Earnings Call Transcript - DOLE Q4 2022

Operator, Operator

Welcome to the Dole plc Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. Today's conference is being broadcast live over the Internet and is also being recorded for playback purposes. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. For opening remarks and introductions, I would like to turn the call over to the Head of Investor Relations with Dole PLC, James O'Regan.

James O'Regan, Head of Investor Relations

Thank you. Welcome everybody. And thank you for taking the time to join our fourth quarter and full year 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 the earnings release and other related materials, are available on the Investor Relations section of the Dole PLC website. Please note our remarks today will include certain forward-looking statements within the provisions of federal securities Safe Harbor law. These reflect circumstances at the time they're 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 be found in our press release, which also includes the reconciliation to the most comparable GAAP measures. With that, I'm pleased to turn today's call over to Rory.

Rory Byrne, CEO

Thank you, James. And welcome everybody. And thank you for joining us today. While 2022 was the first full financial year for the group since the completion of the merger of Total Produce and Dole Food Company, and the subsequent IPO of Dole PLC in July 2021, the continued integration of the legacy business was a key operational focus for us during 2022. We are very pleased with the progress made, starting with the rebranding of our operations, which created the backdrop for one new combined entity under the iconic Dole brand. We launched Dole Exotics and the Be Exotic brand in Europe; the specialist division is dedicated to the growing, procurement, ripening, and marketing of exotic produce, such as avocados and mangoes, aligning with our strategy to focus our efforts on categories with strong growth potential. We released our first sustainability reports of Dole PLC and set ambitious goals for the near, medium, and long term. These sustainability efforts were recognized by a number of industry bodies during 2022. The American Costa Rican Chamber of Commerce recognized us for social responsibility and Action Award; while all Ireland was awarded the orange and green gold accolade, which honors companies with exceptional annual performance on sustainability targets. Post year-end, we announced reaching an agreement to sell our fresh vegetables division to Fresh Express for a gross consideration of approximately $293 million, concluding the strategic review process for this division that we undertook during 2022. We believe a combination with Fresh Express will improve the offering and service to customers and consumers through increased investment in innovation, efficiencies, and food safety. I want to express my gratitude again to the dedicated employees and partners of the Dole fresh vegetable business for their valuable contributions over the years and the support, in particular, to the management team as we worked our way to reaching this agreement. Returning this division to profitability was a key focus for management last year, and this will allow us to focus on our core activities. We expect to use the net proceeds to reduce our debt, strengthen the financial position of the group, and provide more flexibility to finance our future growth. Turning to slide 7, on the fourth quarter's financial highlights, we've delivered very strong results for the fourth quarter driven by a particularly good performance in our fresh fruit segment. Global revenue increased by 4.7% on a like-for-like basis, excluding the impact of foreign currency translation movements. On a mergers and acquisitions basis, it increased by 10.2%. Adjusted EBITDA increased by 21.7% to $74.4 million, driven by the strong performance in our fresh fruit segment. This increase in adjusted EBITDA drove the increase in adjusted net income and adjusted diluted earnings per share. On slide 8 then, we recap the overall full-year performance. Against the backdrop of an unprecedented economic and operating environment, we are pleased with our financial results for the year. Group revenue came in at $9.2 billion, in line with the prior year on a pro forma basis and also in line with our guidance to the market. On a like-for-like basis, revenue increased by 5%. Price increases in response to inflation were the primary reason for