(DOLE) Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2023

There are 9 speakers on the call.

Operator

Welcome to the Dole PLC Second Quarter 2023 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 in listen mode only. 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.

Operator

You may now start the conference.

Speaker 1

Thank you, Ellie. Welcome everybody and thank you for taking the time to join our Q2 2023 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, Jacintha Devine. During this call. We will be referring to presentation slides, supplemental remarks and these along with our earnings release and other related materials are available on the Investor Relations section of the Double Plc website.

Speaker 1

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 by a legal press release. Information regarding the use of non GAAP financial measures may be found in our press release, which also includes a reconciliation to the most comparable GAAP measures. With that, I'm pleased to turn today's call over to Rory.

Speaker 2

Thank you, James. Welcome, everybody, and thank you all for joining us today as we discuss for 2nd quarter results. So firstly, turning to slide 6 on the financial highlights of the 2nd quarter. Well, following on from our good performance in the Q1, we're very pleased to report that our Q2 performance was equally strong. We delivered revenue and adjusted EBITDA growth driven by strong performances in our Fresh Fruit and Diversified Fresh Produce EMEA segments.

Speaker 2

Group revenue increased by 4.4 percent driven by higher pricing. Adjusted EBITDA increased by 9.7 to $123,000,000 achieving an adjusted EBITDA margin of 5.7% compared to 5.5% in the Q2 2022. Adjusted diluted EPS decreased due to higher interest expense. While we continue to work through the regulatory process for on the Plant Sale of the Vegetables Business. I am also pleased to note that on an underlying basis, this division has continued to sustain the improved performance we saw in the Q1 despite a challenging operating environment.

Speaker 2

Now turning to Slide 8 for our operational highlights. In our Fresh Foods segment, we delivered a very strong result in Q2, driven by a significantly improved performance in our European operations and in our non core markets, offset in part by the anticipated decline in commercial cargo profitability. As noted on our last call, 2022 was a challenging year in Europe as we could not quickly pass on significant cost increases to customers due to instability in the marketplace following the start of the Ukraine war. Supply chain disruption is more prevalent in non core markets in Q2 of 2022, where significant market oversupply led to excess fruit moving into these markets of low prices. We are pleased that the healthier supply and demand balance in the first half of the year has both allowed for a better pricing environment in Europe on much improved selling conditions in non core markets.

Speaker 2

However, it remains a challenge to continue to push pricing further to offset some of the inflationary pressures we have based in Europe. North America, our operations continue to performed well despite intense competition in the marketplace. We were pleased to launch our dual golden selection plan up in the quarter, which was very well received by our customers and provides a strong base for further planned innovation within this category. As always, Supply and demand dynamics in the banana markets remain an important variable as we look out into the second half of twenty twenty three. Overall, we continue to see a good balance in supply and demand tempered by an ongoing volatile macro environment.

Speaker 2

The onset of the El Nino climatic conditions can also have an impact on production. However, we believe that with our diverse sourcing base and our advanced farming practices that we are well placed to deal with any challenges that could emerge. Our diversified EMA segment has continued its good momentum in 2023, delivering another quarter of strong EBITDA growth. Inflationary driven price increases are continuing to allow for good revenue growth across our markets. However, volumes remain impacted in certain markets as pricing has increased.

Speaker 2

We're managing our cost base well and placing a strong focus on driving synergies across the segment and also taking advantage of bolt on acquisition opportunities to support our growth plans. As anticipated in our Q1 call, we began to see improving FX comparison in the 2nd quarter after a challenging headwind from FX translation over the last 12 months. While Q2 'twenty three exchange rates remain broadly in line with Q2 twenty twenty two, we are now beginning to see more favorable comparisons to the second half of the year. Our Diverse Among America's Rest of World segment has had a slow start to some of the additional investments we made to support this segment. Looking ahead to the remainder of the year, we remain confident that the division will deliver a stronger 2nd half in 2022.

Speaker 2

With that, I'll hand you over to Jacinta to take up the financial review.

