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

It's 8:30 a.m. Good morning to our participants in Asia, and good evening to those joining us in the U.S. Thank you for joining Del Monte Pacific's Results Briefing for FY '24 First Quarter ending July. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer of the Del Monte Pacific, DMPL, and President of Del Monte Philippines; Parag Sachdeva, Group CFO of DMPL; Greg Longstreet, President and CEO of Del Monte Group; and I am Ignacio, Chief Corporate Officer of DMPL. Parag Sachdeva will now present our results.

Thank you, Iggy. Good morning to everybody in Asia, and good evening in the U.S. Overall, for the quarter, the theme is very strong revenue growth across the group. But profitability continues to be challenged due to higher costs and interest expense. On Slide 5, continuing with the highlights. Del Monte Pacific Group sales grew by 13.2% to $517 million on higher U.S. and fresh pineapple sales, which were up by 18% and 23%, respectively. The group continued to maintain leading market share positions across core products, both in Asia and in the U.S. Demand also was on the increase for fresh pineapple in our key China market where we are the market leaders. Strong consumer responses in the U.S. for expanded portfolio of new branded products. We achieved EBITDA of $51.1 million, which was down by 27% on higher costs. Lower operating income and increased interest expense, as I outlined, led to a net loss of $13.1 million. However, this was lower than the net loss of $30.5 million in the prior quarter, which included one-off costs related to refinancing of high yield bonds. Next slide. When it comes to the outlook, as we all know, the global environment does remain volatile with consumers becoming more cautious with their spending and persisting cost pressures. We as a group continue to remain vigilant in managing our operating expenses and are taking several measures such as packaging material optimization, investments that we are focusing on to improve efficiency, productivity and also minimizing waste. On the commercial side, in the U.S., we are more focused -- we continue to be more focused on innovation while also increasing penetration in a number of high growth [indiscernible]. Our momentum on international sales growth is expected to be double-digit from Mexico and South America. In our base business, we continue to strategically invest and expand in our MD2 fresh pineapple in the coming years. A big focus for the group this year and also in the coming years would be working capital improvement, especially inventory reduction and optimization to generate more cash flow and strengthen the balance sheet with lower debt. To improve margins, we have taken a 4% price increase, which has come into effect from end of July and should lead to gross margin recovery from second quarter onwards in the U.S. We are also expecting some respite from commodity headwinds and are seeing some deflationary trends such as lower metro packaging costs, favorable rates for ocean and domestic transportation and more normal increase in raw produced costs as compared to what we have seen in fiscal '23. But the impact of that from a P&L perspective, as you would appreciate, would generally follow 6 months later just because of the nature of our business and our seasonal packing process that -- particularly in the U.S. which we do in 3 to 4 months. Barring unforeseen circumstances, the group is expected to generate higher net profit in fiscal '24, and we also do not expect to incur any one-off costs in fiscal '24 just as we had demonstrated in fiscal '21 and fiscal '22. On next slide, sharing with you more color on our Q1 results. Sales, as I mentioned, driven by U.S. were up 13.2% with U.S. sales growing at 18.3%. Philippines also grew across all the core categories by 5.4% in local currency and 0.7% in dollar terms. International business out of DMPI declined by 6.9% and that was due to lower shipments to the U.S., driven by supply of pine in Q1 and high inventory that has -- that we have seen because of unprecedented supply chain disruptions in the last year or 2. JD in India grew by 1.5% in local currency driven by B2C sales, which grew at 7% in local currency. When it comes to profitability details, that I will share with you, all of them are on a recurring basis. First of all, there was no one-off item this quarter. But last year, we had USD 71.9 million on a gross basis, USD 50.2 million on a net basis due to early loan redemption. EBITDA of $51.1 million was down 27%, mainly due to higher costs. Our operating profit consequently was also down 47.6% at $36.4 million and net loss of $13.1 million from a net profit of $19.6 million due to lower operating results and increased interest expense. More details on a reported basis on Slide 8 on our Q1 results. Sales, as I mentioned, growth was 13.2% coming from U.S. and fresh pine sales to North Asia. When it comes to the construct, pricing contributed net of unfavorable ForEx to around 5% on a group-wide basis. So the 13%, 5% on a group-wide basis was from pricing and netting off the unfavorable ForEx. Gross profit at $108.3 million was lower by 17.8%, driven by inflationary headwinds and also lower productivity in Mindanao operations. Gross margin at 21%, lower by 790 bps on due to inflationary headwinds and increased costs as we continue to sell high-cost inventory from fiscal year '23 back. That's why you would appreciate that in the first half last year, our margins were high as we were really going with the F '23 pack production at that time, which was then starting to sell from second half of fiscal '23 onwards. Inflationary headwinds, to give you more details, as I've shared in the previous updates, included significant increase in metal packaging costs. It also was contributed by increase in raw produced costs driven by fertilizers and weather-related issues, both in the U.S. and Philippines. On the