Dole plc (DOLE) Earnings Call Transcript & Summary

We're delighted to get a chance to catch up with Dole plc. First, we're going to start with a quick disclaimer.

Before we get started, I would like to note that our remarks today will include certain forward-looking statements covered by the federal securities safe harbor law. Our remarks reflect circumstances at the time they are made, and we are not going to provide any updates or revisions. Actual results may, of course, be materially different due to a range of factors that we disclosed in our financial filings. Also, we are not going to disclose any material nonpublic information.

Okay. Dole plc is a market leader in fresh produce. In 2022, the company generated over $9 billion of revenue and over $300 million of EBITDA, which they reported last week. The company is the product of a merger between Ireland-based Total Produce and U.S.-based U.S. Dole Food, a subsequent IPO of the new company in the U.S. during 2021. It's a company with a rich history, experienced management team. With us today are Chief Executive Officer, Rory Byrne; and Chief Financial Officer, Jacinta Devine. Welcome, and thank you, both of you for joining us today.

Rory, I'd like to start. For people in the audience that may not know Dole intimately, perhaps a brief description of the company and principal product lines and geographies.

Good morning, Bryan. Thanks very much for inviting us here today. It's a great pleasure for us to participate in the -- in your conference this year. So yes, I think the optimal word there is probably intimately in terms of Dole because everybody knows the Dole brand per se. Dole, obviously, the brand -- one of the iconic brands in the fresh produce industry. And in terms of the evolution of our group from total produce to Dole was one of the main attractions for us. So the new Dole plc, as you rightly say, came about by the bringing together of two already well-established and strong companies in the fresh produce sector with Total Produce plc and the Dole Food Company. And bringing them together, created the global leader in the fresh produce sector, more than twice the size of our nearest competitor. And our objective is to build on the strengths of the two legacy companies, which have very complementary activities. So just to give you a flavor of what the two companies are, maybe we look firstly at the legacy Total Produce company and how it's evolved. It's primarily a European-focused company. Over the years, we developed to become the #1 fresh produce providers and are the leading fresh produce provider in some markets. The #1 position in countries like Ireland, the U.K., Holland, Sweden, Denmark, the Czech Republic, Spain and strong positions in other markets. What we do in those markets is we tend to offer, to a greater or lesser extent, depending on the structure of the market, the full range of the fruit basket to the customers. So one of our key skills is making sure that 52 weeks of the year, we have the full availability of fruit and veg that all of our customers would want over the course of the year. Very focused on our service capability, strong import activity to fulfill that category management role of providing fruit every day of the year throughout the full year. We prepack, we distribute specific orders to specific customers. We handle, we ripen, we store, we distribute, and we market to all of the individual available market segments from wholesale through to food service and on to retail. And then over the last 10-plus years, Total Produce in its own right, expanded its business in the North American market. We started out acquiring 65% of the Oppy company, Vancouver-based, but most of the businesses in the North American market. They're strong specialists. They've developed, over the years, specialist categories from things like New Zealand kiwis to New Zealand category of apples. They focus on Chile, they focus on Mexico, top fruit berries, grapes and a wide range of products. We then added in a couple more pieces to the jigsaw North America with Progressive Produce and [ Gambles ] in particular, which gave us a stronger geographic footprint. So then turning to the Legacy Dole. The Legacy Dole business, obviously, is well known in the North American market. Three essential divisions. They had a -- what they call, a Diversified Fruit business, which was all non-banana and pineapple business. It had a strong focus out of Chile, Peru and Mexico. Strong top fruit, apple, pear business, grape business, berries and over the last number of years have also developed a very significant cherry business within that group. They also have a strong position in South Africa, which is the other Southern Hemisphere supplier primarily to Europe as well for a similar product range and some citrus in that as well. The Dole veg business is the second division, and that's a business that consists of a fresh packed producer of a range of salads and vegetables for sale, freshly packed plus, a significant $1 billion revenue business in the value-added salads category. And the third business is really our division, I should say, is really the jewel in the crown, and one of the real strong strategic reasons that the business was fundamental interesting to us as part of the merger. And that's what was known and still remains known as a Fresh Fruit division, which is essentially the banana and pineapple business within Dole. So significant farming assets, good shipping [ fleet ], the #1 market position in North America, the #2 market position in Europe. So when you bring all that together, as a combined group, we have strong backward integration, strong forward integration into the market, over 115,000 acres of productive land, some 13 ships, more than 250 facilities split between both Europe and North America with some in South America. We sell to over 75 countries. And we've got key leadership positions, both in important product categories, such as bananas, pineapples, grapes and arrange other products depending on the individual market, plus we've got key strong market positions. And now obviously, looking to the future, using that combined strength with a strong focus on building the strong or above-average growth categories, such as avocados, berries and organics.