Speaker 3

Thank you, Rory, and good day, everyone. Turning to the group results on Slide 10, we delivered a strong result in the second quarter with revenue increasing $90,000,000 to or 4.4 percent. On a like for like basis, the increase was 3.8%. Adjusted EBITDA increased CAD11 1,000,000 or 9.7 percent to CAD122.7 million with the increase driven by a strong performance in Fresh Fruit and Diversified Fresh Produce EMEA, offset by a decrease in Diversified Fresh Produce Americas and Rest of World. On a like for like basis, adjusted EBITDA increased 9.2%.

Speaker 3

For the first half of the year, We have now delivered $223,000,000 of adjusted EBITDA from $4,100,000,000 of revenue. Income from continuing operations increased to $63,700,000 from $59,600,000 and net income increased to $52,300,000 from $48,400,000 Adjusted net income decreased $4,100,000 to $48,400,000 and adjusted diluted EPS was $0.51 in the quarter compared to 52,400,000 at $0.55 in the Q2 of 2022. The decrease in adjusted net income was driven by an increase in interest expense, partially offset by the strong adjusted EBITDA performance. As Rory mentioned, the Fresh Vegetable division's underlying performance has improved. However, the current period was impacted by non recurring costs and the cessation of depreciation and amortization due to the assets held for sale reclassification.

Speaker 3

Now turning to the divisional updates for our continuing operations and starting with Fresh Fruit on Slide 12. Fresh Fruit division delivered another strong result in the Q2. Revenue increased 4.1%, driven primarily by higher bananas on pineapple pricing. Volumes of bananas sold increased on a worldwide basis, whereas pineapple volumes were lower. Adjusted EBITDA increased 16.9% compared to the Q2 of 2022, driven by revenue growth, which offsets higher sourcing costs and higher costs of shipping, packaging and handling, as well as lower commercial cargo activity.

Speaker 3

Turning to Diversified Fresh Projects in EMEA on Slide 13. This division also performed strongly in the quarter with reported revenue increasing 7.7 percent driven by higher pricing on a like for like basis, primarily adjusting for a $16,000,000 increase to revenue from bolt on acquisitions as well as a $1,000,000 negative impact from foreign currency retranslation. Revenue increased 6%. Adjusted EBITDA increased 10.8%, and on a like for like basis, the increase was 10%. There was a strong performance across the segment with our Spanish, Dutch, Czech and Irish businesses performing particularly well.

Speaker 3

Finally, Diversified Fresh Produce Americas and Rest of World on Slide 14. Due to lower volumes across the segment arising from our export strategy for 2023, as well as challenges faced in the various cash grade, revenue decreased 6.8% year on year. Partially offsetting these factors was continued strong performance for potatoes and onions in North America. Adjusted EBITDA for this division decreased by 16.4 set. Turning to Slide 15 to discuss our capital allocation and leverage.

Speaker 3

Capital allocation and managing our leverage remains a key focus for the group. And we are pleased that at the end of the quarter, our leverage was 2.6 times. The reduction in leverage from the Q1 was driven by strong adjusted EBITDA performance and good management of our working capital across the group. Following a similar trend to Q1, interest expense has increased approximately €9,000,000 year over year to $19,800,000 following the rise in interest rates over the past 12 months. For the full year, we are retaining our forecast of $90,000,000 We continue to dispose of non core assets within the group and received proceeds of $12,000,000 in the quarter, primarily from the sale of to vessels, which we discussed in our last earnings call and the sale of a property in Latin America.

Speaker 3

We expect to deliver further sales as the year progresses. Capital expenditure for the 2nd quarter was $21,000,000 of which $18,000,000 related to continuing operations. Expenditures incurred sorry, excuse me, expenditures included farm renovations and ongoing investments in IT, logistics and efficiency projects in our warehouse and processing facilities. For 2023, we now expect CapEx to be circa 110,000,000 and this includes $10,000,000 of CapEx attributable to the Fresh Vegetables division. Finally, we are pleased to declare a dividend of $0.08 for the 2nd quarter, continuing our commitment to return cash to shareholders.

