Earnings Call Transcript - DOLE Q2 2022

Operator, Operator

Welcome to the Dole plc 2022 Second Quarter Results Conference Call and Webcast. Today’s conference is being broadcast live over the internet and is also being recorded for playback purposes. 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, Victoria. Welcome, everybody, and thank you for joining our second quarter 2022 earnings conference call. This conference call is being webcast live on our website and will be available for replay after this call. Joining me on the call today are Johan Linden, Chief Operating Officer; and Jacinta Devine, Chief Financial Officer. This is Jacinta’s first earnings call since assuming the Chief Financial Officer role on July 1st. Jacinta has over 25 years of experience in the group and we wish her every success in her new role. Our Chief Executive Officer, Rory Byrne, apologizes for not being able to join us today as he is attending to a personal matter. During this call, we will be referring to presentation slides and supplemental remarks, and these are available on the Investor Relations section of the Dole plc website. Please note, our remarks today will include certain forward-looking statements under 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. Our earnings press release, financial statements, and related materials for the second quarter can be found on our website at doleplc.com/investors. Information regarding the use of non-GAAP financial measures may also be found in the press release, which includes a reconciliation to the most comparable GAAP measures. The details of our statutory forward-looking statements disclaimer can be found in our SEC filings and in the presentation slides, which we will be referring to today. Our financial statements in the second quarter were also filed with the SEC earlier today and contain reported financial information for Dole plc for the quarters ended June 30, 2022 and June 30, 2021, and the half-year numbers for both 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 second quarter and first six months of 2021 as if 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'm pleased to turn today's call over to Johan.

Johan Linden, Chief Operating Officer

Thank you, James, and welcome everybody to – and thank you for joining us today. I want to begin by acknowledging that we recently marked the one-year anniversary of the completion of the IPO and the merger of Total Produce and Dole Food Company. The merger has brought together two highly synergistic and complementary organizations, establishing Dole plc as the global leader in our industry. We are pleased with how well the integration has gone and we continue to progress well with the synergy initiatives. In Q2, we again increased intercompany trade, which is a key objective. We are also making good progress in maximizing internal utilization of existing group assets and by working together to make investments that support the combined businesses. Additionally, we have continued with the rebranding of Total Produce businesses, which is an important step as we expand the presence of the DOLE brand in the marketplace. If we take a step back and reflect on the last year, there have been many headwinds the entire industry has faced. From rising input costs to global supply chain disruptions, the pandemic, and the ongoing geopolitical situation causing market disruptions, it is undeniable that it has been a year full of unprecedented uncertainty and challenges. However, we have been able to react to and mitigate the impact of these challenges at a speed and efficiency far superior to what we could have done prior to the merger. We know that the key to succeed in this industry over the long term is scale and diversification, which is why our vertically integrated business model, supported by our highly strategic and diversified asset base, has allowed us to continue performing well during this uncertain and challenging environment. Turning to our Q2 performance, overall, the group has delivered results for Q2 in line with our expectations. On a pro forma comparative basis, excluding the impact of currency translation and net M&A activity, revenue increased by approximately 3.2%. Adjusted EBITDA of $109 million was in line with our expectations, although behind last year. The reduction from last year was predominantly due to expected changes in the phasing of our EBITDA and a slower than anticipated turnaround in our fresh vegetable business. Turning to our balance sheet, we are pleased to see our leverage come down to 3.4x at the end of the quarter and we expect our leverage to improve further in the second half. In the second quarter, we had a strong focus on cash flow. While we needed to maintain some higher working capital to protect from supply chain shortages, we focused on tight management of working capital and discretionary spend. We also took a disciplined approach to CapEx by focusing on essential projects. Importantly, we made further progress on disposing of non-core assets totaling $10 million in Q2, as we continue to focus on optimizing our invested capital. We are pleased to announce today a cash dividend for the second quarter of $0.08 per share. This continues our commitment to return cash to shareholders. Turning to Slide 8, for our operational highlights. In our fresh fruit division, we had a strong quarter driven by our North American business and commercial cargo. As we mentioned in our Q1 call, during the first half, we have implemented cost savings and risk mitigation initiatives, including placing additional hedges in place. We progressed with the challenging task of rebalancing our supply and demand in bananas after the changes in the marketplace caused by the war. In the absence of further abrupt changes in market conditions, like we saw at the start of the war, we are now pleased with the outlook and are looking forward to a strong second half, outperforming our prior year comparatives. Our diversified business, on a like-for-like basis, had a very robust quarter, despite ongoing supply chain and inflationary challenges. We are very pleased to see our Diversified segment consistently demonstrating their ability to trade well and dynamically set pricing in response to exceptional market conditions. We expect that robustness to continue in the second half and we are very satisfied with the current progress we are making in these segments. While we are pleased with our second-quarter performance overall, we are disappointed with the progress we have made in our vegetable business. Q2 showed significant improvements over Q1, but not to the levels we anticipated in our turnaround plan. We expect to face an unfavorable environment through the second half of 2022. Inflation continues to impact our value-added salad business. We have been able to push through soft price increases. However, recent softness in category demand is creating a difficult trade-off for the industry between the pursuit of the volume needed to maximize production efficiencies and the pricing needed to offset inflationary headwinds. To combat these challenges, we are actively engaged in mitigation efforts while continuing to explore consolidation opportunities as well as strategic opportunities for growth. While we remain confident in our ability to return the vegetable business to profit, we do not now expect to see a full recovery in our vegetable business until 2023. With that, I will hand you over to Jacinta to give you the financial review.