transportation side, we saw a significant impact on ocean freight, even though the total imports to the U.S. is more like 10% to 15%, but the overall impact was significant, and also, we saw increased warehousing costs both in the U.S. and in Asia. Gross margin for DMFI was at 18.2% and lower by 780 basis points versus 1 year ago. We did take multiple pricing actions in '23 to partly offset the cost of this. Impact of inflation and other cost headwinds is approximately $44 million for the quarter from a P&L perspective. Just to build on it, metal packaging itself would have contributed around $15 million to $18 million of the $44 million that I just mentioned. When it comes to the base business, our margin decreased by 410 basis points, again driven by commodity headwinds and lower productivity in Mindanao operations, partly offset by pricing. Impact of commodity headwinds, inflation and other cost increases is approximately $9 million for the base business. And as I mentioned earlier, favorable impact on revenue from pricing net of FX is approximately 5%, which is offsetting the cost headwinds and other related issues that I just explained. EBITDA due to lower gross margin was at [ $52 million ]. Net loss of $13.1 million -- due to lower operating results was at $13.1 million plus increased interest expense on an ongoing basis as the rates and the benchmarks have significantly increased versus where we were last year. When we look at net debt, we were at $2.3 billion, higher by $570 million due to the additional loans we have taken to refinance the redemption of $100 million DMPL [ Series ] A2 preference shares, where we are still saving on interest costs. Approximately the arbitrage is around 3.5% if we have to compare it with -- not redeeming the pref shares. So that's a net savings even in a very high interest rate environment. Working capital loans also contributed to the overall increase, particularly in the U.S., where we are carrying higher inventory for seasonal builds due to increased costs as well as a lower sales than planned that we saw last year. Lastly, we also increased our loan for the acquisition of Kitchen Basics that was achieved in -- of August last year. Gearing ratio accordingly at 6x due to increased loans and net debt to adjusted EBITDA at 7.2x and is 2.2x higher than last year. On the next slide, please, we'll share with you more about our increased revenue performance across the group. Pleased to share that the U.S. business grew by 18.3% and roughly contributes -- or continues to contribute 70% of the group sales. We achieved total sales of $359 million, mainly driven by higher branded retail sales which grew by 18.8%. Branded retail sales contributed 78% to total DMFI sales. Revenue growth, again, was mainly driven by pricing taken across categories in line with inflation and also volume growth across key categories of canned vegetables, fruits, tomatoes, broth [ and ] stock as well as our new newly launched JOYBA bubble tea. Kitchen Basics contributed around $5.1 million to the revenue, representing around 1.4% of net sales. We do continue to hold leading market share positions across the core business on the back of strong commercial execution and also new product expansion. New products, as we always indicated to you in the past 3 years, have contributed to around 8.7% to total DMFI sales in the first quarter. Asia Pac sales also grew by 2.5% to $149.3 million. Exports of S&W branded fresh pineapple increased by 22.9% due to higher than planned supply plus increased market share in China where we continue to have dominant share and also higher sales of Deluxe fresh pineapple, which is showing very encouraging trends. Exports of processed pineapple products was lower than last year due to higher inventory in the U.S. Philippine market, as I mentioned, also did show a robust growth of 5.4% and we ended the quarter at $75.9 million. In terms of overall core business, it continues to be very healthy. And sales of packaged fruits, beverage and culinary was higher behind compelling communication campaigns and also value for money offers amidst a very high inflationary environment. Foodservice and convenience stores continue to grow, and the growth that we saw in the first quarter was 25% and 16%, respectively. Innovation continues to be a big part of the story and contributed 5.4% to Philippine market sales. When it comes to Europe, again, on a small base, just like fiscal '23, it grew by 11.4% to $8.5 million, driven by higher sales of packaged products. On next slide, just as we did at the AGM, we would like to provide more context on our increased or higher loans, which went up by $569 million versus last year. And as I have explained while -- on Slide 8, the main cause of increase was preference share redemption, acquisition of Kitchen Basics and mainly increase in inventory in the U.S. That all is very clearly laid out and led to the increase. Now, what are we actually doing about it. We have a very clear goal in the U.S. and in Philippines to manage our inventory much better going forward, and we are taking the right actions to achieve the same, including reducing the pack in the U.S. as well as processed pineapple in the Philippines by almost 10%. We expect to also improve our operating performance in '24 behind strong volume growth and improve our margins from the second half of fiscal 2023 -- from the second half of fiscal 2024. Secondly, also on the capital structure side, we are considering the issuance of appropriate equity instruments. And to just give an update, we continue to progress on our DMFI IPO as we have recently announced, and we had completed the filing of F1 with SEC. So that program continues to be actively pursued. We expect our debt levels in '24 to go down to USD 2.1 billion and bring down our net debt-to-equity ratio to below 3x in the short to midterm. With that, let me hand over to Greg to provide a more deeper insight into the U.S. business.