So when we talk about growth, what do you see as the secular growth rates for -- or the secular growth rate for the industry?

Yes. It's interesting. I mean it's an industry that gets a lot of free publicity from the medical profession. There's been a lot of promotion in Europe, supported by the EU to promote 5-a-day programs, fruit for school programs, and we participate in all of those. I think as well, the pandemic forced a lot of us to reassess our healthy eating habits. And I think there's very strong health and wellness trends that are underpinning the demand and the growth. Having said that, the last couple of years have been a little bit unusual. We've had such high cost inflation, such disruption in supply chain that the growth has really come by growth in price rather than growth in volume. Obviously, over time, we would like to see more growth in volume. I think one of the interesting standard point within that inflation environment is that the resilience of the consumption of fresh produce, that the consumer, if they've got discretionary spends, our sense of it is one of the last areas that the consumer is cutting back on is in buying fruit and veg and that supports the underlying health and wellness favorable trends. Well, inherent overall category percentage probably increases low 2%, 3%. We're targeting, obviously, to add on to that, using our scale, using our size, using our internal strength and building on the categories that have above-average growth as well.

So over time, you came from the Total Produce side of the business and created a lot of value in Total Produce through acquisitions, creating the scale you created. Can you give us some perspective on how Total Produce evolved over time? And maybe what attracted you to merge with Dole?

Yes. I mean it's an interesting story when you look back on us, and there's probably a book and it's somewhere, Bryan. I'd say when you take a company, a little Irish company that ends up becoming the most significant fresh produce player in world terms. So it is interesting. You can go back even, I suppose, the pace of acceleration probably started in the late '70s and '80s with the demands from, say, the Irish market of the consumers wanting to have full availability of fruit and veg throughout the year. If the importers wanted to be able to supply that they had necessity to consolidate and that created a company called [ Fruit Importers ] of Ireland. It ended up in the early '80s quoting on the Irish stock market, and it gave us an avenue for the real owners to have liquidity and to create a platform for future expansion. [indiscernible] then rather ambitiously acquired a U.K. company, which was twice its size, and that proved to be very successful back in 1986. That really created the platform then for further growth. And gradually, as the company grew in financial strength, expanded to Holland, we made a couple of significant acquisitions down in Scandinavia, Denmark and Sweden, in particular. And then you look back to the early '90s when Europe was creating the single European market, that opened up opportunities in markets, which previously have been very close markets, such as Spain, and that we went in, in 1993, to Spain. And by combination of some joint ventures and acquisitions, we've ended up over the last, I think, nearly 30 years now becoming significantly the largest fresh produce operator in that market. We then moved on to the U.S., as I explained at the onset, where we started -- we did a lot of search into the market, very careful about identifying the company and the Oppy business has been a great platform for us to grow in the North American market. And we, as a stand-alone -- on a stand-alone basis, built a pretty decent sized North American market. Dole, obviously, as a company, the big banana companies, Dole [indiscernible] Del Monte, were always on our radar. And Dole, certainly, over the years, we would have always looked to Dole, particularly in the Fresh Fruit business, as I described earlier, the jewel in the crown. We're always aware that they were the leading innovators, the best managed business, always looking at the [ latest ] moves and that. So we became aware that David Murdock was looking at the legacy for the company and trying to find an owner and a future of the company that made sure all of the stakeholders in the business were appropriately positioned to make sure that Dole survives for the long term. So I think from our perspective, we were -- back in 2018, we're able to construct a deal, again, by having generated shareholder value over the years, we had the financial capability to do that. And we took an initial 45% stake. We had options then to take the majority fairly quickly, if we wanted to, and then longer-term [ option ] on the balance of it. I think, for us, the key category strength, particularly on the banana and pineapple business, the strength of backward integration in some of the other categories, particularly out of Chile and South Africa. And we felt that, that fitted very well with the upstream Total Produce business with the marketing handling and distribution strength in the market. So obviously, the brand as well, and that's one of the reasons we decided to take -- use the name Dole for the entire company, the strength of the brand. And we still believe that there's some very strong long-term potential, bringing together the two companies, whether it's in logistics and sourcing and marketing are in the brand as we move forward for the future.