this growth. Adjusted EBITDA of $338 million was in line with our guidance. The decrease year-on-year was primarily due to the loss incurred by Fresh Vegetables following a challenging year, along with the impact of negative foreign currency movements. Our Fresh Fruit segment performed very strongly, taking advantage of its strong strategic asset base. Our diversified risk projects also performed well in 2022, remaining agile in the face of challenges from supply chain disruptions, inflationary pressures, and economic uncertainty. Moving on to Slide 10 for our operational highlights, our Fresh Fruit division had a very positive end to the year and excellent overall performance in 2022. North America and Commercial Cargo operations continued to perform very well with a healthy supply and demand balance, and good shipping rates driving our performance. In Europe, high shipping rates and adverse currency movements continued to impact profitability, partially offset by an improved supply and demand balance, which allowed for better market pricing in Q4. Importantly, this dynamic has also extended to better contract pricing in Europe for 2023. The recent customer renewals have allowed for important cost variables to be reset to more sustainable levels for the industry. Overall, while supply and demand dynamics in many markets mean an important variable for 2023, with our diverse sourcing base and leading customer portfolio, we believe we're well placed to have a strong year. Our diversified EMEA segment continued to trade well on a like-for-like basis in Q4 while also benefiting from its extensive product and geographic diversity. Inflationary pressures and supply chain challenges continued to be apparent in certain markets. Still, overall, our businesses continue to demonstrate the ability to price dynamically and provide consistent and high-quality service to our customers. Looking now to 2023, we continue to be encouraged by our success in managing supply chain complexity, and with our dynamic pricing model, we expect to have a consistent year. Our Diversified Americas segment continued to be impacted by specific supply chain challenges in Q4, with disruptions affecting several products, particularly on apples and kiwis. More positively, our important Chilean cherry business had a strong start to its season, and our U.S. operations continued to perform well, particularly in products such as potatoes and onions. Overall, in 2022, the negative impact of supply chain disruptions on the export side of the business offset the positive environment in the rest of this division. However, the scale and range of activities in our Diversified Americas segment still allowed us to maintain a solid level of performance overall. Our fourth quarter performance of Fresh Vegetables remained somewhat disappointing as the industry went through an exceptional period of supply shortages, resulting in significant increases in sourcing costs in Q4. However, performance improved at the end of the quarter as supply began to improve, and as our turnaround plan began to deliver benefits. We remain focused on driving continued improvement in this business, whether it remains a part of the group. Turning to Slide 12, to our sustainability highlights in 2022, we published our first sustainability report of Dole PLC, which outlined our ambitious goals for the coming years. Summary of these goals is set out on Page 13 of our presentation. We achieved a 4% reduction in our Scope 1 and 2 emissions, achieved a valuation for CDP time disclosures, and committed to the science-based target initiative. We continue to make investments in new and renewable energy sources as we transition from fossil fuels. Examples include further solar panel facilities in Ireland, the addition of two wind turbines at manufacturing facilities in Salinas, and the addition of five new electric tractor rigs at the San Diego port terminal. Our business model remains driven by adding value to society by delivering on social investments, evidenced by our long track record in Latin America through the Dole Foundation, promoting healthy nutrition for consumers, and finally, being a good steward of our natural resources like water, biodiversity, and so on. Detailed goals for emissions for 2023 have been submitted to SBTI, and we will continue to focus on climate risk management. Our second annual sustainability report was found in the fourth quarter of 2023. With that, I'll hand you over to Jacinta to give the financial review.

