Del Monte Pacific Limited (D03) Earnings Call Transcript & Summary

It's 4:45 p.m. Good afternoon to our participants in Asia, and good evening to those joining us from the U.S. Thank you for joining Del Monte Pacific's Results Briefing for the Fourth Quarter and Fiscal Year 2023, which ended last April. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer of Del Monte Pacific and President of Del Monte Philippines, DMPL subsidiary; Parag Sachdeva, Group CFO of DMPL; Greg Longstreet, President of Del Monte Foods and CEO in the U.S., and I am Iggy Sison, Chief Corporate Officer of DMPL. Parag Sachdeva will now present our fourth quarter and FY 2023 results. Sorry, let me just share the file again. Yes.

Okay. Thank you. On Slide 5. Good evening, everybody, in Asia, and good morning in the U.S. Let me start with the key highlights. For Q4, sales grew by 2.6%. Sorry about that. So on Slide 5, as I said, Q4 sales grew by 2.6% to $584.6 million on higher U.S. and fresh pineapple sales, which were up by 3.9% and 4.6%, respectively. We posted EBITDA of $55 million for the quarter, which was down by 30% on higher costs amidst inflationary environment, lower operating income and increased interest expense resulted in a net loss of $11.9 million. But more importantly, the group continued to maintain leading market share positions across core products. From a full year perspective, DMPL Group sales rose 3.4% to $2.4 billion on higher U.S. and international sales out of Asia. EBITDA lower by 6.2% to $330 million on higher cost. Net profit before one-off financing costs down by 27.8% to $72 million, while net profit with one-off costs down by 83.1% to $16.9 million. On Slide 6, just wanted to share that outlook with you. The global environment did remain volatile and the volatility impacted our business with consumers becoming more cautious with their spending and obviously, the persisting cost pressures, which impacted our gross margin and our EBITDA performance as well. We remain vigilant and focused on managing our operating costs, and these include some of the optimization effort, which is underway around packaging materials, power and fuel initiatives both in the U.S. and in Philippines. Investment in plants to improve efficiency, productivity through automation and also minimizing waste. And at the same time, on the revenue drivers, we continue to look at the right price increases, including a 6% price increase, which has been implemented in May in the U.S., and will be reflected in DMFI's planned gross margin recovery from second quarter of fiscal 2024 onwards. We are planning to substantially increase our MD2 fresh pineapple production to support higher exports of these premium products. Our premium pineapple export business continues to be very robust and continues to grow double digit. We also will have increased focus on working capital improvements, especially inventory reduction to generate more cash flow and strengthen our balance sheet. And barring any unforeseen circumstances, the group is expected to generate higher net profit in fiscal year 2024. Slide 7, as you can see, just building on the highlights, I would like to share more context on our results. Sales grew by 2.6% at $585 million. U.S. sales, as I mentioned before, up 3.9%. Philippines grew by 6.6% in local currency and marginally up in dollar terms as well. International business grew by 1%, driven by fresh. And our JV in India grew by 11% in local currency, whereas our packaged business sales were up 12% in rupee terms. EBITDA of $56.9 million, down 27.2% from $78.2 million due to higher costs and unfavorable sales mix. Our operating profit of $36.7 million, down 35.9% from $57.2 million. Net loss of $10.5 million from a net profit of $20 million due to lower operating results and increased interest expense from higher cost of borrowing, obviously, as we know, implemented globally by -- led by Fed to curb inflation, and we are seeing the rates starting to plateau down and should give us some respite in fiscal year '24. Probably [ worse then ] I shared on this slide are versus prior year quarter and exclude one-off items of $1.4 million net. Slide 8 will share more details around our performance for DMPL. Our fourth quarter sales at $585 million was driven by branded sales in the U.S. and exports of fresh pine in Asia. That led to a 2.6% growth. Growth from pricing and trade optimization was approximately 5.7% on a group-wide basis. This is net of unfavorable ForEx that impacted mainly Philippines. So we will also provide more color on the turnover analysis in the next slide. When it comes to gross profit, we were at $117.8 million. This was lower by 20%, driven by higher costs and to some extent, unfavorable sales mix as well. Gross margin at 20.2% lower versus last year by 570 bps. Fourth quarter also saw the full impact of commodity headwinds. I had alluded to this in our third quarter call as well. The impact -- full year impact or full impact of commodity headwinds continued as we were selling the inventory from the current pack, which has significantly higher costs, coupled with unfavorable sales mix as we sell more multi-packs across core business segments. Now doing a deep dive into our gross margin. For DMFI, we ended the quarter at 19%, which was lower by 580 bps versus a year ago. We did take multiple pricing actions in '23 that came into effect in September '22 and then February 2023 also, which partially offset the impact from cost headwinds. Gross margin for the base business also decreased significantly by 850 basis points during the same period. Some of the factors were pretty much the same as Q3. It was driven by commodity headwinds such as cost of fertilizers, our packaging cost did increase. We also experienced lower productivity both in plantation and cannery. But all of this was partly offset by pricing that we took mainly in the local business. But just to remind, the pricing was taken in smaller tranches and multiple times so that it does not have a big impact on the consumer's pocket. As explained earlier, the favorable impact on revenue and margins from pricing group wide is approximately 5.7% to 6%. EBITDA, we achieved $55 million, lower by 30% from $78.2 million and that was all due to lower gross profit. Our net loss of $11.9 million, lower by $31.9 million, driven by lower gross profit and higher interest costs. Our debt at $2.25 billion, higher by $708 million due to additional loans, and I would like to provide more context around this. The first factor is the refinancing, the redemption of DMPL Series A1 and A2 pref shares, which amounted to $100 million. Just to remind everybody, $200 million of pref shares were already refinanced at the end of fiscal year '22 in April to be more precise. Another $100 million got refinanced in December. Working capital loans of DMFI as we ended up with higher inventory for seasonal bills and also it was impacted by increased costs. We did see some shortfall in sales as compared to our annual plan, which also ended up leading to higher inventory plan. We also did increase our term loan for DMFI. That was mainly to acquire the Kitchen Basics brand that was achieved sometime in Q3. We also refinanced in last May, the redemption of $500 million Senior Secured Notes in the U.S., and that required an additional redemption cost of around $45 million from a cash perspective. So these were the main factors which led to our borrowings being higher, but most of them were leading to reduction in our overall cash interest cost -- cost net of dividends that we were paying on pressures. Just to remind everybody on the call, the redemption of $500 million bonds in the U.S. are also giving us savings as our interest cost is now capped at 8% for several years and would be a saving going forward -- considerable saving going forward. When it comes to the gearing ratio 5.84x, which is higher than last year and is mainly driven by the increase in borrowings as explained above. And the same would go for net debt to adjusted EBITDA, which is at 6.7x and is 2.3x higher. Again, due to the increased debt, as I explained above. On Slide 9, let me provide you a little bit more context on our revenue profile. When it comes to revenue profile of our group, Americas in this quarter constituted around 73.7% of our total group sales, which is higher by 3.9% in the fourth quarter to $431 million, and this was mainly driven by higher branded retail sales, which grew by 5.2%, with branded retail sales contributing around 73.3% to DMFI sales. The revenue growth was mainly driven by pricing, which was taken across categories in line with inflation. It was obviously offset by some volume impact from shift in normalized stocking levels to pre-COVID days. To some extent, some supply constraints, but that was not a major factor. Also I would like to highlight that Kitchen Basics contributed a revenue of close to $8.7 million, which represents 2% of net sales. If we exclude KB, DMFI's net sales would have