Jacinta Devine, Chief Financial Officer

Thank you, Johan, and thank you all for joining us here today. Turning to Slide 10. As Johan mentioned, we are pleased with the strong results delivered by the Group in what remains a difficult inflationary trading environment. Revenue for the second quarter was $2.4 billion, a decrease of 4% against the pro forma comparison, primarily due to a negative foreign currency translation impact of $112 million, and a net reduction of $69 million from M&A activity, both primarily in our diversified Fresh Produce - EMEA segment. On a like-for-like basis, revenue increased by 3.2%. This increase in revenue was driven by robust growth in our Fresh Fruit and diversified fruit segments, offset in part by a decline in the Fresh Vegetables segment as a result of lower volumes in value-added salads, due to both lost volumes following the recall event earlier in the year and due to lower industry demand. Adjusted EBITDA for the second quarter was $109 million, a decrease of $34.5 million on a pro forma comparison basis. $4 million of the decrease in adjusted EBITDA was due to the impact of currency translation on the reported results. On a like-for-like basis, the $30 million decline was primarily due to the strong prior year comparison in Fresh Fruit and a loss in Fresh Vegetables. Turning to Slide 11, adjusted net income for the second quarter was $41.3 million, in line with the prior year and lower on a pro forma comparison. The decrease on the pro forma comparison was predominantly due to the decrease in adjusted EBITDA offset in part by a lower tax expense. Adjusted fully diluted EPS for the quarter was $0.44 compared to $0.74 in the prior year and $0.70 on a pro forma comparative basis, again driven by the reduction in adjusted EBITDA. I will now provide some more detail on each of the individual segments, starting with Fresh Fruit on Slide 13. Revenue for the second quarter increased by 3.5%, compared to the pro forma comparison for 2021, continuing the good momentum from the first quarter. Revenue was positively impacted by increased pricing in commercial cargo, increased pricing in North America for bananas, and higher worldwide volumes and pricing in pineapples. This was partially offset by lower pricing in non-core markets for bananas. Adjusted EBITDA for the second quarter decreased by 32.4%, compared to the pro forma comparison for 2021. The prior year comparisons had the benefits of strong market conditions due to tight supply following the hurricanes in Central America in November 2020. As expected, these conditions did not repeat in 2022. Adjusted EBITDA was also impacted by higher ocean and inland freight costs and higher costs in packaging, fertilizers, and other materials. These higher costs were partially offset by higher pricing in core markets and strong performance in the commercial cargo business. Moving to the Diversified Fresh Produce - EMEA on Slide 14. Revenue for the second quarter decreased 10.7%, compared to the pro forma comparison for 2021. This was primarily driven by a negative translation impact on currency of $110 million, due to the strengthening of the U.S. dollar in the quarter against all major European currencies. In addition, there was a net reduction to revenue from M&A activity of $69 million in the quarter. On a like-for-like basis, revenue grew 8.1%, driven by increased pricing and strong revenue growth in South Africa due to different seasonal export timings compared to 2021. Revenue growth was partially offset by some logistics challenges in Europe, which impacted volumes. Adjusted EBITDA for the second quarter decreased by 3.9%, compared to the pro forma comparison for 2021. The decrease in adjusted EBITDA was primarily a result of translating the results of European currency businesses into U.S. dollars, which strengthened significantly against European currencies compared to the prior year. On a like-for-like basis, adjusted EBITDA increased 7.4%, driven by a strong performance from our Spanish and UK businesses in the quarter, offset by a more challenging quarter for our Northern European businesses due to logistical challenges. Turning to diversified Fresh Produce - Americas and Rest of World, revenue for the second quarter increased 5.7% compared to the pro forma comparison for 2021. This increase was primarily driven