Thank you, Parag. In the first quarter in the U.S., the Del Monte's business, as just Parag suggested, benefited from very strong demand and execution of our growth strategies, achieving $356 million in revenue, 69% of group sales. But importantly, it's not just about pricing. There's solid volume growth, over 5% for the entire U.S. business. Importantly, the retail branded business, which has really been our focus for channel development and channel expansion, was up 7.8% in volume, driven by our core businesses. The revenue also had some very strong performance, up 18% and up 19%, respectively, for branded retail. So good quarter for growth. In the U.S. right now, growth stories like this aren't very common. Most of our peers are demonstrating mid to high single-digit volume declines. So our strategy to expand our brand into more stores and more aisles, drive innovation, drive channel development continues to work, and we are optimistic about the outlook for growth this year. Channel development in foodservice was also a success story, again this quarter, up 8.5%, driven by new customers and some new outlets that I'll describe later. Kitchen Basics continues to be a solid contributor both in sales and margin to the company. $5.4 million sales were demonstrated in the quarter and really like what we're doing in terms of developing new distribution and new outlets for that business. And it's giving us a very strong national presence and a high-growth, high-margin category of broth and stock. Innovation continues to be a very prominent fuel for growth for the company. Innovation is now approaching 90% of the sales for the company. Our innovation is margin accretive. One of our success stories that we have talked about in past quarters is the rollout in development of new JOYBA bubble tea. We currently have capacity to produce approximately 1 million cases of this product. That 1 million cases, has been sold out over the past year. We've been on allocation with not enough supply to meet demand. So we are in the process of adding an additional 4 million cases of production. That production will be available in the second half of this year and will help us elevate sales this year to more than double its current run rate with an outlook of 5 million cases in sales in the fiscal year ahead. I'm very encouraged by the success of this item. It's done well in multiple channels with multiple customers, including Costco and Sam's Club and Target, and a lot of new excitement around the brand itself with some line extensions and really some new categories that we're looking to enter with the JOYBA brand in the coming year. New products such as our Gut Love and Boost Me Fruit Cup Snacks were also recognized this past quarter in the 2023 Mindful Awards for our ability to up-cycle many of the ingredients in those products. EBITDA was at $25.4 million. As Parag mentioned, inflation -- the final wave of inflation has hit our cost of goods. We'll be cycling through that high cost of goods here in the first half. We have taken pricing again that will help us restore margins in the second quarter of this year and put us on proper trajectory to maintain those mid kind of [ '20 ] margins that we've been achieving back in line with our objective. So encouraged, and Parag suggested that inflation appears to be behind us. The rapid rise in our cost that we've had to incur in the last 2 weeks [Technical difficulty] including warehousing in a lot of areas that we think are going to bode well for us. The next slide. This is our market share. This is a key indicator for us. Our fundamentals are very sound. We're growing the right products. We're growing branded business across existing channels and new channels. We continue to gain share. In the U.S., we compete in 4 multibillion-dollar categories. We are the dominant market share leader in vegetables, growing share again this quarter. We're the dominant brand across packaged fruits, with a record quarter of growth, up 3.8 points in our canned business, 5.3 in our Fruit Cup Snacks business, demonstrating more growth in the very large tomato category. And in a category of broth and stock that's growing at nearly 15%, we're doing a good job of holding share and still delivering solid growth in that business. The category dynamics are changing in the U.S. Purchase patterns are changing. There is a need for value. We're really focused on delivering value and affordable nutrition. We're having success with the new products that cater to the value segment. But we're also having success providing easier meal solutions as more and more consumers look to prepare meals at home. Our brands and our products and our categories are ideally suited to meet that demand. For long-term growth, our strategy will be to continue to invest in bringing differentiated and innovative products to market and expanding our distribution channels and building our brands. The next slide highlights some of our marketing investments. We continue to support our JOYBA expansion with some really thoughtful on-target campaigns through various social and digital media outlets. We did a nice job of re-launching our adult fruit cups, our Fruit Refreshers line. We've seen increased demand over [ planned ] in that business and are working to keep up with that demand. So really encouraged by our ability to grow our healthy snacking portfolio. The next slide. Just a few examples, some of the things we've done for Back to School. We're just kind of in the middle of Back to School season right now and have got a lot of creative merchandising and display activity and partnerships with brands like Chobani. So encouraged by the increased demand and the market share growth in that untapped space. And we continue to ramp up both our domestic production and our external sourcing and global sourcing of those items. Back to School was also supported through Amazon with some unique promotions and events to drive both trial and awareness of our Fruit Cup Snacks and adult products. So really encouraged by our ability to reach consumers and drive more growth in household penetration for these products. The next slide is just another summary of PR. We continue to promote the advantages of our high-quality products, the nutritional benefits of our products. We are investing in our ESG efforts, continue to be recognized for our ability to promote sustainable acts like avoiding food waste and up-cycling, consistently are being recognized for new product innovation and really doing a nice job of using influencers in the U.S. marketplace to help spread the news about our interesting and innovative new product portfolio. The next slide. My last slide is just to comment on our success in foodservice. We think this business has potential to be quite a large business for us. Today, foodservice, although it's growing at a rapid rate, is only 6% of sales. We believe it can be twice that over the next couple of years. We really like the position we've taken, marketing our wonderful pineapple products that are produced in the Philippines. We think we have the best products, the best pineapple juice products, the best pouch and canned pineapple in the U.S. marketplace and our customers and distributors are taking notice. We've had a lot of success growing this business in the past few years. And catching up with our inventory situation this year, we fully expect to return to some pretty sizable growth rates again in both F '25 and '26 as we look forward and develop new contracts and new business. So with this, I will transition to Mr. Cito Alejandro.