increased by 1.8%. Pleased to share with you that DMFI continues to hold leading market share positions across its core businesses on the back of strong commercial execution, which includes distribution of core products and also new product expansion. The new products launched in the past 3 years are contributing meaningfully to the revenue story and grew -- and contributed 9.2% in the fourth quarter. When it comes to Asia Pac sales, in the fourth quarter, it declined marginally by 0.2% to $142.6 million and exports of S&W branded fresh pineapple and packaged pineapples increased by 1.6% due to higher sales, mainly of premium fresh pineapples in China and the Middle East. Philippines market delivered $68.5 million, which is a growth of 6.6% in peso terms. Sales of packaged fruit. Culinary and also new products were higher behind some compelling communication campaigns and value-for-money offers amidst the inflationary environment. Del Monte improved its market share in a number of core categories, particularly fruits and beverages, and it maintained #1 ranking across all the core categories. Our modern trade business, which is a good barometer of how our grocery business is doing, overall, grew at 10%, and foodservice sales continues to rebound and grew at 18%. If you just look at innovation, just as now -- as we look at our performance and contribution in the U.S. business, that accounted for 8% of Philippine sales. When it comes to Europe, which is a small component of our business, but has done well this year, that declined in the fourth quarter by 7% at $11 million from $11.9 million driven by lower packaged food sales. So our marginal change mainly supply driven. That's how I would sum it up. So now from the fourth quarter, let me take you through some additional context on the full year results, on Slide 10. With key highlights in the group summary, sales of $2.4 billion, up 3.4%. U.S. sales up 4.4%. Philippines was lower by 4.3% in dollar terms. But if you look at it in local currency, it was up by 6.6%, following a pretty strong recovery, which we made in the second quarter. International business grew double digit at 11.5%, driven both by fresh and exports of packaged products. JV in India had a solid year, increased by 8% in local currency, driven by both recovery of B2B sales and also continued growth of B2C sales as well. EBITDA, despite all the headwinds that I talked about and a tough second half, we delivered $337.2 million for the full year, which was a marginal reduction of 4.1% versus $351.5 million, mainly due to higher costs, which we talked about and unfavorable sales mix. Our operating profit of $253.1 million was down 5.3% versus $267.3 million. Net profit of $72.2 million, down 27.8% versus $100 million due to lower operating income and also increased interest expense from the higher interest rates and the entire impact of refinancing $300 million pref shares, which is actually offsetting or more than offsetting the pref dividends that we pay and is charged directly to our net profit after tax or retained earnings. All figures from a profitability perspective excluded one-off items. On Slide 11, let me give you some more context about our one-off costs. As I mentioned before, we did raise $600 million through a 7-year term loan facility, which was financed at SOFR plus 4.25% credit spread, and that was -- that led to us incurring a onetime redemption fee plus also write-off -- noncash write-off of deferred financing costs, which amounted in total on a pretax basis of $71.9 million and [ $50.7 ] million on a post-tax basis. In addition to that, we also incurred excess of net realizable value over cost of inventory related to Kitchen Basics acquisition, which is more an accounting treatment of valuing inventory at market value as part of acquisition accounting. On Slide 12, let me pivot to a more detailed overview of our revenue and margin performance. So full year sales, $2.42 billion are driven mainly by higher sales in the U.S. and also international markets, including S&W business in Asia doing pretty well. Growth from pricing and trade optimization, net of unfavorable ForEx was approximately 7.8% on a group-wide basis. We will talk more about this in the turnover analysis in the next slide. Gross profit, which everybody would be interested in, we did $607 million, which was lower by 3% (sic) [ 2.5% ] driven by the inflationary headwinds that we faced, particularly in the second half. And to some extent, some unfavorable mix that we saw from a trend perspective, both in the U.S. and as well as our base business in Asia. Gross margin at 25.1% was lower by 150 bps as inflationary headwinds and increased costs, particularly impacting second half of fiscal '23. That's what led to it. We were barely above last year up to -- for the first 9 months, but went down with the increased cost and continued impact in the fourth quarter. Gross margin for DMFI, just as I explained in the fourth quarter was at 23.1% (sic) [ 25.1% ] for the year, which is lower by [ 80 bps ]. And again, we proactively continued multiple pricing actions starting from Q4 of fiscal '22. And then again, a few rounds in '23 to partly offset the cost headwinds. The impact of inflation and other cost headwinds is approximately $132 million for the year from a P&L perspective when it comes to DMFI. Gross margin now for the base business decreased by 430 bps during the same period, driven by commodity headwinds such as cost of fertilizers, increased packaging costs that was again partly offset by pricing. The impact of commodity headwinds, inflation and other cost increases is approximately $75 million for the base business. As explained earlier, the favorable impact on revenue and margin from pricing, net of FX group-wide is approximately 7.8%. EBITDA of $329.7 million on a reported basis is lower by 6.2%, and that's all generally attributable to gross profit and margin, particularly in Q4. Net profit, $16.9 million lower by 83.1% impacted by one-off redemption costs of $50.7 million to refinance the U.S. loans as explained in the one-off costs. Debt-related KPIs, very much the same and have already been covered in Q4 results. On Slide 13, now let me provide a full year context on our revenue performance and mix across the geographies. Americas constituted 71.8% of total group sales, which was higher by 4.4% to $1.74 billion, mainly driven by higher branded retail sales, which grew by 8.2%. Revenue growth, just as in Q4 was driven by pricing taken across categories in line with inflation. And also it was driven by the expansion in Joyba. Our acquisition of Kitchen Basics also obviously help the revenue story. So those were additional drivers in addition to our distribution expansion that led to the overall construct and growth of 4.4% in the U.S. If we exclude Kitchen Basics sales of $35.1 million in Fiscal '23, that would mean that our net sales would have increased by 43.1% for DMFI or 2.6%. Just as we had always shared in the prior quarters, the branded retail sales continue to have a good momentum and accounted for 75% of sales, while private label continues to hover around 5% of the total DMFI sales. When it comes to new products launched in the past 3 years, the contribution was 7.7% to DMFI's total sales. In terms of profitability, the U.S. segment continues to improve in performance and now is constituting 65% to total group's operating profit. When it comes to Asia Pac sales, it marginally declined by 0.9%, mainly due to lower Philippines sales in U.S. dollar terms, offsetting higher international sales, both for fresh and packaged products. Export sales of S&W fresh pineapples and other packaged products continued to have a pretty solid year and grew by 13.8%. Our exports continue to have a very good momentum behind the newly launched naturally ripened, extra sweet S&W Deluxe premium fresh pineapple, which continues to gain traction in China, Japan and South Korea, and particularly is doing very well in the China's retail segment. Asia Pac contributed 26.2% to group's revenue and 32.2% to operating profit. Philippines business grew also by 6.6% in local currency from a full year perspective, but was down 4.3% in dollar terms due to peso depreciation. The improvement in sales has been seen across all channels driven by culinary beverages and innovation segment. Innovation grew strongly due to higher sales of Mr. Milk and also Potato Crisps in the snacking segment with new products in total contributing 7.7% to total fill market sales. Europe sales, as I mentioned, did well for the full year and grew by 35.3% to $47.5 million, mainly behind higher packaged fruit and beverage sales. On Slide 14, I would like to just round it up with the dividend news, which has been approved by the Board of [ USD 0.13 ] per share to common shareholders that represents 15% of our fiscal '23 net profit before preference dividends. With that, let me hand over to Greg to give a comprehensive market update on the U.S. business.