by strong performance in the potato, onion, and avocado categories, as well as a recovery in Chilean grape volumes after weather impacted volumes in Q2 of 2021. Adjusted EBITDA for the second quarter decreased by 5.4%. This decrease was driven by Q2 2021 having a seasonal timing benefit in the quarter compared to Q2 2022 and due to a challenging quarter in a joint venture kiwi business. Excluding seasonal timing impacts, there was positive development in the majority of the North American businesses in the quarter, particularly in the avocados, potatoes, and onion categories. Now turning to Fresh Vegetables on Slide 16. Revenue for the second quarter decreased by 6.9%, compared to the pro forma comparison for 2021. Revenue was negatively impacted by lower volumes of value-added salad products due to lost volumes following the value-added salad recalls in December 2021 and January 2022, and lower industry demand. Revenue was also impacted by a planned decrease in volumes in fresh packed vegetable products. These decreases were partially offset by price increases in value-added salads and significantly stronger pricing in fresh packed vegetable products supported by the reduced volume strategy. Adjusted EBITDA for the second quarter was a loss of $5.7 million. Fresh vegetables adjusted EBITDA was negatively impacted by lower revenue and lower cost absorption due to lower volumes, as well as inflationary pressures on freight, packaging, and labor costs. These challenges in the value-added salads business were partially offset by improved performance in the fresh packed products. Turning to Slide 17, capital expenditures for the second quarter were $22 million. We have now invested $39.4 million year-to-date, focusing on reinvestments in farms and glasshouses in our growing regions and inefficiencies in logistics, warehousing, and processing closer to the markets. We are now expecting capital expenditures of $110 million for the year, a reduction of $15 million versus our prior guidance. After completing the disposal of two non-core warehousing assets in Europe in the quarter, we have now generated approximately $27 million in sales of non-core assets year-to-date and remain focused on optimizing our invested capital further in the coming quarters. Looking at working capital. Earlier this year, in addition to our normal seasonal working capital increases, we took additional precautionary measures by building up inventory to combat potential shortages due to global supply chain concerns. As we entered Q2, we have been starting to see normal seasonal working capital effects unwind, and while we expect our working capital to continue to come down as we move into the second half, we do still see an underlying higher level of working capital now compared to prior years being driven by the precautionary measures we took earlier in the year and higher prices. Prior to the beginning of 2022, Dole entered into $600 million of interest rate swaps with maturity dates ranging from 3 to 5 years, which effectively converted $600 million of our debt from variable to fixed rates. Earlier this year, we added a further $100 million swaps, such that we now have approximately half of our outstanding debt at fixed interest rates. We are pleased that we were proactive in mitigating some of our exposure to rising interest rates. However, in light of the recent significant interest rate increases announced by many central banks driving up underlying base rates, we expect the full-year interest expense to be approximately $60 million. We are continuing to make good progress on managing our global tax outlay after the merger last year and, having considered our latest operational forecast for the year, we expect an adjusted effective tax rate in the range of 23% to 25%. We are pleased that we were able to further diversify our funding base in Q2. As planned, we entered into a new three-year committed trade receivables arrangement, giving us increased financial flexibility at a lower cost as we continue to invest in the business and execute the strategy we outlined as part of the IPO. Our net leverage at the end of the quarter decreased to 3.4x. We expect leverage to decrease further in the second half of the year. Now, I will hand you back to Johan, who will give an update on our full-year 2022 outlook and closing remarks.