Speaker 3

Now I will hand you back to Rory, who will give an update on our full year outlook and closing remarks.

Speaker 2

Thanks, Jacintha. Well, as we look back over the first half of the year, we're very pleased with the group's performance delivering some $223,000,000 of adjusted EBITDA. So far in 2023, we've seen the benefit of through logistical efficiencies in several areas, which is helping to bring more stability to our core food business. General balances, of course, is the reduction in on Commercial Cargo Contribution and Activity. With the onset of the new climatic conditions, there is the potential for disruption in many of our key growing regions in Central and South America in the second half of twenty twenty three and into twenty twenty four.

Speaker 2

However, as I said earlier, we are monitoring the changing weather patterns closely and believe we're well placed to deal with potential challenges used by our diverse sourcing network and indeed due to our advanced farming practices. From a macro perspective, similar to Q1, we continue to see positives for our business from the strength in the euro, more open supply chains and continuing signs of inflation moderating. However, there are some headwinds and we see higher interest rates and a continuing strong Costa Rica colon. In summary, while the macro environment remains volatile, we believe our strong first half has put us in an excellent position to deliver good results for the year, and we are now targeting an adjusted EBITDA for 2023 of at least $350,000,000 In conclusion, We're very pleased with the excellent results we've delivered for the first half of the year, and we hope to continue the momentum in the second half, while also delivering on the wider strategic for our issues we outlined for the year. To remind everyone, our principal strategic priorities for 'twenty three are completing the sale of the fresh vegetables business, focusing on cost control and operating efficiency across our businesses, including the ongoing value creation and collaboration projects, continuing with a disciplined approach to capital and accelerating growth in our core business areas.

Speaker 2

I want to finish by once again thanking again all of our people across the group for their ongoing commitment and dedication to drive at Double PLC Forward as well, of course, to our suppliers and customers for their ongoing support, which provides us with confidence as we look towards the remainder of the year. We'd also like to take this opportunity to add one further thought. As most of you will know, the hole has its origins and a great affinity with Hawaii. And we'd like to just take this opportunity to express our deepest concerns, sympathy and all of our thoughts with the people of Maui who have been so We sincerely hope that with the help of all of us together that they can recover from this strategy. So with that, I'll hand you back to the operator and we're happy to take questions.

Operator

We are now open for the question and answer session. We have our first question from Ben Benaview from Stephens. Your line is now open.

Speaker 4

Hey, good morning everybody. So I want to start with the guidance. I appreciate The nuance kind of guidance raise that you provided us with this morning. When you think about the Elements of Variability. It sounds like it's an abundance of caution relative to the unknown and the unknown being primarily weather.

Speaker 4

Is there any evidence of disruption thus far? And can you give us a sense of when kind of the window where that risk is most acutely manifesting itself, so that we can be aware of maybe when we're in a spot where we have better visibility.

Speaker 2

Yes. I mean, obviously, there's a few things going to us. First of all, we had a very strong finish to the year last year, half 2, and in particular, Q4 was particularly strong and particularly in our Fresh Foods division. Complicated times to forecast just generally, I mean, we've been hit So many uncertainties over the last couple of years from Russia, Ukraine, oil prices, energy issues, weather I'm continuing complications, so just the art of forecasting accurately becomes a little bit more difficult. But having said that, We're feeling very positive and we have added the at least to 350 to underpin that confidence.

Speaker 2

I think if any impact is likely to in terms of weather, otherwise it could be in Q4, but it's a bit early to call it. But we aren't, generally speaking, Feeling good. There's nothing in the current trading that would require us to make any kind of comments to say suggest something different to that.