Thank you, Parag. On Slide 16, we'll do a recap of our Del Monte Foods USA business for the fourth quarter and for the fiscal year. First and foremost, sales reached $428.7 million or 73% of group turnover in the fourth quarter. Sales were up 4%, driven by a combination of factors. Higher branded retail sales was the primary driver, and that included our canned vegetable, fruit, tomato and Joyba bubble tea business. We did also, as Parag mentioned earlier, have a series of pricing actions that have gone into effect over the past 18 months to help us offset inflation, but also command the proper value for our brands in each respective category. Distribution gains of Joyba continue to be a highlight and a success story for us. Higher sales of our specialty vegetables and in particular, our multipack products, which I'll talk about later, continues to be a source of new growth and incremental volume for us. We also enjoyed some incremental sales of $8.7 million from our recently acquired Kitchen Basics stock and broth business, and continue to be pleased by the pro forma performance of the Kitchen Basics business having exceeded our pro forma assumptions for both net income and EBITDA this year. Excluding KB, our sales were up 3% for the fourth quarter. New products, as Parag alluded to, have been a big part of our success story, now contributing over 9% of DMFI's total sales and driving a lot of margin improvement as we focus on more and more branded innovation. Gross margins were lower this quarter. As you recall, we had much higher gross margins in the first 2 quarters and lower gross margins in the second 2 quarters. That was planned. We saw the inflation that was coming at us and knew that we'd be facing headwinds in the third and fourth quarter. We have, again, priced to address that and are very confident that we'll return margins back to their respective mid-20s once that pricing is fully implemented, effective in August. The net loss of $4.3 million from a net profit of $19 million was due to those increased input costs, the inflationary pass-throughs and higher interest expense as Parag alluded to. Full year sales were just above $1.7 billion -- $1.733 billion. That's up 5% driven by higher branded sales. The net loss, as Parag alluded to, driven exclusively by the onetime financing costs. Excluding the onetime financing cost, which did lower our interest rates that we'll be paying for the next several years, generated a profit. Without that, we would generate a profit of $52.5 million, close to our profits of last year at $54.3 million. So that onetime event certainly was something we had to endure for the overall balance sheet improvement and lowering of interest payments on a go-forward basis. As mentioned earlier, we had a 6% price increase that was successfully executed in May, and that will be reflected in our Q2 margins going forward and we'll restore gross margins and continue the track record we've had of increasing gross margins each year for the past 5 years. The next slide, 17. As we look at market shares, we continue to be pleased by the strength of our brands and the growth in market share across our portfolio. In our largest flagship business, we gained nearly 1 point of market share here in the fourth quarter with canned vegetables. So our canned fruit business hold market share, our tomato business grow market share, pretty consistent performance across broth and stock, and a slight decrease in market share growth in the fourth quarter, but we are encouraged by the outlook that we're seeing take place here in the first quarter of the new year. So the leadership in share continues to be a part of our playbook for success. We're having an excellent period of our selling season in which we're working with retailers right now to establish new points of distribution and improved shelf sets in our existing channels, but also in new channels. And as consumers continue to change their purchase cycles in the U.S. We're responding in a number of ways to make sure that we're offering enough value in offering our brands wherever consumers are shopping. So I'll highlight that more in the coming slides. So on Slide 18. We'll talk about a few areas of marketing investments. We continue to invest behind our brands to drive awareness, drive trial and drive increased consumption. This past quarter, we invested in our fruit cup snack business, which continues to be a healthy segment of the portfolio for us and our new launch of our national organic brand called Take Root, which is focused at the moment in our tomato business and really seeing some strong success in new distribution and velocity gains in that Take Root business. Slide 19, is a look at our frozen food business as well. So we continue to drive, growth and development and interest in our frozen food portfolio and supported the frozen food month campaign broadly in this most recent fourth quarter. The next Slide 20 talks about PR. So we continue to do a number of positive PR events, and we're creating substantial impressions and awareness on some of our products like our Del Monte Gold Pineapple, which continues to gain market share and distribution in the U.S. marketplace, our new Take Root organic business, now that we have a complementary brand of broth and stock between College Inn and Kitchen Basics, we have a national footprint and are having a lot of success building awareness and really restoring growth to Kitchen Basics and building on success of College Inn. The next slide looks at foodservice. Foodservice continues to be a growing portion of our business. This has been a focus for us the last several years, achieving double-digit growth consistently in that foodservice channel. Having a lot of success with our introduction on pineapple juice and our continued growth of our core pineapple business as well as our new fruit salsa portfolio, which is having success in the health care business. Slide 22, talks about just -- as we step back now and we look at all the work we've done to build brands and build new products in the U.S., we now have a portfolio of 7 brands that really resonate with consumers. They're all centered around health and nutrition. They're focused around healthy snacking, in flavor and meal enhancing. And we have tremendous credentials in terms of health and wellness across each of these brands and continue to really educate consumers on the many benefits these individual brands provide. And building out a portfolio of products that really resonates with the needs of today's consumers. The next Slide 23. Some of the trends that we are addressing and having success with, in the U.S. marketplace, we're seeing an increase in morning snacking. So we've developed a number of grab-and-go healthy, better for you, convenient fruit snacks for the morning occasion. We've also discovered there is an opportunity with the increasing recessionary environment in the U.S. to try to offer consumers organic products at lower price points to really fill the white space between private label pricing and some very high-priced organic offerings. That's where we Take Root in our [ Bunch of Good ] brands fit and they are having really strong success in building a brand that consumers can excessively afford across organics that creates trust and really is generating some strong repeat sales. As we think about value, multipacks are a big part of our playbook and our strategy. We are the leading branded player in multipacks across our categories, whether it's fruit cups, tomatoes, canned fruit, broth and stock or canned vegetables. And we continue to gain distribution and see increased sales and channel penetration with these multipacks. Slide 24, is a look at this approach that we've taken in terms of good, better, best, to help us address different consumer need states, different channel strategies and really deliver upon the consumer today in the U.S. marketplace that's looking for both value, but also preparing more meals at home and looking for quality and brands that they can trust and really create that kind of culinary experience at home. We've offered a broad portfolio of solutions for these consumers, and we're having success in growing each of these offerings across our vegetable fruit cups, tomato and broth and stock portfolios. On Slide 25 are some examples of those successful growth. strategy is really working for us this year. In this past year of our fiscal '23, we gained almost $60 million in new revenue from Walmart through our expanded distribution of these core based and value-based products. We also have a number of new customers that we established this year, which will carry into this fiscal '24 was sustained revenue and profits. For the first time, we've been selling the Dollar Tree and the dollar channel account this past year by successfully introducing our harvest brand, a value-based products that generated over $10 million this past year, and we'll continue to generate more sales for us in the years ahead and then convenience. Circle K is the #2 convenience chain in the U.S. We've established brand new distribution there through Joyba and our core portfolio. So just more examples of us building out our revenue base, and it's all around brands, and it's all around brands that deliver on that good, better, best strategy. Slide 26 is just a quick look at Joyba. Joyba now has become a national success story for us. We are in the process of dramatically expanding our capacity to support a fully national rollout of this product. The product currently as an example, within Target stores in the premium tea section, we are the #1, #2 and #3 SKUs in terms of dollar velocity in the section. We're continuing, as I mentioned, to add capacity to keep up with demand and are having success across the U.S. So a big part of our playbook for F'24 growth will be this Joyba business. It will also be our Kitchen Basics business, the organic Take Root business as well as our continued expansion of our vegetable portfolio across adjacencies. So with this on Slide 27, I will pass the presentation over to Mr. Cito Alejandro.