So you reported results last week. Can you talk a little bit about, like where you feel now -- that the merger -- you've been merged for a while, kind of what's better than expected and maybe where some of the pain points are in terms of business?

Yes. I mean it's been a fascinating, for lack of a better word, the last couple of years, I suppose. Certainly, when we go back to early 2020, when we were starting the process of trying to renegotiate with David Murdock's people as to how we might configure this new deal, the world look like a very, very different place. And we've been hit by the pandemic, the knock-on consequence was that on supply chain disruption and the start -- the beginning of an inflationary environment. And then that got exacerbated obviously by the war in Ukraine, the impact on energy prices and fuel prices, the fundamental impact it's had on things like farming inputs, such as fertilizers, in particular, our paper, which, obviously, the all fruit gets packed in, in cardboard boxes are a large percentage, but still that the cost increase not have been huge. And that also triggered some foreign exchange volatility, particularly we saw last year where the dollar breached parity with the euro. So when you take all of those things over the last few years, I think what we're really, really pleased with is the fundamental resilience of the business over that period of time. And we think we've done pretty well. You look at -- we've got four divisions, 3 out of the 4 have held their own and done well. Obviously, the veg business has very disappointing. We had a food safety issue at the end of '21, couldn't come at a worse time. Significant costs associated with the product recall and then a lot of difficulty getting that business and the profitability of it reestablished in such a complex environment. But the other two divisions, we have two diversified divisions, which one covers the Americas, North and South America, with the exception of one issue around the supply chain issue on the grapes, a big grape program out of Chile, that business in the main held its own. And then in Europe, on our diversified business, which is really Legacy Dole -- the legacy Total Produce business. It again has held its own pretty solidly over the course of '22. And the only impact from a reporting perspective has been the huge strength of the dollar, dramatically reduced the reported dollar earnings. But on an underlying basis, we're very happy with that division.

So you recently came to the decision to sell the fresh veg business. Can you talk a little bit about just the motivation to sell?

Well, I suppose when you look at the performance over the last 18 months, and probably even going back to 2018, when we took the initial stake, we, in the early days, had a smaller problem as well and that we had some management changes. I think essentially, it was taking us a long time to return the business to the kind of profitability that we think is appropriate. It actually became a very big distraction not just from a management perspective, but also from an investor perspective. Investors became, in our view, disproportionately focused on it or maybe rightly so. And I think we ended up -- we've done a lot of work on our turnaround plan. We're a long way through that. But at the same time, we explored all of the other strategic alternatives around it. So to end up with a deal whereby you can actually increase your EBITDA and at the same time, take some $250 million off your debt number, I think most people would take that any day of the week.

Yes. It was a great price. And I just -- it's different right than most of the other businesses that you have currently, right? So it is sort of unique in terms of kind of the role of play of the portfolio.

Yes. It's very discrete, very different. The interaction with the remaining fruit business is minimal. There's some -- it's more on the administrative accounting and IT side where the interaction is. But on operational integration is very minimal, very discrete, very capable of being separated. And I think what it does as well because it was different and discrete, it does give us -- maybe it's no harm to take a little bit of a step back and gives us a great opportunity to refocus on the other Fresh Fruit businesses.

Just -- there's going to be about, I guess, about $290 million of gross proceeds. Can you give us a sense of kind of what net proceeds will be from the divestiture? And then sort of use of proceeds, how you're thinking about using the proceeds?

Yes. Yes. So we announced that the gross proceeds are expected to be $293 million. We'll have some tax leakage, difficult to know exactly, but in around $20 million. We'll have some working capital adjustments and some transaction costs. So we expect the net proceeds will be in around $250 million. So -- and again, as we stated, we intend to use the majority of those proceeds to repay debt.