Johan Linden, Chief Operating Officer

Thank you, Jacinta. The economic environment remains fluid as we look into the second half, and today we are seeing both positive trends and further challenges. On the more challenging side, as we mentioned when referring to our fresh vegetables business, we have recently seen initial signs of adjustments in consumer behavior with evidence of consumers decreasing demand for certain value-added products, which have a higher retail selling price. However, partially compensating for this, we have seen signs of demand increasing in the banana category as consumers look to substitute for lower-priced products. In our diversified segments, our extensive range of products and markets leaves us well positioned to perform well as economic conditions change. Additionally, on the positive side, we have recently seen stabilization in prices in important commodities like packaging and fertilizers, as well as fuel, and we also started to see signs that we are turning the corner on the availability of labor. In summary, we are pleased with the outlook in the two diversified segments and believe we have an improved outlook in our fresh fruit segment compared to Q1. However, due to a slower than anticipated return to full operating profitability in our fresh vegetables, and the increasing impact on translation due to the significant strengthening of the U.S. dollar, we believe it is prudent to reduce our full-year adjusted EBITDA guidance by approximately 5.5% to a range of $330 million to $350 million. We remain positive on the long-term outlook, and our priorities for the second half of the year remain in line with what we set out during the last earnings call with a critical focus on accelerating the turnaround of our value-added salad business. In closing, we are delighted to have now reached a one-year milestone of operating at Dole plc, and I want to thank again all our talented and dedicated people for the immense contributions they have made to our business in the past year. Because of the strength of our people and the support of our partners and customers, we are looking to the future with great confidence. With that, I will now hand you back to the operator, and we can open the line for questions.

Operator, Operator

Thank you. And our first question comes from Patrick Higgins at Goodbody. Please go ahead. Your line is open.

Patrick Higgins, Analyst

Thanks. Hi, guys. Three questions for me, if that's okay. Firstly, just on the value-added salad business. Could you just give us some color on the wider market? Is it currently in decline as well, or how much is still underperforming in the market? And I guess how much pricing has the competitive set taken relative to Dole at this point? Secondly, I think you mentioned looking at consolidation opportunities within this business; could you just expand on that? Does that include potentially disposing of your business to other operators? Are you looking to maybe add to your business, and what kind of size of deals would you be looking at? And then finally, could you just give us a sense of your expectations of phasing in that business into H2? Should we expect still loss-making Q3 and then profitable into Q4 and onwards into FY 2023? Just interested to hear how that pacing is going to work? Thank you.

Johan Linden, Chief Operating Officer

Lots of questions, Patrick. Okay. So, first of all, when we look at the markets for value-added salad, we have seen the category come down. So, the category has lost some ground due to higher prices, and people are shying away from that in favor of lower-priced products such as bananas, potatoes, and onions. So, the market or the category has taken a hit, complicating our return to profitability. When a category is declining, it becomes difficult to ask for new volume at the same time that you want to raise prices. We have taken some price increases and are satisfied with them, although we expect to take more as we negotiate new contracts with customers. Yes, we've lost some market share as a consequence of the recall, but we are hopeful to reclaim some of that volume going into Q1 of next year. When it comes to consolidation, we mentioned that we are always looking around at market activities. Our core focus right now for vegetables is to return to profitability; that's our main priority. Regarding the phasing of EBITDA, we expect Q4 to be stronger than Q3.

Patrick Higgins, Analyst

That’s great. Thank you.

Operator, Operator

Thank you for your question. Our next question comes from Adam Samuelson at Goldman Sachs. Please go ahead.