Thank you, Greg. And good afternoon to all of you, and good morning. I shall now discuss the results of Del Monte Pacific for the fourth quarter and the full fiscal year, sorry about that. So sales for the fourth quarter of $180.3 million, up 3% on higher international sales and in the Philippine market alone. Our sales was 7%, up in peso terms, although flat in U.S. dollar terms because of the ForEx. Most of the sales were driven by our progress in packaged food, culinary as well as new products mix behind our strong advertising campaigns and value for money offerings. Good to know that modern trade and foodservice have really posted good growth, 10% on modern trade and 18% on foodservice. The modern trade growth is encouraging because that in itself is our barometer of offtake in the market. Innovations continue to gain traction and now accounts for a good 8% of Philippine sales and growing. It's our objective bring our innovation program to account for about 15% to 20% in the coming years. International generated sales of $92 million, although we experienced higher sales of pineapple -- fresh pineapple primarily driven by the S&W Deluxe variety, we encountered problems with our processed exports as demand softened in the fourth quarter. EBITDA, $15.2 million, down 45%, and net loss of $3.7 million, is actually due to higher costs and interest expense. On a full year basis, sales was up 2% at 764.6 million Philippine peso, sales up 7% in peso terms but down 4% in USD. And our total year EBITDA of 118.2 million was lower by 21%. Likewise, profit was lower. And again, for the same reasons in the fourth quarter, higher costs and higher interest expense. Next page. Looking at our market shares, we continue to do well, and we're very strong across most of our leadership categories. Packaged pineapple is up, canned mixed food is up, our ready-to-drink users, which at one point in time was struggling is now up and continues to grow. We're not worried about this tomato sauce because we have leadership share. Spaghetti is about pretty much challenged by price brands, but we have a new campaign coming up that will further increase the value of our premium-priced spaghetti sauce to make it work for the consumers. I'm pleased to report our 12.5% share in the yogurt dairy business. This is down actually temporarily because of our multiple price increases in Mr. Milk, but we have rolled back prices right now by more than 10% to address our pricing gap versus competition. Next page, please. So I just wanted to wrap up our marketing efforts in the Philippines. We continue to do well with our cooking campaigns in our pineapple product. As you know, our pineapple products are mostly used for cooking. TV and digital campaigns are heavy. Pleased to note that whereas last year, we spent 48% of our media in digital and social media. This year, we're going to spend between 55% to 60%. And this really addresses the emerging role of social media in communications. Next chart. Beverage, as I [ flagged ] earlier, we continue to get good recovery in this business that was lagging in the past 6 months. So the summer program has also helped us. The weather was also cooperative. And looking at the lower part of the page, as you know, we have been pushing a lot of our multipacks just like in the U.S. to address the consumer need for value. And actually, this is across all the categories and they hover about 15% to 20% of our total sales today. Next, talked about innovation earlier. 8% of total Philippine sales, we are very much focused just on these categories for now. And we think that we have further upside in building this category. And total today, it's about [ 1.5 billion ] in sales and growing. And this year, we expect to bring this to about [ 2.5 billion ] in total. Next, some of our summer program, school time is coming up. Classes are going to be opening face-to-face here in the Philippines in August, and we are ready to go with our school program for these products. Next, pleased to report that food service in our convenience business is growing again. Food service, fourth quarter sales up 18%, and key accounts are now at about 96% and generated 89% of pre-pandemic levels. And we expect to return to pre-pandemic volume going into the second half of this year. Convenience store are very important nowadays because people are now gravitating to stores closer to their homes. Sales up 10.5%. I guess this is also one of the reasons why convenience stores actually have increased by 20% in terms of opening this year to address the consumer need for shopping closer to their homes. Next chart. Talking about our innovation in international, which is now at 15% of total international sales and growing. And combined, these products have a potential to deliver $100 million in the next 2 years. NICE FRUIT Frozen packs are now sold in about 9 countries. And our prominence in the quick service restaurants like McDonald's and Kentucky Fried Chicken continues to grow. And again, our Deluxe line, S&W Deluxe has been a clear winner for us, particularly in the big China market. Next slide. Just a quick overview of fresh sell. We continue to be the biggest exporter of fresh pineapple to China. I'm pleased to report that we now have increased our leadership share to 53% of the total imported pineapple in China, which is essentially the bulk of the pineapple business. Our Japan business continues to grow. In South Korea, recently, we have been able to achieve market leadership at 38% market share. Next chart, please. As you know, we have continued to engage with our stakeholders in China. I mean, we have -- we continue to visit them, participate in food conventions and all. And this is just an example of how we are displaying in the China market and to tell you how big our presence is there right now. The one at the left is at Hema store and we are the leaders in -- we are the leading fresh pineapple brand in this market. Next chart. More S&W. This is now Contadina MD2 canned pineapple and we are also pushing that heavily in the food conventions. And one of our leading partners is J Gerber & Company. They are the ones handing our packaged goods business and they have initially had good success with the introduction of the Deluxe brand in that market. Next chart. Pleased to report that the Del Monte India fourth quarter sales up 17% in rupee terms, we have managed to improve our gross margin to 17.6% margin points and here are 2 products that we have been pushing and we're very pleased that our innovation program in India started to grow. We have a very good General Manager, President there right now. We appointed him about 3 years ago, and he continues to do very well in growing our India business, not only growing, but making really a positive contributor. With that, next chart. Okay, Iggy, turn over to you.