Jacinta Devine, CFO

Thank you, Rory. Good morning and good afternoon. Turning to the group results on Slide 15. Firstly, it is worth noting that the results for the fourth quarter are the first set of quarterly results where we compare to reported rather than pro forma financials. As Rory mentioned, we delivered a strong performance in the fourth quarter. To recap on the key numbers, revenues for the fourth quarter increased over €100 million compared to the prior year, driven by higher pricing across all segments. On a like-for-like basis, revenue increased over 10%. Adjusted EBITDA for the fourth quarter increased by 21.7% or $13 million to $74 million, with the increase driven by a strong performance in fresh fruit. On a like-for-like basis, adjusted EBITDA increased 29%. Adjusted net income was $8.9 million, and adjusted diluted EPS was $0.09 in the quarter versus breakeven in Q4 2021, with the increase driven by higher adjusted EBITDA, offsetting higher interest expense versus the prior year. On a full year basis, revenue remained in line with the prior year, whereas adjusted EBITDA decreased by 14%. The decrease was predominantly due to significant challenges in our fresh vegetables segment, which resulted in a $33 million adjusted EBITDA loss. Foreign exchange translation also had a negative impact of $15 million. These impacts were partially offset by a strong year in price increases. Adjusted net income and adjusted diluted EPS both decreased versus the pro forma comparators for 2021, driven by the decrease in adjusted EBITDA and higher interest expense. I will now provide some more detail on the fourth quarter performance for each of the operating segments. Turning to Slide 17 for Fresh Fruit, Fresh Fruit had a strong fourth quarter, ending the year with revenue increasing 8.7% and adjusted EBITDA increasing 163%. Similar to the third quarter, the increases were driven by higher pricing for bananas worldwide, continued strong performance from commercial cargo, and higher pineapple volumes. Operating costs remained elevated, particularly shipping and packaging costs and costs of sourced fruit. However, higher prices have offset these cost increases. Moving on to Slide 18 for Diversified Fresh Produce - EMEA. The good underlying performance in this segment was demonstrated by the 6.9% increase in revenue on a like-for-like basis, driven by higher pricing. Adjusted EBITDA decreased 19.5%, but adjusting for foreign exchange and mergers & acquisitions, this decrease reduces to 4.8% on a like-for-like basis. This decrease was mainly due to higher logistics and sourcing costs faced by our Scandinavian businesses due to unfavorable conditions in South Africa, offset by strong performance in our Spanish, Dutch, and Czech businesses. Turning to Diversified Fresh Produce - Americas and Rest of World on Slide 19. Revenues for the fourth quarter increased by 19.6%, driven by higher pricing and higher volumes of cherries in Chile and continued strong sales of potatoes and onions in North America. Disappointingly, adjusted EBITDA decreased by 24% during the quarter following a weak season for Chilean apples and kiwis and lower pricing of raspberries in North America, partially offset by a strong start to the Chilean cherry season and higher pricing of potatoes and onions. Finally, turning to Fresh Vegetables on Slide 20, revenue increased by 6.1% as we saw the benefits of higher pricing for value-added products and continued strong pricing for the fresh-packed range. We continue to incur losses in the fourth quarter in Fresh Vegetables, particularly due to sourcing challenges and increased costs for vegetables and continued inflationary impacts on other input and manufacturing costs. Turning to Slide 21, capital expenditure for the fourth quarter was $31 million, and for the full year, we invested $98 million. For 2023, we expect CapEx to be around $120 million, which aligns with depreciation for 2022. We are pleased that our net leverage at the end of the year was 3x, in line with our target. As expected, we saw the unwind of seasonal working capital in the fourth quarter, which contributed to the reduction in leverage from the third quarter. For 2023, we expect the pattern of seasonal working capital movements to be similar to 2022. Our full-year interest expense was $61 million in 2022 with the continued rise in market interest rates. We currently expect our full-year interest expense for 2023 to be around $90 million before any benefit from the sale of divestments. Finally, we have declared a dividend of $0.08 for the fourth quarter, in line with previous quarters this year, continuing our commitment to return cash to shareholders. 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. The operating environment so far in 2023 continues to bring both new opportunities and challenges. As we noted in a recent update, we experienced a cyber incident identified as ransomware in February, which, although it had a limited impact on our overall operations, was disruptive to the Fresh Fruit and Vegetables divisions and our Chilean businesses in particular. More positively, we moved quickly to contain the threat and engaged with leading third-party cybersecurity experts to work in partnership with our internal teams to remediate the issue and secure our systems. Switching to supply chains, so far in 2023, we are seeing signs of improved logistical efficiencies in several areas. However, we've also seen further weather events, just colder weather, particularly in Spain, which has created challenges for importers in Northern Europe at the start of the year. Lastly, when looking at the macroeconomic environment, we've seen positives for our business with the strength in Europe, lower and more stable fuel prices, as well as some signs of inflation moderation in certain areas. However, as the environment remains uncertain, we need to remain fully focused on managing costs and delivering operating efficiencies. Overall, for 2023, we believe our business is well positioned for growth, and while forecasting in the current environment is complex, we are targeting full-year adjusted EBITDA of $350 million. Our forecast assumes no contribution from the Fresh Vegetables division. In conclusion, we're very pleased to finish 2022 with a strong fourth quarter and have agreed to divest our Fresh Vegetables division. Our principal priorities looking into 2023 are completing the sale of the Fresh Vegetables business, continuing to focus on cost control and operating efficiencies across our businesses, including the ongoing synergy projects, maintaining a disciplined approach to capital, and accelerating growth in our core business areas post completion of the Fresh Vegetables transaction. 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. With that, I'll hand you back to the operator, and we can open the line for questions.