Speaker 4

Okay, great. And then maybe thinking about I know it's early, but thinking about next year, I kind of think of this business as a very steady grower on an organic basis, call it low to mid single digit EBITDA growth. Is it your expectation that once you've got the Fresh Business sale behind you, and notwithstanding, unpredictable external variables. This business seems poised To deliver that as you guys continue to generate cost efficiencies and you're seeing strong performance return From a top line perspective across your businesses.

Speaker 2

Yes. I mean, it's a little early to give any kind of guidance or forecast for 2020 for a broad summary of the scenario is accurate, and we'll be planning and working over the next few months to make sure that we maximize our position in 2024.

Speaker 4

Okay. Fair enough. Congratulations.

Speaker 2

Thank you.

Operator

Our next question will come from Adam Sembelson from Goldman Sachs, your line is now open.

Speaker 4

Yes, thank you. Good morning, everyone. Good morning, Anthony. Good morning. I guess the first question maybe sort of keying up Ben's point, if you look back historically in El Nino periods, Can you maybe talk about the parts of the business that have proven more susceptible or at risk of supply Disruption or maybe the geographies and Rob, you're most kind of closely watching based on historical precedent in a longer period?

Speaker 1

Yes.

Speaker 5

So, good morning, Adam. Yes, so historically, the biggest impact has been within our Banana segment and you will have rains in Ecuador and you will basically have droughts in the other places. And if you go back historically, So the last two big ones we had, one was in the end of the 1990s and one was, I think, was 2015, 2016. In the end of 2019, the volume, the overall volumes in Ecuador came down 8% because of the rain. What has happened since then is, of course, at least if we looked at ourselves, is that we have a very experienced, we have the best team in the industry.

Speaker 5

They lived through already what happened in the late 1990s. We have prepared when

Speaker 4

it comes to drainage. We have ag practices, so that we

Speaker 5

feel that we are in a very good position to handle what might come at us. Also, when you look at the dry areas, We have more irrigation in place and also different access practices than we had been. So we don't believe the impact will be as big as it was in the late 90s. Then there are some other impacts in Peru when it comes

Speaker 4

to avocados and berries. The seasons get a

Speaker 5

little bit delayed, And volumes get a little bit lower, but the big ones are for bananas.

Speaker 4

Okay. That's very helpful. And then as I guess, a nice clarify on the EBITDA guidance for the year and I appreciate that there's the modifier of at least, But I guess, first half EBITDA of 2/23. Just the implied second half kind of is almost just a $350,000,000 would almost equal to what you did in the Q2 alone. Appreciating their seasonality, but can you just maybe talk about Where seasonality you're expecting you think seasonality might be more pronounced that, a $350,000,000 EBITDA level and how that should be?

Speaker 2

Historically, Adam, if you go back over the banana business, it was a strong first half and a much weaker second half. Last year, certainly, the back half The year was disproportionately strong. So it's a little bit of an unusual year. We're seeing a little bit more consistency in earnings over We've just put the factors into it. We're happy with Q2.

Speaker 2

We're happy with what we're trading at the moment. And we're feeling positive about the full year outcome, but We just don't think there's any sense in being more specific than that at this point in time.

Speaker 1

Okay. All right. That's helpful. I'll pass it on. Thanks.

Speaker 2

Thanks, Alan.

Operator

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

Speaker 6

Hi, good afternoon. Thanks for the question. I guess, I'm also going to pick On the EBITDA guidance, it just seems like with the way the European currencies are moving, moderating inflation, Being even more beneficial over the back half versus what we just saw in the first half, alongside like easing comparisons in the Americas, Rest of World business with the comparison with the great business a year ago. Like where specifically do you see Like the greatest like what's causing you the greatest cause concerns like over the back half. I know like spot rates for Costa Rica Cologne and Colombian peso appear to be moving against you, but Like any just any incremental color over the back half would be helpful.

Speaker 6

Thanks.