Thank you, Cito. So sustainability highlights. First on broader scope 3 measurement of our carbon footprint. The next slide is our EPR program where we will recycle a minimum of 20% of our plastic waste beginning this calendar year. We have energy conservation programs as well as bamboo growing and mangrove rehabilitation and tree growing projects to the foundation. And the next one is on, sorry about that -- now we just go to the recap the outlook. We can already see some questions. So I'll go straight to the outlook recap as Parag presented earlier, we continue to manage certain cost pressures as well as address consumers that are becoming more cautious with their spending. We remain vigilant in managing our operating costs, as you will see enumerated here. In the U.S. and other markets, we will continue to increase channel penetration while accelerating innovation. International sales growth in North and South America as well as the distribution of DMFI's branded portfolio in these markets, including Kitchen Basics. Greg referred to the 6% price increase in May which will be reflected in the Del Monte Foods' planned gross margin recovery from second quarter onwards this fiscal year. And we continue to increase our MD2 fresh pineapple as Cito referred earlier, especially the S&W Deluxe Fresh to support higher exports of this premium product. And we will continue to work on working capital improvements, especially inventory reduction in fiscal year '24 to generate more cash flow and strengthen the balance sheet. And barring unforeseen circumstances, the group expects to generate higher net profit this fiscal year. So we already have 16 questions in the Q&A. So our colleague, Jennifer Luy, who's responsible for Investor Relations, will now read and moderate the Q&A. Thank you.

