Dole plc (NYSE:DOLE) Q3 2022 Earnings Call Transcript

Dole plc (NYSE:DOLE) Q3 2022 Earnings Call Transcript November 17, 2022

Dole plc beats earnings expectations. Reported EPS is $0.14, expectations were $0.1.

Operator: Welcome to the Dole plc Third Quarter 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 now like to turn the call over to Head of Investor Relations with Dole plc, James O’Regan.

James O’Regan: 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: Thank you, James. Welcome, everybody, and thank you for joining us today. While we are very pleased that the Group’s 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 on 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, 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 reduces 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 area — 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.

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Jacinta Devine: 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 prior year and $0.03 on a pro forma comparative basis, again driven by the increase in adjusted EBITDA. 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 North American market for avocados, potatoes and onions. Our results in this segment were impacted by a difficult end of Chilean grape season in North America, leading to a loss in the quarter. Then 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 expenditure 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. 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: 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 have continued 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 does continue 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.

Q&A Session

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

Adam Samuelson: Yes. Thank you. Good morning, everyone.

Rory Byrne: Good morning, Adam.

Adam Samuelson: 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: 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 then 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. And there’s a lot of different facets to that plan. It’s about reviewing all the costs that we are having. It’s reviewing all the pricing that 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.

And 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. But what has happened in the end of Q3 and 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 remain has failed and that is due to an extreme heat that we had in the beginning or late summer beginning of the fall followed by rain. That crop failure, combined with market being somewhat soft for value-added products, value-added is a little bit higher, has put the quarter to become challenging. But this doesn’t change how we look at 2023 going forward.

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

Johan Linden: No. I don’t think we

Rory Byrne: Yeah. I

Johan Linden: Yeah. Go ahead, Rory.

Rory Byrne: I think — yeah. I think it’s a little early to give a more comprehensive update on 2023, Adam. And I think what we will do is as we finish out the year, more logical and sensible from an investor perspective to give a more comprehensive update in the next quarter on where we see 2023. On an overall basis, as Johan says, we are just getting a run of bad luck in this division and certainly, the current production issues at in Salinas in California have been very unhelpful, but the underlying work with the new management that we put in place, with the some of the legacy produce guys going over to help out to get — to assist beyond. We have a very good management team and that they just needed a little bit more impetus and help to get over the hump at the moment. We are making good progress on all the profit improvement plans and we will update on the next call on our view on 2023.

Adam Samuelson: Okay. And then if I can just ask a separate question, because in the slide that you did introduce this kind of asset-light kind of some 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 probably ?