S&P Global Ratings has updated its outlook on Dole PLC to stable from negative while affirming all its ratings, including the 'BB' issuer credit rating.

The stable outlook reflects S&P's expectation that Dole will continue generating healthy Free Operating Cash Flow (FOCF) and remain committed to deleveraging, aiming to maintain leverage around 3.5x. S&P anticipates that Dole will continue reducing leverage, supported by a modest 4% year-over-year growth in EBITDA in 2023 and a significant reduction in working capital requirements as supply chain constraints ease.

This enabled Dole to generate approximately $130 million in discretionary cash flow (DCF) after adjusting for cash outflows related to its salad business, which was reported as a discontinued operation. The company used this DCF and proceeds from asset sales to repay debt and reduce leverage to 3.9x at fiscal year-end 2023, down from 4.6x a year earlier.

Although DCF is expected to decline below $100 million in 2024, the company's cash available for debt repayment will benefit from the recent sale of its Progressive Produce business, which brought in $100 million in net proceeds. Therefore, S&P projects over $150 million in debt repayment in 2024. Based on flat EBITDA growth expectations for the next year but ongoing debt repayment, S&P projects that debt to EBITDA will decline below 3.5x by fiscal year-end 2024.

Dole's scale and longstanding relationships with key retailers are expected to help it maintain stable operations. The company performed well in 2023, with a gradual recovery in profitability and cash flow generation as it overcame supply chain disruptions and high energy costs from the Russia-Ukraine war, which had negatively impacted its European business.

While its fresh fruits segment continues to face the risk of earnings volatility due to potential weather-related harvest disruptions, Dole's diversified global sourcing network has alleviated some of the inherent pressures in its operations. In addition, S&P believes Dole's leading market positions in fresh produce in North America and Europe and its ability to service large key retail partners will enable it to generate long-term growth.

Dole management, known for its conservative financial policy, remains committed to debt reduction. S&P believes it will remain committed to reducing debt and operating with leverage in the low-to-mid 3x area in the long run. While ongoing bolt-on acquisitions are recognised, there needs to be more flexibility within the rating for mid- to large-scale mergers and acquisitions (M&A) or incremental shareholder remuneration, as these could likely cause the company to deviate from the forecasted deleveraging path.

The stable outlook reflects S&P's expectation that the company will continue generating healthy FOCF and remain committed to maintaining leverage below 3.5x. S&P could lower its ratings if leverage does not improve to 3.5x or below by 2024 and the company does not generate a free cash flow of more than $50 million. This could occur if additional product recalls or exogenous events lead to excess market supply and pricing pressure, resulting in materially weaker margins; the company cannot offset unfavourable foreign currency and commodity fluctuations with higher prices, or more aggressive financial policies prevent the company from further deleveraging.

S&P could raise its ratings if it believes Dole will sustain leverage below 3x. This could occur if the company can operate without significant market disruptions, such as earnings volatility being less pronounced, profitability being maintained by offsetting input cost inflation with price increases and operating efficiencies, and the company commits to operating with leverage below 3x.