Thank you, Iggy. We will start off with the P&L questions before moving on to the balance sheet and debt related questions. So our first question is, with the new products, new markets, market leadership, price increases, sales still grew below inflation rate. So does that mean volume was down?

Let me take the question and then Greg and Cito can complement. Just to reiterate, when it comes to our Fresh business and Philippines in the fourth quarter, the volumes grew versus last year. When it comes to our U.S. business, we have to look at it in 2 parts. One is our branded business, and the second is our non-branded business or channels such as co-pack or private label that are not very strategic. So when it comes to our branded business, the volume decline was marginal. Most of the marginal -- most of the volume shortfall came from nonstrategic business, which we had already factored in our plans. So we continue to focus and grow in core markets and this is [indiscernible] more important retail market shares in all of our core categories despite all the contraction that we are seeing in some of the categories.

No, I think that's a good answer, Parag. I think that's covered the bases. It is a story in the fourth quarter in the U.S. between branded and non-branded. As Parag said, we are feeling good about the branded business and our ability to grow market share and grow our core segments such as our flagship business, canned vegetables grew in the fourth quarter year-over-year, but areas like co-manufacturing, we did see a big pullback year-over-year, and that's the business that we pack for other brands. So we saw other brands, I think, more impacted by a decline in demand. That business in the fourth quarter was down 36% year-over-year versus prior year. So that's where the pullback is occurring, it's occurring in more nonstrategic businesses. The overall health of the business is quite good. and we have momentum as we head into this new year in the first quarter. Anything else add Cito?

Nothing more -- nothing more. I think Parag explained it well.

Thank you. Revenues increased by 3%, but gross profit declined by 20% and which meant that price increase was not enough to cover the increases in costs. Is this due to competitors' pricing? How are Del Montes' competitors doing in terms of adjusting prices against inflation?

That's a good question. Just to give some context here. We absolutely were expecting some impact from the significant headwinds, which is something that all the businesses are facing in our second half. And we have planned for that. We did see some increased cost pressures that came our way. And to your point, we then proactively planned for another measured price increase in our U.S. business in May, which is going effective in August. So we are pretty confident that we would see margin recovery from second quarter of fiscal year '24 onwards by 300 to 500 basis points based on the proactive pricing actions that we have already taken, which is also coupled with very strong cost measures that are also being put in place, value engineering programs, reduction of waste that we seeing. And also some downward impact, a positive impact from some of the commodities that are softening, including ocean freight and transportation as well. So that's a little bit of context in our -- on our Q4 story in margin, which we are proactively addressing in the coming quarters.

The only thing I would add to that, Parag, is that relative to what is the competition doing, we're seeing consistent pricing across our categories. All competitors in these businesses are facing the same kind of inflationary pressure. The final surge or wave of inflation did come through in the second half of the year and in the fourth quarter. So we are seeing consistent pricing action even across private label as prices rise to try to help deal with these higher costs and higher input costs.

I think for the Philippine market and also for our markets in Asia Pacific, our competitors are also taking price [indiscernible] some of them delayed it, and it is only now that they're taking pricing. Some took little price increase last year. I'm sure that the profitability may have been affected, but -- this year, they have taken prices starting the first quarter.

Okay. Thank you so much. I'm going to read all the cost and margin-related questions if they're kind of related. The first one is, help me understand the situation clearer. The whole year, USA sales were $1.7 billion, which, if divided by 4 is about $424 million per quarter. In 4Q, sales in USA were $428 million, which was roughly 1/4 of full year. What astonishes is the first 3 quarters were reasonably healthy, yet 4Q appears to be a washout. The key statistic of near 6% fall in GP margins down to 19% from near 25%, what's going on? Second from [ Omar ]. Are you expecting more margin pressure in the coming quarters? And how will this affect Del Monte's financial and operational results? What's the plan for the company if margins continue to remain depressed for a longer period of time. And one more, despite the implemented price increases throughout the year, gross margins for DMFI and the base business for 4Q were significantly lower at 19% and 18.5% compared to 25% and 27% last year. Kindly share management's plans going forward to tackle the cost pressures and to what extent margins will be lifted by these actions. For FY '24, what improvement in margins can we look forward to?

Any more else that Jen that you like to add?

Yes. So -- yes, these are the, I guess, the main concerns with our margins and cost pressures.

Okay. Again, let me take a stab, and I would request Cito and Greg to correct to help. So Q4, when you look at in isolation and compared to the 3 quarters, would like to reiterate that in the first half, when particularly in the U.S. business, we are still selling in rental from the prior year pack which is at a much lower cost as compared to the fiscal year '23 pack where we saw the surge and increase in commodity headwinds pretty significantly. And that is what we would be cycling and incurring in the third and fourth quarter, particularly the fourth quarter. So that's the first aspect which I wanted to clarify. The second aspect would be in addition to the cost pressures, which everybody is facing, we are also required to continue providing value-based offerings to our consumers, which we are doing very well by having increased sales of multi-packs across our core business. And when we do that, it does end up being margin dilutive as compared to our prior year, but we are addressing that. We are addressing that, and we continue to look at opportunities to improve the margin of our multipack business as we invest in automation and improved productivity going forward. So that's being done. And it's also being done through enhanced procurement efforts as we grow in scale in some of these packaging formats. So do we have a plan going forward? Yes. We are expecting our margins to improve in fiscal year '24 as we execute our price increase effective August. And we also execute cost optimization programs and start seeing some of the positive trends that we are seeing when it comes to certain commodities. So that's also expected to help or cool down in the second part of the year. So that's on the U.S. side. When it comes to our base business, in addition to the inflationary headwinds, which obviously impacted our cost structure. We also did see some negative impact from productivity, particularly around our plantation and cannery metrics after 3 very strong years. So we saw some dilution taking place, which impacted our cost structure for the fourth quarter, which is a pretty big quarter for us from a pineapple production perspective, which did not go that well in our favor and impacted our margin performance for the fourth quarter. We do not expect this to be an ongoing issue. Particularly, we expect that to improve in the second half of fiscal year 2024. In addition to that, pricing-wise, there is some improvement we are considering, and we are also seeing softening of commodity costs in our Asian and Philippines operation. With that, I would request Cito and Greg to complement.