Speaker 2

I think really, as I said earlier, a lot of it relates So the outcome in the back half of last year, we had an exceptionally strong set of circumstances and everything came In a positive way, particularly in the Fresh Food division in the last quarter of 2022. The back half of the year historically We're not suggesting that this year is going to be dramatically weaker, but it's just we put all the factors into the mix and we think Let's take it step by step and let's not get ahead of ourselves in terms of putting out a figure and then having to justify it. So we're feeling comfortable. We're feeling positive. And we've put the guidance out on that basis, Chris, through into the market.

Speaker 6

Got it. Thank you. And Johan, like as it related to the volume decline of like 8% for the bananas in the late '90s, El Nino. Like, are you able to like how much of like an EBITDA headwind would that have Amounted to. Obviously, you mentioned all the improved operational practices you have in place, but This is the way like as a like if we have a worst case scenario like what kind of an EBITDA headwind are we looking at?

Speaker 6

Thanks.

Speaker 5

The beauty for us is that if

Speaker 4

the worst comes to pass and there is a very dramatic decrease in volume, We have a diversification, both in regards to our sourcing network and how our shipping is set up that we will

Speaker 5

be able to handle that better than the industry in general. So we don't believe it will have a big hit if it comes to pass

Speaker 4

for us.

Speaker 6

Okay, that's helpful. Thanks. And then one last follow-up. Like the gross debt reduction this quarter was nice See, like how much further, like, do you expect to be able to reduce debt over the balance of the year just as a result of, like, Just organic cash flow as well as like non core asset sales. Obviously, the timing of the fresh vegetable business out of your control.

Speaker 6

So I'm just trying to understand like what within your control you can do to continue reducing debt? Thanks.

Speaker 3

So for the balance of the year, we would hope to have a working capital inflow similar to last year. And asset sales, we do anticipate asset sales, but I suppose it can be difficult to predict the exact timing of those. So, we'd be expecting to come in somewhere in the range of around $950,000,000 to $970,000,000 something like that towards the end of the year. But look, it's difficult to predict, particularly with the working capital movements, but we're pleased with the progress we've made so far this year in that regard.

Speaker 6

Great. Thanks very much. I'll pass it on.

Speaker 2

Thanks, Christopher.

Operator

We have our next question from Brian Spillink from Bank of America. Your line is now open.

Speaker 7

Thanks, operator. Good morning, everyone. So, Cynthia, I wanted to just pick up maybe on that last question with regards to cash flow and free cash flow. If we look at the first half, We've got EBITDA up pretty meaningfully and we actually have cash from operations down pretty meaningfully. Free cash flow conversion and net income is like 14%, the conversion from EBITDA pretty low.

Speaker 7

So I guess two questions. You just mentioned you expect some working capital In the back half of the year, but maybe more broadly, can you just give us some guideposts on how we should think about Free cash flow as a percentage of EBITDA or net income. Just what's the normal free cash flow conversion in this business? Just simply because it's very erratic. It's moved around a lot and just trying to get a level set as we kind of work through our DCF models, How we should really be thinking about cash flows?

Speaker 3

Yes. It is difficult to predict. With our large turnover. We obviously can have significant working capital movements. So the impact In the year to date is very much normal.

Speaker 3

It's seasonal. We're actually despite the outflow in working capital where in the 6 months. We're actually pleased because that reflects a reduction in inventories, which you might recall from last year, We had increased our inventories as the defense mechanism against supply chain disruptions. So overall, that working capital movement is positive for us at this time of year. Very, really challenging, to be honest, To answer more comprehensively than that, all I can say is we're working hard to manage our working capital, but obviously with higher prices and managing that can impact the gross amount of working capital.

Speaker 3

But anyway, and that's of Ignoring the FreshVeg transaction, which will obviously change our cash flow significantly if we complete that at the end of the year.

Speaker 7

Yes, but the divestiture isn't free cash, but that's a non operating No,

Speaker 3

no, sorry. No, no, absolutely. No, No, it's NetDash, obviously. It's our NetDash.