And then market is still very much focused on leverage ratios. And so can you remind us what your leverage targets are and what the path is to get there?

Yes. So our targets -- our stated targets are 3x. And in fact, that's where we finished the year. As of the 31st December, we were just at 3x, which we're very pleased. We have a working capital outflow during the year, so that was very much our expectation to get back to our target. Post the veg transaction, though, and the inflow of the $250 million proceeds, we'll be somewhere between 2 and 2.5x during -- again, with the working capital outflow potentially during the year. So we're pleased with that and the opportunity to repay debt. Still comfortable at the 3x. But I suppose there's no doubt the move in interest rates in the last year has -- we're keeping that under review, no doubt.

But 3 is kind of where you're headed for now? And then once you get there, we're kind of thinking about what it might be...

Exactly. We just really need to keep an eye on the debt burden and the interest cost. So that's focus for us.

And then one of the things that I think is difficult for investors is you have a very complex business, right? And it's difficult to track from the outside. Rory, we've talked about a bunch about this. It's a difficult business to track from the outside for investors. Can you talk a little bit about just how you plan the business, like with the budgeting process?

Yes. Yes. No. So in some ways, it's not as complex, perhaps as people might perceive. But firstly, it's worth saying that we do a very detailed bottom-up approach to budgeting and planning. Each business stands on its own, produces its budget and it rolls up then into the segments as we reported to the market. The businesses are a little different. We look at the Fresh Fruit business in the first instance, which is vertically integrated, and we look at us, I suppose, as one business, certainly focused on things like price, volume and the particular markets that it sells into the particular geographies. The diversified businesses are product-focused and market-focused. So again, we look very much at margins in those businesses. We have a dynamic pricing model, which you can really see during 2022, where despite the inflation challenges, we were able to push through prices and maintain our margins. So that's a really key focus for us. The vegetable business is very much focused on products pretty much as Rory described. Again, volume margin are important in those businesses. Overall, when we look at it segment by segment, it's -- the focus is on adjusted EBITDA and delivering returns there. We focus on cash generation and cash flow generally. Working capital is very important, very large turnover. So working capital is a key factor. And then the leverage is -- leverage is a key focus. And things like cash taxes are important. We are very large global footprint. So we focus on cash taxes as well.

So I guess when you think about it from the end, consumers are going to consume fruit and vegetables, right? So that part is relatively consistent. Maybe there's some growth.

Yes.

It's the weather -- it's how you get the product to those consumers, I guess, that creates probably the most complexity in the business. Is that a fair...

Yes, I know that's true. That's true. But I suppose we have a very experienced management team. We've been doing this over a very long period of time. Certainly, weather issues can have an impact. We have had a couple of issues. We had an issue in California this year. I suppose we had the port disruption that Rory referred to, which does create complexity. But over time, we tend to manage our way through those issues pretty effectively.

Rory, over time, Total Produce had been -- really gained a reputation with investors as a really good acquirer of assets, not just price, but also basically making the target better. Like -- so can you talk a little bit about now how you're thinking about the marketplace, I guess, and I say this in the context of, obviously, interest rates are higher, right? So it has some impact on value creation, but also there's a lot of pressure, I guess, right, on maybe on companies and maybe that creates more of a willingness to sell. So if you could just talk a little bit about just that aspect of the business, and how you're thinking about M&A going forward?