No, I think you summarized it well, Parag. We are very aware of the inflationary impacts on our business. And as Parag cited earlier, in the U.S. market, we incurred $130 million of inflationary costs this year that came through our P&L. We anticipated this through our pricing actions every 6 months. We've been able to raise prices, watch the impact of prices, while we cut cost and value engineer and find savings wherever we can. But there's a limit to how much we can raise prices in each of these events and how we manage margins. Each year, if we go back in time, every year for the past 5 years, we've consistently raised margins. This year, we knew the battle would be to hold margin, quite honestly, with that $130 million in costs, we were fighting to hold margins and position ourselves to begin margin growth again in F' 24. And that's what's going to occur. We're very confident in the plan we have. The pricing that we've executed our pivot to more and more innovation that is value and margin accretive. So our outlook for the year ahead is quite optimistic. The growth will continue. We have managed our way through unusually large inflation this year, most of which, as Parag suggested, came through in the fourth quarter. And we are on stable ground with a healthy business with better margins and better pricing as we head into the new year. Go ahead, Cito.

Yes, I think the only thing I would add is, we, of course, have a plan to get back to our traditional levels of profitability, particularly for Del Monte Philippines composed of the Philippine market and International. Second is, other than pricing, we are pushing productivity, particularly in our pineapple processing operations in Mindanao and that is -- and that is already coming in as we speak. The third thing that's in [indiscernible] is commodity costs are coming down, especially agriculture inputs which, as you know, is a big component of cost knowing other portion. So we're very -- I'm optimistic that we can turn this margin around. It was a very unique fourth quarter for us. But I think overall, Philippine market in Fresh is in good shape to return to historical margins.

Thank you so much, our panelists for answering these questions clearly and extensively. Moving on to net profit. On 4Q, the amount of foods was lower by $3 million, the Del Monte Philippines, lower by $17 million, but overall down $32 million for the group, the $12 million difference, are those in holding company expenses?

Good question again. Thank you for probing that deeply. Let me clarify, net income for DMFI business was minus 4.3% or it was a net loss of 4.3% versus 19.9% last year. So it was not a difference of $3 million, but a difference or delta of around $24 million. That's the piece which you are missing.

Okay. I think he was referring to the organic profit from $100 million to $70 million? $100-plus million last year for the group, down to $70 million this year to the $30 million variance.

Okay. This is for the full year? Is the question for the full year?

So yes, you're right. It's for the fourth quarter.

Yes. So that's the answer for the fourth quarter.

Okay. Thank you, Parag. For full year 2023, how much profit or loss did Kitchen Basics make and shouldn't Del Monte better consider or concentrate on lowering debts first rather than expanding into new business ventures.

That's a good question. We made cash profits of $6.5 million to $7 million in the 9 months excluding the accounted treatment of the $5 million that we called out, which is much ahead of our first year performance as we took over the business. We do have -- we do consider it a positive in many ways. Particularly because we have been able to stabilize market share, and we have clear plans in place to expand the business. Which we -- when we acquired was not in that good health from a top line perspective. In terms of margin, again, we outperformed versus what we were contemplating despite the investments we are making to expand distribution. And overall, with $6.5 million to $7 million of cash profits that more or less is outweighing the interest expense. And with our projections on EBITDA to be around $11 million to $12 million, we are in pretty good shape despite the increased borrowings that it has left it.

Thanks, Parag. Why is there a one-off item almost every year? Anything anticipated for the next year?

Again, tough and difficult question. We did not have any one-off costs in fiscal '21 and '22. So I would like to clarify that. Yes, we had a one-off cost this year of $72 million, but that has -- that is going to reap good benefits in terms of lower interest costs for several years going forward. So it was done with a clear return on investment in mind. In addition to that, we obviously have the $5 million of accounting adjustment, as I explained on Kitchen Basics inventory that we acquired, that's not necessarily a cash cost. That's just a book adjustment that we are required as per IFRS rules. Other than that, we had $2.5 million of one-off legal claims that we amicably settled from California wages. So that's pretty legitimate and well-defined list of one-off costs in fiscal '23. We do not expect anything material in fiscal '24.

Thank you, Parag. what are the sales expectation for international sales to Mexico, South America and Canada? Does Del Monte have any existing sales to these markets?

Yes, it's one off the growth drivers we have overall sales of around $50 million in these markets, and we expect to continue investing and growing in this segment, and I'm sure Greg will provide more context to this.

Yes. No, just to build on that. Absolutely, we think international is a growth channel for us. With the acquisition of Kitchen Basics, it allowed us to enter Canada for the first time. So we're broadening our portfolio and our expansion up there. Down in Mexico and South America, we've stood up a sales and marketing infrastructure that's having a lot of success growing items like Del Monte pineapple in our Contadina business. So we think there is a nice pipeline of future growth in those markets.

On the increase in MD2 pineapple production, what is the expected increase to be seen in FY '24 and beyond?

I think we can expect high single-digit to low double-digit growth.

Thanks Cito. For Parag, how much is spent at the holding company, if operating units are experiencing profit squeeze, management should be more aggressive in trimming corporate overhead, what are being done?

Yes. Great question. We do manage our overheads very tightly to provide more context, our overall corporate overheads across the group are around 6% to 6.5% of net sales, that's what it is projected to be. And we are very mindful of increasing the same, and we are just adding where we need to from an infrastructure perspective to improve our planning processes, and to really support the business going forward. No intention to include any effect in any of the businesses, whether it's the U.S. or our base business or even a very lean corporate structure that we have to manage the holding company.