Adam Samuelson, Analyst

Yes. Thank you. Good morning, everyone. I guess the first question is just to clarify a little bit. So, the $20 million reduction to the adjusted EBITDA guidance, could you maybe parse that between the reduced outlook for Fresh Vegetables? I think you alluded to an improved outlook in Fresh Fruit. Could you quantify the different moving pieces there? Specifically, the slide said that the second quarter was in line with expectations. Could you clarify that the entire $20 million reduction is in the second half?

Johan Linden, Chief Operating Officer

Yes. Q2 was in line with expectations, but looking into the second half, we had expected a stronger rebound on vegetables. That is what's driving the reduction. When we spoke during Q1, we saw strong growth for the value-added category. When a category is growing, it’s easier to reclaim lost volume due to a recall and easier to increase prices. This ability to ask for price has been affected due to the downturn. The main driving factor for the reduction is a reevaluation of the turnaround for vegetables, alongside some translation impacts we noted.

Adam Samuelson, Analyst

Okay. All right. That's helpful. And then just as we think about that change in EBITDA relative to the change in free cash flow outlook, the interest, and CapEx went down, those are largely offsetting. You mentioned expecting a full-year increase in working capital usage. Any way to quantify that as we think about the free cash flow profile of the business looks like this year?

Jacinta Devine, Chief Financial Officer

Yes. While we do expect our normal working capital inflow, we are coming off a higher base due to our decisions earlier in the year to manage the global supply challenges.

Adam Samuelson, Analyst

And sorry if I just again with the combined company, it's hard with prior years to think about the phasing would be in Dole versus Total Produce, kind of working capital. Wouldn't always…

Johan Linden, Chief Operating Officer

Yes. If you take out the recall, which impacted working capital last year, we expect an output of around $40 million to $50 million by year-end.

Adam Samuelson, Analyst

Okay. That's super helpful. I'll pass it on. Thank you.

Operator, Operator

Thank you for your question. Our next question comes from Christopher Bonds at Deutsche Bank. Please go ahead.

Christopher Bonds, Analyst

Hi, thanks. Good morning. I just had a quick follow-up on the value-added salad business. Could you provide some more specificity on when you think you'll be done with the turnaround? Do you expect the return to positive EBITDA in the fourth quarter, or is that more of a fiscal 2023 endeavor?

Johan Linden, Chief Operating Officer

We will turn it around, and we do expect a positive EBITDA for the vegetable business in Q4. We have stabilized our service to customers. Historically, we have seen when we service them well, it follows with new volume requests. We are optimistic that demand will come back for us. We have started to see some small wins, but we still need more.

Christopher Bonds, Analyst

Got it. Understood. Could you comment on sensitivities from here, from currency as it relates to EBITDA? To the extent we have further dollar strength or even a weakening, how should we think about the resulting impact on profitability? Additionally, what portion of your costs are dollar-denominated versus in local currencies?

Jacinta Devine, Chief Financial Officer

Yes. Just to clarify, we're talking about translation rather than transaction exposures. About a 1% strengthening of the U.S. dollar has an impact of about $1 million on our EBITDA. Approximately 50% of our U.S. dollar expenses are dollar-denominated.

Christopher Bonds, Analyst

Great. Thanks. That’s helpful. I’ll pass it on.

Operator, Operator

Thank you for your question. Our next question comes from Roland French at Davy. Please go ahead.

Roland French, Analyst

Hi, good morning and good afternoon, everybody. A couple of questions, if I could. Maybe just further follow-up questions on the vegetables business and value-added salads, particularly. I guess my interpretation is this is a complex category, and ultimately it feels like there needs to be more radical actions taken in that segment. Can you walk through other than pricing what actions are being taken, whether it's leadership changes, whether it's network adjustments, or looking at different channels?

Johan Linden, Chief Operating Officer

Yes, let’s see if I understood your questions. Private label versus branded has no real impact on our profitability. It does complicate production due to the addition of one SKU. I don’t have it in front of me, but my guess is that we have around 60% under the Dole brand, and the rest is around private label today. As for overall actions, we have strengthened management within the organization, adding analytical power from corporate to go through processes and numbers. We've also added industry expertise in operational excellence and are making contingency plans. If we have wins soon, then we will act according to one plan; if not, we will adjust our fixed costs.