Yes. I mean we have a lot of experience, as I say, in the M&A sector, and it's been a key element. Obviously, if you want to grow from being an Irish company to being the global leader, it's very hard to do that organically. You've got to do it by way of acquisition. So I think one of the key strengths we've had is that we've done a lot of the -- we've done pretty much all of the work internally. So we know who the players are. We've built up a big database on who's who in the sector and who the most interesting companies are. And we tend to negotiate, not thinking as investment bankers, but we tend to negotiate the deals ourselves. Over the years, we've taken a very flexible approach to that where we've taken sometimes 50% shareholdings with the view to becoming the owner over time. And we've taken a range of -- that we tend to try and build a strong relationship with the vendor, and we tend to try and find the right balance that works with the vendor for the long term and works for us. And Oppy in Canada is a good example. I think that business over the last 10 years has doubled since we've become involved in terms of bringing ideas, bringing thoughts, bringing new sources of supply to the business has developed. So in terms of the backdrop in the overall market environment, it is true to say that there are unusual market dynamics out there. You have interest rate rises. I think that's probably going to more impact upon the private equity side of the business. There haven't been huge players in our center -- in our sector, more in North America, where there's a lot of localized PE firms have been investing. We've seen some in Europe over the last 5 to 6 years. And I think that's more been a feature of the cheap money and the amount of money that the PEs have raised over the years, where people are seeking yield in a different way. And personally, I think some of the musical chairs or the merry-go-round PEs might come to a grinding halt at some point in time, and that may open up some opportunities. But I would have to say, though, that in our sector, the good companies in our space from trading and operating point of view are still doing pretty solidly. They have the dynamics that we've displayed, where demand has been pretty resilient and they have been doing pretty well. And for us, obviously, that means that in general, values for private companies, even though a lot smaller than us, have held up pretty well over the years. And for us, I think there's a phase of consolidation. I think if we can get the veg deal through the antitrust processing and get the cash on that gives us an opportunity to refocus and look to the future in a good way.

And I guess that kind of leads to the next question is just like going back on offense, right? Like obviously, Dole is a big deal, right, for legacy Total Produce. But in terms of being able to go back and be more acquisitive and really play offense, like time frame-wise, like is that something that's going to take -- are we waiting for -- hitting the leverage targets? Is it something that could happen if the right opportunity came across today, would you be able to kind of do something? Just without asking whether it's going to make an acquisition tomorrow, just...

Yes. I mean obviously, we think it's interesting when you look at our sector. It's still both in North America and in Europe. And indeed, in other parts of the world that we do keep our eyes on, whether it's Australia, New Zealand, Asia. There are a huge number of companies in the revenue range of, say, $100 million to $1 billion. A lot of companies that have developed good niches within that space would be a very good and complementary to our activities in some of the higher growth categories, whether it's berries or avocados or organics or even some companies that have good customer access. So we do keep our eyes open. I think one of the key catalysts for us is really to drive on with the refocus of our business and hopefully get that reflected in the share price, and that certainly will give us a better platform to move forward with acquisitions in the future.

Right. And it is -- in terms of where you are today, given how large the company is on -- does the scale that Dole plc has today kind of change the way you would have thought about M&A previously? Like are -- is there more you can bring to acquisitions -- the markets, maybe...

I think there was a lot more that we could bring strategically to acquisitions. I think as well you look at the world is becoming a smaller place. The retailers, you just look at North America with the Albertsons, Kroger merger, for example. And there are -- to a greater or lesser extent, those kind of processes happening in various different parts of the world. So those kind of customers, as they become bigger themselves, also need more capable and more sophisticated suppliers to be able to supply their full fresh produce needs over the course of the year. So joining up with a group of like ours can be very interesting for some of these smaller companies for the long term. On the other hand, we've been patient. We need to find value adding from a shareholder value perspective acquisitions that really give us the opportunity. We're well positioned where we are today. If the market dynamics change, our share price improves, we get the leverage back to where we think is really comfortable. I think then we've got all the tools in the toolbox to be able to execute on an acquisition strategy going forward.

And then just sort of -- just aside from the proceeds from the fresh veg divestiture, any other levers that can be pulled that can accelerate debt reduction? So anything that you can do to sort of...

Yes. So we constantly focus on our asset base and we look at, whether there are assets there that are either noncore, nonperforming or just not contributing to EBITDA, and we seek to monetize those assets. In -- at the end of '22, we had marketed product, marketing property, should I say, up about $30 million. And during 2022, we also realized sales proceeds of about $40 million. So we expect to continue to try and realize proceeds in that way, again, focusing on noncore assets throughout.

So things like property, warehouses, like there's just a lot of assets, right, or...

Yes. And we just constantly reassess it. As you know, we sold some property in Europe. This year, we have noncore, nonoperating assets in Hawaii, which are part of that actively marketed bucket. So yes, focused on generating proceeds from those type of assets.

Okay. Well, Rory, Jacinta, thank you very much for spending time with us today. We're out of time. But again, thank you for coming in and spending some time with us.

Yes. Thank you very much, Bryan.

Thanks, Bryan.