Moving on to debt questions. Net debt from Q4 F' 22 to Q4 F '23 increase was around $700 million, of which $300 million was for preference share redemption, $100 million for working capital, including Kitchen Basics. The $300 million unaccounted for was used for what? Considering the redeemed $500 million senior notes were already part of the debt.

Again, a great question. Let me elaborate and clarify that more explicitly. Now there are 2 parts to this. Yes, our debt increased by $700 million. The first part is more investments and one-off transactions. The one-off transactions would include refinancing after shares, which is $100 million. The second would be increase in our term loan in the U.S. by $100 million to acquire Kitchen Basics. And the third one would be redemption of high-yield bonds, as I indicated during my update, that was another $50 million, $50 million to $60 million. So for one-off transactions our borrowings increased by $250 million to $260 million. And in addition to that, we also saw impact on our inventories coming both from a cost perspective and also increase in quantity that took place because of 2 reasons. One, we were normalizing our inventory levels following quite a low inventory level that we have reached, particularly in our U.S. operations. And the second one was we did see some softness in sales as things -- as categories contracted in the U.S., particularly in the second half. So due to these factors, our inventories did increase by around $350 million to $400 million across the group. So that would explain most of the increase on the working capital side in addition to the $250 million, $260 million that we saw from one-off investment or long-term perspective.

Thanks for the clarification Parag. Two more on gearing, one from George. What is the plan to reduce gearing? How long will it take to pay off, say, a $2 billion debt? And how will this be done? Second from [ Mohammed ]. Could you comment on the company's current loan covenants and reach? And what is the plan to pay down debt in the next 12 months?

Great question. Thank you. So loan covenant first. We were very clear when we refinanced our pref shares that it would lead to a higher debt and that was already discussed with the banks. So as a result of that, we were in breach and we have got waivers both for fiscal '23 and fiscal '24 from our partner banks. So that's taken care of and addressed. Obviously, with increase in inventories and our second half results being impacted from an operating income perspective, that led to our leverage being more than what we were projecting or expecting and we are addressing that in a number of ways. In terms of our priorities, lowering inventories for Greg, Cito, myself, is our #1 priority. So we would be addressing that, and we expect to lower our inventories by $75 million to $100 million group-wide. That would help us from a reduction in leverage perspective. And based on the operating improvements without any capital structure initiatives we expect the leverage during the year to be lowered from 6x to around 4.5x to 5x. Of course, our internal goal is even more aggressive. What I'm telling you is a slightly realistic less aggressive target of 4.5% to 5%. In addition to it, we are working on a number of initiatives, as you are aware of, to continue improvements in our capital structure, on the capital structure side which should lower the leverage from a group perspective by another 1x to 3x depending on the 2 or 3 initiatives that we are working on. Obviously, these are subject to market conditions and are evolving as we speak.

Thanks, Parag. On the term loan B, I note that the end April 2023 hedge 8.1% interest per annum. Management previously shared a 3-year, 3% interest cap was purchased and also the impression that the all-in interest rate with the cap will be 7.25%, which was 3 plus 4.25%. Kindly explain. Also, is this the interest rate on the 600 million loan for the next 3 years.

Let me clarify. 7.25% is correct, but it is missing the cost of cover which is another 0.8%. So that's why it becomes 8.1%, and you need to add to the 7.25% which is a 3% cap on SOFR plus the 4.25% being the credit stack. Now in terms of covering $600 million, yes, largely we are covered for the $600 million in the next 3 years, particularly for the first 2. In the last year, it does go down to around $400 million, if I'm not mistaken.

Thanks for the clarification, Parag. Could you please speak about capital management and why the company is in a negative capital position currently? What will be the impact of refinancing for Del Monte and what will happen after 2024?

The question isn't entirely clear, but let me attempt. As I said, we are definitely addressing the leverage issue. In terms of our overall policy where we want to be. We want to be less than 2x from a leverage perspective, and we are working on various initiatives to bring that down and we are looking at it from a multiple program perspective that is being worked on. And we feel confident that we would be able to address that in fiscal year '24 in addition to the operating improvement plans that I just talked about.

Thanks, Parag. Now we move on to the IPO questions. In early April, Del Monte announced a confidential submission of draft registration statement by Del Monte Foods for the proposed IPO. It's been 2 months since the announcement, and there has been no further update. Is this IPO plan still ongoing? Typically, how long can this registration process take? Is there a time limit to the process?

Well, Jen, as you know, we're in a quiet period and really can't comment on anything relative to any IPO at this point.

Thank you, Greg. There's also a question about updates on the Del Monte Philippines IPO.

Our focus is pretty much on a number of other capital structure programs, not at DMPI at the moment. So I won't be able to share any progress in the short term around the DMPI IPO.

Okay. I'll just share the feedback of [ Mohammed ] on this U.S. IPO. The economy is expected to go into recession, and the IPO market has not been favorable. In the past, the company has tried to list various subsidiaries, but always canceled due to unfavorable market conditions. So why is listing the U.S. business at this time, good for shareholders if we are not in the best pricing environment?

I think we cannot comment much on the U.S. side at this stage. That's what I would say, but we are obviously studying the market and understand the implications very clearly. So thank you for the advice.

Besides the U.S. market, are we planning any price increase for the Asian market?

Modest price increases are being considered, and we will continue reviewing that as the business evolves.

Del Monte share price is down to $0.20 from -- down 50% from $0.41. Is the major shareholder not interested in buying more shares off the market?

I would leave it to the major shareholder to answer the question.

Yes and will bring that up in the [indiscernible].

Those were all our questions, quite difficult this round, thank you so much to our panelists for answering them so extensively and clearly.

Thank you, everybody. Thank you for all the support, and I appreciate the questions.

Thank you.

Thanks, everyone.

Thanks, everyone. Bye.