Operator, Operator

Our first question comes from Ben Bienvenu with Stephens.

Ben Bienvenu, Analyst

Hey, good morning. I want to ask when we look at your $350 million of EBITDA guidance that you provided, some of the core assumptions that go into that, and I recognize that you noted you expect no contribution from Fresh Vegetables. But if I take this year's results and I back out Fresh Vegetables, it looks to be above that $350 million level. So maybe talk to us about what the push and pulls are in that $350 million guidance commentary.

Rory Byrne, CEO

Sure. Thanks for the question, Ben. Yes, I think the overall question is that the site that the environment is still quite volatile out there, and forecasting continues to be a very complex and difficult science, without a doubt. There is ongoing supply chain disruption; who knows where foreign exchange is going to end up? It has been quite volatile over the last couple of years. Unfortunately, we've still got the war going on in Europe, in Ukraine. Energy costs are quite volatile, fuel is quite volatile, inflation, although we've seen some indication that it might be moderating, still appears to be increasing in some European markets. So while we're doing very well to manage all of those variables, we also need to consider unexpected issues like the cyber-attack, which, while having a limited overall effect, required a lot of work to re-establish our systems and continue to operate effectively. On the other hand, foreign exchange may well be favorable, and we have seen some ups and downs across the business, but nothing major. Overall, we've had a solid start to the year. Looking at the combination of analyst estimates, the average across all analysts covering us comes in somewhere around $370 million. After taking all that into account, we arrive back at approximately $350 million for our forecast for 2023. We have reallocated the head office costs that were previously absorbed by the Fresh Vegetables division, which is reflected in our target. Once we finalize the divestiture of the Fresh Vegetables division, we plan to realign our cost base to reflect the new business, which should provide benefits in 2024. So putting aside the uncertainties, that summarizes where we are.

Ben Bienvenu, Analyst

Okay, very good. And you noted the cash coming in the door from the sale of Fresh Vegetables. I think the primary objective is to pay down debt. Can you talk about your appetite as you pay down debt and you start to see some of the other business lines improve? Perhaps some of the headwinds that you identified ease? What is your appetite to accelerate growth investments and/or pursue M&A?

Rory Byrne, CEO

Yes, we are obviously focused on debt reduction. Given the current market environment, there is a degree of caution regarding investment or M&A. We still perceive some disconnect between public and private market valuations. Good private companies in our sector are still valued highly, while larger players are undervalued by the stock market. This gap somewhat discourages us from pursuing serious M&A activity. We are continually reviewing our position and will manage our balance sheet as the company evolves over the next year or so.

Operator, Operator

Our next question comes from Adam Samuelson with Goldman Sachs.

Adam Samuelson, Analyst

Thank you. Good morning, everyone. So I guess, first question, maybe continuing on the puts and takes around 2023. Can you talk about where the supply-demand balance in bananas and pineapples stands today? How do you see the most significant areas for improvement on demand or productivity?

Rory Byrne, CEO

I think regarding seasonality, we're expecting a broadly similar profile by quarter. There may be some variations, but we don't think it will be materially different than '22 was versus '21. So there will be some ups and downs, but as you know, Adam, we look at this business on a full-year basis rather than quarter-on-quarter, and we don't expect such radical shifts as we had between Q1 '22 and Q1 '21. So we feel a bit more aligned to last year's performance. Johan, do you want to comment on the overall supply-demand balance for bananas?

Johan Linden, COO

Sure, we feel that we are in a good place right now. We started the year well. The market has been tight in banana supply, but we have managed to meet demand. Supply conditions are expected to ease a little bit throughout the year, but we believe we are well positioned for a balanced outcome regarding supply and demand for the full year. Additionally, we had an exceptional year in commercial cargo, and while we anticipate solid performance, it may not be at the historical highs of 2021 and 2022.

Adam Samuelson, Analyst

That's all very helpful. And just a quick follow-up. What are the expectations for interest expense and CapEx for the year?

Rory Byrne, CEO

Jacinta, would you like to take that?

Jacinta Devine, CFO

Sure, yes. So we are expecting an interest expense of approximately $90 million, which reflects the increase in interest rates. For CapEx, we are estimating around $120 million, which aligns with our depreciation number for 2022.

