, Analyst

Okay. And just to be clear, I know you are not giving guidance, but can you help maybe give some parameters on how you would be thinking about 2023?

Rory Byrne, CEO

I think it’s too early to provide a detailed update on 2023. As we approach the end of the year, it makes more sense to give a comprehensive update in the next quarter regarding our outlook for 2023. Overall, as Johan mentioned, we've been experiencing a streak of bad luck in this division, and the current production issues in Salinas, California have certainly been challenging. However, the progress made with the new management team, along with support from some of the experienced produce staff, has been positive. We have a capable management team that just needs some additional support to overcome current challenges. We are making good progress on all the profit improvement plans, and we will provide an update on our perspective for 2023 during our next call.

Adam Samuelson, Analyst

Okay. And then if I can just ask a separate question, because in the slide that you introduced this kind of asset-light summary of the parts. Is it a sale-leaseback type transaction or is that some sort of corporate split to effectuate that kind of earnings profile under serious consideration at this juncture, and if not, just help us think about what would get you to that point?

Rory Byrne, CEO

Yeah. I mean, it’s really just to illustrate to investors the very valuable long-term assets that we do have in this business. We see them as integral to our existing business. So we don’t actually have any plans to separate them or do a sale and leaseback of those assets, as they are very important to us. If you look around at some of the farm REITs, particularly the U.S. farm REITs, they have very high valuations and people are seeing the value in long-term farming and other assets. In this slide, we are just at a macro level setting it out for investors, look, this is what you own. You have good net assets in the long-term asset division, and you have asset-light, debt-free EBITDA with a significant amount, and that should attract a significantly greater value. But in the short term, we are not actually thinking about splitting the company. We like having the two pieces together, but you can actually look at them as two separately valuable businesses under one ownership structure.

Adam Samuelson, Analyst

All right. That’s really helpful. I will pass it on. Thanks.

Rory Byrne, CEO

Thanks, Adam.

Operator, Operator

Our next question comes from Roland French from Davy. Your line is open.

Roland French, Analyst

Thank you. Hi, everybody. I hope you are doing well. I have a couple of questions as well, if I could. Maybe just starting on the banana business and an update on, in terms of contracting since we last spoke, i.e., how have interactions gone across Europe and North America, as well as maybe just some color around the supply situation, has it gotten better, worse, or remained the same? That’s the first question on banana contracting. Then maybe just on the cost environment, I know in the outlook, you talked about currently seeing some positive trends but your caveat that with some further challenges. Just breaking that out in context of some of your key cost buckets. Finally, somewhat related, just on the supply chain, I know it’s clearly been friction in the last 12 to 24 months; how has the supply chain improved or worsened since we last talked?

Rory Byrne, CEO

Maybe, Johan, you take the first and I will pick up the other two.

Johan Linden, COO

When it comes to bananas, it’s been an absolutely interesting year. We started out having one view on how the year would develop, and everything changed when Russia decided to invade Ukraine. What happened then was that we had a lot of demand destruction, so demand fell off. We had to readjust supply. Costs for important input materials went up, fertilizers, and also paper, the boxes that we are using, and FX collapsed; the euro collapsed. We have been able to perform well under, although taking this backdrop, we have performed very well within the division. We are now entering the most intense negotiation period where we are negotiating with the customers. As we did on the last call, we expect the supply situation to become tight, and it has become tight. Supply has come down, probably even a little bit further than we have expected. Right now, we are in a situation when we are going out to meet customers where we feel relatively comfortable that we will be able to pass on the cost increases that we have, just because of the tight supply situation. This is also complicating the negotiations that we have with our suppliers, but I think, putting them all together, we are ending up in a good position here looking into the next year.

Rory Byrne, CEO

And then just following on with our other couple of questions, Roland, on the cost environment, it’s very hard to call whether inflation has peaked or not. We have seen this week, some of the European countries' inflation rates were slightly down. On the other hand, the U.K. rate of inflation was considerably up, as you will know. In some of our segments, we are seeing some easing of inflation, but it’s a little bit early to call. In terms of the supply chain, obviously at the end of the second quarter, we had some significant strong impact because of port congestion that had an unfortunate and big impact on our Chilean grape business, where ships were part of the ports for too long to hold the quality of the fruit and discharge they had for supermarket programs and lots of knock-on consequences. However, we are seeing some easing of port congestion, particularly in some U.S. areas, and fuel is a little bit better, with some evidence that shipping rates may be coming off their highs, but we have yet to see it come through in a material way. So I think supply chain is better than it has been, and hopefully, will settle down, and costs are probably a little too early to call whether we have hit the peak or not.