Roland French, Analyst

Got it. Okay. That's good color. Thanks a lot. Could you remind us how much supply do you think is going to be reduced this year? Have you seen any retailers push back on any of the price increases? How do your contracts work?

Johan Linden, Chief Operating Officer

Contracts work differently in different markets and with different customers. In Europe, negotiations occur between now and November for supply contracts. In America, contracts are more rolling. Yes, we often face pushback from customers, but we've been able to pass on needed price increases in this category. It varies by market, but overall, we feel good about Europe as we successfully implemented price increases. So far, we’ve seen supply down by 3% and expect that decline to accelerate going into the second half.

Roland French, Analyst

If you look at the H2 implied EBITDA on the midpoint of the range, it still needs good growth. Is that largely coming from Fresh Fruit?

Johan Linden, Chief Operating Officer

Yes, we are optimistic about diversified segments performing well. We expect a stronger second half in Fresh Fruit compared to last year.

Operator, Operator

Thank you for your question. Our next question comes from Kenneth Zaslow at Bank of Montreal. Please go ahead.

Kenneth Zaslow, Analyst

Hey, guys. Just wanted to follow-up on the banana market a little bit. How much supply do you think is going to be reduced this year? Have you seen any retailers push back on any of the price increases?

Johan Linden, Chief Operating Officer

Contracts vary by market and customer. In Europe, we negotiate between now and November. In America, we have rolling contracts. There is usually pushback, but we feel we have successfully passed on price increases. We expect supply to decrease by about 3%, and we expect that decline to accelerate into the second half.

Kenneth Zaslow, Analyst

Given the banana outlook and stabilization in the Fresh Vegetables, do you think 2023 would be an above algorithm year due to recovery from this?

Johan Linden, Chief Operating Officer

It's too early for us to answer that. We will get back to you during the full-year guidance later in the year.

Operator, Operator

Thank you for your question. Our next question comes from Bryan Spillane at Bank of America. Please go ahead.

Bryan Spillane, Analyst

As we look into the colder weather months in Europe, potentially for energy rationing in certain areas and higher energy costs, can you talk about preparations you are making operationally to address these factors?

Johan Linden, Chief Operating Officer

We believe consumer behavior may change due to higher home heating costs. However, we sell a diversified range of products. If one product is negatively affected, others will compensate. We feel well-positioned structurally. All divisions are looking into future energy requirements. We’ve made investments into biofuels and solar energy to prepare for a harsh winter. We are aware of potential surprises in the coming year, but with our diversification, we believe we can manage these effectively.

Bryan Spillane, Analyst

Meteorological forecasts predict another La Niña. Could you remind us what impact it has on sourcing, especially from South America and the Western U.S.?

Johan Linden, Chief Operating Officer

This year has seen cloudier and colder weather, with decreases in production in Ecuador and Colombia. If that continues, the trends will persist.

Operator, Operator

Thank you for your question. Our next question comes from Ben Bienvenu of Stephens. Please go ahead.

Ben Bienvenu, Analyst

I was hoping to revisit the Fresh Vegetables category. I appreciate the color on the exit rate for profitability this year, but you expect to be back to positive EBITDA in the fourth quarter. I'm curious about the recovery of margins in 2023. Are you expecting a return to the levels seen in 2021, or is that unrealistic?

Johan Linden, Chief Operating Officer

The target for us is to return to 2020 levels. We are taking the necessary actions to achieve this expectation. We have taken actions this year that we believe will positively impact our products. The categories are coming off strong growth but we believe consumer demand will return.

Ben Bienvenu, Analyst

Regarding your expectations of pricing moving forward, are you expecting to take price increases, perhaps in smaller doses?

Johan Linden, Chief Operating Officer

Yes, we expect to take price increases in the category and anticipate underlying inflation will prompt competition to do the same. As we negotiate contracts, we will push for pricing. Thank you very much for your time. We appreciate your participation in today's call, and we look forward to speaking with you soon.

Operator, Operator

Thank you. This concludes the question-and-answer session. I would like to pass the conference back to Johan Linden for any final remarks.