Adam Samuelson, Analyst

All right. That's super helpful. Thank you.

Operator, Operator

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

Chris Barnes, Analyst

Hi, guys. Thanks for the question. I just wanted to follow up on the Fresh Vegetables sale. Are you able to share any expectations on the timing of when you expect this transaction to close? And what your confidence level is in completing the transaction, considering potential antitrust concerns?

Rory Byrne, CEO

Thanks, Chris. There are a couple of points to highlight regarding the Fresh Vegetables deal. First of all, we believe this is a very good outcome for all stakeholders involved in this transaction. We think it's beneficial for the buyer, for us, given our financial dynamics, and for those involved in the business. We trust this secures a strong future for everyone involved. Importantly, we feel this is a good deal from both a customer and consumer perspective, as it will allow for significant investment in innovation, efficiencies, and food safety. As you know, the competition process is underway, and we've been advised to restrict public commentary to avoid interfering with the process. It's a process driven by the buyer, with appropriate input from us on the framework established within the agreement regarding competition. We will continue to work through it, and at this time, we cannot provide further updates as the process evolves.

Chris Barnes, Analyst

Understood. I guess, in the meantime, while you do own the business, can you provide any update on returning the Fresh Vegetables business to profitability? You had the cybersecurity incident earlier this quarter. Did extreme weather in California cause additional disruption? Any status update on how that business is performing?

Johan Linden, COO

Yes, we are satisfied with the work the division is doing. Our focus has been on servicing our customers. If we successfully service our customers, we typically achieve volume and pricing. We are currently executing this well. We have a strong operational cost focus to get costs down, and we have seen progress in that area. We've negotiated new contracts, and we are pushing prices where we can. We believe we are making significant headway with this division. As for the cyber-attack, it did impact service levels temporarily, but we have resumed full service now. Regarding weather, while we haven't experienced production in California this January, we expect to see higher costs during the transition we undertake in the coming weeks. Overall, we feel we're moving in the right direction.

Chris Barnes, Analyst

That's helpful. And then just a final question around the cyber incident. Do you expect to recover from the disruption through either supply recovery or insurance proceeds later in the year?

Rory Byrne, CEO

The simple answer here is no, we do not expect to recover in either of those categories. Insurance for cybersecurity in North America is currently prohibitively costly, and we do not anticipate recovering in any other significant way.

Operator, Operator

Our next question comes from Gary Martin with Davy. Your line is open.

Gary Martin, Analyst

Good morning, all. Just a quick question regarding the recent updates on the poor weather in Southern Europe and Northern Africa. Is this expected to be an issue limited to Q1, or might there be impacts throughout the first half of the year? Additionally, with the low yield in Chile, is that expected to transition into Q1 and Q2 of FY '23?

Rory Byrne, CEO

Regarding current conditions in Northern Europe, we have not seen a material impact on our business, just some minor effects in the UK and Irish markets. We expect normalization in these markets over the coming weeks. There seems to be a bit of a perfect storm this year with supply chain issues, weather concerns, and Brexit-related factors, which may have caused some Spanish producers to plant less due to pricing increases. However, we believe the market will adjust over time, and signs of improvement are already apparent. In terms of Chile, we are hopeful for improvements as we face better conditions this season. However, issues have persisted, and this FY '23 will reflect challenges, particularly in apples and kiwis. We've factored those impacts into our guidance for the year. In terms of inflation, our biggest product line remains bananas, which still provide excellent value for customers. We have not seen significant price sensitivity in bananas, although some resistance exists for higher-priced products. We expect customer spending on core essentials to remain high, so we do not anticipate material impacts.

Gary Martin, Analyst

Thanks so much for the color.

Operator, Operator

There are no further questions at this time. I'll now turn the call back over to Rory for closing remarks.

Rory Byrne, CEO

Thank you very much. We are very pleased to follow a strong Q3 with a strong Q4. Overall, despite significant challenges in 2022, we are pleased with our full-year performance. We believe this outlook positions us well for the future. Thank you all for joining us today.

Operator, Operator

This concludes today's conference call. You may now disconnect.