Roland French, Analyst

Okay. Great. Maybe just a quick follow-up: how seasonal is the Chilean grape business?

Rory Byrne, CEO

It’s very seasonal. I mean, it just runs for a number of months, really from the early part of the year.

Roland French, Analyst

Okay. Great. Thanks so much. Best of luck.

Rory Byrne, CEO

Thanks, Roland.

Operator, Operator

We now turn to Ben Bienvenu from Stephens. Your line is open.

Ben Bienvenu, Analyst

Yeah. Thanks so much. Good morning.

Rory Byrne, CEO

Good morning, Ben.

Ben Bienvenu, Analyst

I want to ask about the comments you made on pricing. You noted that you expect to make continued pricing increases as we move forward. Are there categories in which you feel like you have more opportunity to take price versus others, and what are you seeing so far in the prospective consumer reaction to pricing increases you have taken?

Rory Byrne, CEO

Yeah. I mean, obviously, you look at our most important category being bananas, and it’s starting from a low base. There’s a willingness to acknowledge cost increases, which can then get reflected in price increases to the consumer. There have been some ups and downs, as Johan described in terms of availability of supply, but I don’t think we are seeing any fundamental change in consumer demand. I think pricing in some of the other higher priced categories, such as mangos, papayas, and organic products, can be a little bit harder to implement significant price increases without affecting demand in those categories somewhat. However, looking at the big picture, we do not see any fundamental shift in consumer desire to purchase high-quality fruits and vegetables that we supply.

Ben Bienvenu, Analyst

Okay. Great. And then my second question relates to M&A. Can you talk a little bit about what the environment offers you? Are there particular opportunities that you are looking at that you are excited about or focused on? If you could characterize the robustness of the pipeline that you have ahead of you, that would be helpful.

Rory Byrne, CEO

Yeah. Obviously, with the year that we had, a huge and overwhelming focus of the entire management team is to try and get the Veg division turned around. We keep an eye on what’s happening in the M&A world. We know who the interesting companies are in the different segments, whether that’s berries or bananas, distribution, or avocados. We have a very good database. One of the interesting aspects of M&A is, all three divisions are performing similarly well, so I am not seeing any fundamental change in the value of those companies. We are not seeing any decline in sales or any great opportunities to buy companies cheaply, because the sector is actually doing well. It’s a bit unfortunate for us that we have the one division where we need to put in more work to fix. However, we are keeping our eyes on the opportunities that are out there. In the short term, we have probably different priorities just to get more confidence with investors, delivering the numbers, and getting the business back on track, while we have ongoing discussions regarding our M&A pipeline. At the appropriate time, we think we can add interesting pieces to the Group.

Ben Bienvenu, Analyst

Okay. Great. Thanks so much.

Rory Byrne, CEO

Thank you, Ben.

Operator, Operator

Our next question comes from Christopher Barnes from Deutsche Bank. Your line is open.

Christopher Barnes, Analyst

Hi. Thanks for the question. Rory, I just wanted to pick up on a line that you just mentioned on the consumer. Given the recession risk still palpable and inflation still high in absolute terms, are you noticing any shifts in consumer behavior, such as trading down or shifting the shopping channels? I think you mentioned that there’s still a propensity to consume, which is great, but has there been any shift, whether in North America or Europe, that concerns you from a consumer behavior perspective?

Rory Byrne, CEO

I mean, all the points you make, Christopher, are absolutely right. Inflation nerviness and lack of disposable income are certainly part of the current environment. Thankfully, fruit and veg tend to be low down the list of discretionary items that people stop buying. It’s been difficult to measure any material change in consumer behavior. Some of the higher priced categories I mentioned might be under a bit more pressure, but we do not see any fundamental shift in demand in fresh fruit and vegetables. During difficult economic periods, people might look at discounters that offer a narrower product range, but there is not a significant concern that consumer behavior toward fresh fruit and vegetable consumption has changed.

Christopher Barnes, Analyst

Thank you for that information. I understand you're not providing guidance for 2023, but since we are now in mid-November, can you share any insights on the performance so far this quarter across the various divisions? It seems that Fresh Vegetables may be performing slightly below your expectations, but how should we view the other sectors as we approach Q4?