Speaker 7

Yes. I just but so I guess two follow ups there. If I'm understanding it correctly, What you're working hard on in terms of working capital is really inventory. Is that where the biggest sort of Lever is, if you will, in terms of converting EBITDA to free cash flow is a lot of the working capital items, is it inventory that we should be watching?

Speaker 3

Inventory is important. Trade receivables are important. At different times of the year, our funding of our growers and Players can move around a bit, so that's important. And the timing of seasons makes that, difficult. The end of the year can be impacted by the timing of seasons in that regard.

Speaker 3

So that moves around quite a bit. Yes, but it is. It's focused on working capital to manage that as tightly as we can all the levers that we have in that regard.

Speaker 7

Okay. And then again, I'm going to ask again. I'm just trying to get a sense of as we're modeling out years, I'm not asking for just a pinpoint estimate, but just What's the range of just converting EBITDA to free cash flow? Yes. You know it's a 50% of EBITDA, 20% of EBITDA?

Speaker 3

Yes. So we hope to have somewhere around $50 ish $50,000,000 for the year. So

Speaker 7

$50,000,000 of free cash flow? Yes. Okay. And is that a normal like again, so just kind of think of that as a ratio of net income. Is that kind of a normalized free cash flow conversion?

Speaker 3

Yes, that's sort of a normalized number.

Speaker 6

All right, perfect.

Speaker 3

Thank you very much. Thank you very much. Yes.

Operator

We have our next question from Gary Martin from Davy. Your line is now open.

Speaker 8

Hi, Rory, Johan and Sinta. Congratulations on a very strong set of results today. Just a few questions from my side. Just first, just starting with, I know you mentioned a continuation of Strong supply and demand dynamics for fresh fruit, but just to double click into that a little bit more. Are you expecting positive volumes into the second half?

Speaker 8

And also just I suppose in congruence with that, you had mentioned strong pricing in fresh fruit as well, particularly bananas. Are you also expecting that to persist into the second half?

Speaker 2

Yes, I think, Johan, I can take that one. I think, I mean, volumes were expected to be pretty stable. We've said that there's a healthy supply demand there and pricing will be pretty similar Driven from that stability in volumes to the first half of the year. Maybe a slight weakening, but it's too hard to call too early to call yet.

Speaker 8

Thanks for that. And then just second, just on the small bolt on acquisition made in diversified EMEA during the quarter. It was interesting to see, I mean, should we see this as a bit of a starting pistol to kind of Kick back into just kind of more acquisitions in the diversified space. I mean, what's the best way to think about this?

Speaker 2

Yes. I mean, it's pretty small, and we're constantly looking at other neighboring businesses with our existing businesses that can add something and get efficiencies and that's an ongoing process. So over time, we may add in a few more bits and pieces like that. But we're not going to move Materially, those kind of acquisitions, but they're interesting, help solidify our position, help build our categories, build our position with customers. Historically, in the total projects model, it's what we did and we'll continue to do that going forward.

Speaker 2

Exactly.

Speaker 8

And then just maybe a final one, just I know you've touched on El Nino quite extensively, but I suppose just touching on The European heat wave in June July, I mean, did that is IXX having a knock on impact later in the year? Like is there Any kind of fruit and veg production issues off the back that's expected to impact Dole anyway? And what's

Speaker 2

We don't think about HeatWave is going to have a material impact on it. It will affect some categories Release of supply into Northern Europe, coming out of Southern Europe in particular, the temperatures in Spain, Southern Spain in particular, and have an impact on but we're not expecting that to have a material impact on us.

Speaker 8

Okay. That's really helpful. Thanks so much. I'll pass it on.

Speaker 2

Thanks, Gary.

Operator

Seems like we don't have any questions as of right now. I'd now like to hand back to our management for the closing remarks.

Speaker 2

Okay. Thank you. So I think we can look back at Q2 as being another good quarter and a strong sequence of good quarterly performances. Plenty of challenges, but we also see there's plenty of opportunities and we look forward to the future with optimism. So thank you all for joining the call today.

Speaker 2

Thank you very much.

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