Rory Byrne, CEO

Yeah. We are pretty happy with the other three divisions. Obviously, if we look at our European business, the biggest impact is really the FX ratio. You look at things like our currencies like the euro year-on-year, an 11% depreciation; the Swedish kroner, which is significant, a 17% year-on-year movement against the dollar. So when you are retranslating and reporting in dollars, that has quite a material impact on your numbers. Even on a day-to-day trading basis when you are importing into euro markets and CK markets with a significantly weaker currency, the inflationary pressures do put a little bit of stress on those businesses, but nothing material. We are pretty happy with our Diversified businesses. Our Fresh Fruit business has a strong position in the banana and pineapple market; we are the number one in North America. We have a loyal customer base, and we work hard to maintain the service levels and requirements. We have done that through COVID and supply complications, and our customers appreciate it. We continue to work closely to ensure cost chain items are reflected in the price. Except for the Vegetable business and currency exchange, we are feeling pretty good.

Christopher Barnes, Analyst

Okay. Great. Thanks. I will pass it on.

Operator, Operator

Our next question comes from Ken Zaslow from Bank of Montreal. Your line is open.

Ken Zaslow, Analyst

Hey, guys. How are you?

Rory Byrne, CEO

Good, Ken.

Ken Zaslow, Analyst

Just two questions. My first one is about the Chilean grape crop and the extreme heat and iceberg situation you mentioned. Will it not have an impact next year? You indicated that your outlook for 2023 wouldn't change because of that. Is there a reason why a 30% to 40% change is seasonal? Is there something to consider? It seems like the Chilean crop is seasonal.

Rory Byrne, CEO

On the Chilean one, it was actually nothing to do particularly with the crop, but rather the logistical issues we had. The ships carrying large volumes of products couldn’t get discharged in the right time, which meant we were dealing with a perishable product. The delays meant the subsequent season's product started to arrive in the market simultaneously. We are working on it, and it was just exceptionally unusual this year. We are working on the basis that those supply chain disruptions will not reoccur in 2023 and we are looking at ways to manage that to avoid similar problems. The iceberg situation was a very unusual crop failure, but we see some areas of production that can compensate, so we do not expect that crop failure to repeat in 2023.

Johan Linden, COO

The crop failure was at the tail end of the California season, and we are now moving into the Arizona season or are currently in Arizona. It will have a little bit of an impact in the Arizona season just because we are starting them a little bit earlier than expected, but we should have cycled out of that coming into January 2023.

Ken Zaslow, Analyst

Okay. My second and far more important question is, if you were to look back a year and now, and look forward three years, do you think your earnings power has changed based on the environment we are in? Do you think it stays where you would have thought it would be, and can you give the pluses and minuses of how that might emerge?

Rory Byrne, CEO

If we look back over the last year, our three segments from Fresh Fruits and our two Diversified businesses have performed pretty solidly. Our European business has had a few ups and downs, but balancing out against the most unusual economic environment. Pretty much all of us on this call have lived long enough to see the war in Europe with the Russian-Ukrainian situation, and the disruption logistics caused by COVID still endures. Given that backdrop, we performed well. Our Fresh Fruit business, with our market position and diversity of sourcing, shipping capacity, and management capacity, gives us confidence those three divisions can continue to perform well and hopefully build our profitability by even further integrating the two legacy groups. The big challenge has been the Vegetable division, and we are intensely focused on the turnaround plan. We can’t seem to catch a break at the moment, with the unfortunate crop failure impacting volumes heading into plants that require higher volumes to cover costs. We are tracking volume improvements and have solid operations management, ensuring all aspects of the business receive proper focus from operational efficiency to cost efficiency. Given the uncertain macroeconomic factors outside of our control, I am optimistic about the future.

Ken Zaslow, Analyst

Great. I appreciate it. Thank you.

Rory Byrne, CEO

Thank you, Ken.

Operator, Operator

This concludes our Q&A. I will now hand over to Rory Byrne, CEO, for final remarks.

Rory Byrne, CEO

Thank you, everybody, for joining us today. I think it’s a good Q3 number for us, a huge improvement on the prior year. Three out of our four divisions are performing very well, and although we are a little bit unlucky in our Fresh Vegetables division, we will get there. We should take a more medium to longer-term view and we have a great business with a strong market product position. We look to the future with confidence. So thank you very much.

Operator, Operator

Today’s call is now concluded.