Thank you very much, Greg, and good morning to all of you. I will now talk about Del Monte Pacific, which comprises of the Philippine market and our international operations. Despite our strong exports of fresh pineapple and the very steady performance of the daily food market, our sales for the period was down 4% largely due to the lower exports of processed products to the U.S. Philippine sales was up 5% in peso terms, although flat in dollar terms due to peso depreciation. But our sales of packaged food, beverage and culinary were all up, and these were very much supported by compelling communication campaigns as well as value for money offers in the face of an inflationary environment. Foodservice and convenience store continued their strong performance, and I'll talk more about that in the coming slides. International sales, as I mentioned, is down 7% due to the decline in export to packaged pineapple, and fresh pineapple up 23%, driven by North Asia and increase in sales of our high-margin S&W Deluxe primarily in the China market. EBITDA and net profit, however, was lower than 1 year ago and mainly driven by higher costs and higher interest expense. Our market shares remained solid. Not only do we have very strong market leadership positions in our core categories, but we even managed to grow market share over that period. Packaged pineapple, canned mixed fruit to and ready to drink juices, market shares were all up in the culinary segment, in tomato sauce, in our pasta sauce, where we were either steady or slightly growing. We had a hit in the drinkable yogurt -- our 3-year old drinkable yogurt category, and this is primarily due to multiple price increases in Mr. Milk and some competitive activities, but volume and share recovery plans are underway. Next slide. So just wanted to take you through some of our marketing initiatives. In culinary, in fruit, our strategy here is to increase usage of our products in various meals and different locations. In the pasta sauce segment, we aim to gain more market share from competition, and our strategy is to [ own ] the birthday occasion, which is the #1 occasion for pasta sauces in the Philippines. Next [ chart ]. As you know, beverage is about occasions and frequency of use, and we are capitalizing on these 2 key pillars of growth in this category. On the left side, you will see how we have positioned our fiber in which 100% pineapple juice as a Nightly Fiber Habit print, and this is gaining traction and the segment is actually growing. Fit 'n Right continues to roll, and we've done a lot of digital advertising among the millennials, the Gen Z, to increase volume of this product, and it has actually been growing that way. Next chart. This is more on innovation. And I told you about the price issues that we encountered in Mr. Milk. And we just rolled back the price to MXN 52 for a [ 6 ] pack and this is a demonstrated price that allowed us to grow this segment. We also introduced a new flavor, and we're signing this up with products that are used for [ birthday ] occasion in snacking. In the potato crisp category, we've introduced lower sized products in order to increase distribution in the low-end segment of the market, and likewise these trials of the products. Next chart. Just to summarize our innovation portfolio, we will be adding more to this over the second half of this fiscal year and also through FY '25. But right now they account for 5% of total Philippine sales. Our goal is for innovation to account for at least 15% of our total portfolio or revenue over the next 3 to 5 years. Next chart. Talking about foodservice and convenience on the left side of the screen. As I can [ share ] this update. Sales up 25% versus prior year and this is already 108% of our pre-pandemic level. We continue to open new accounts. And in our core accounts, more outlets are now opening. And we are really very close to the pre-pandemic level today. Right hand of the chart is our convenience store update. Revenue up 16% versus prior year, although this is still 77% of pre-pandemic. So that's more growth ahead of us. Encouraging to note that the convenience store category of China has actually increased outlets today, actually more than 20% of the pre-pandemic level, which I think is a real [ bode ] of confidence and the optimism on consumer consumption. Next chart. I'm pleased to report to you our significant development in China with our distributor, Goodfarmer. We held our first ever S&W pineapple festival in China. And this is to communicate S&W's strong commitment to the Chinese market and the Chinese consumers. We showcased our [ innovative ] products such as S&W Deluxe pineapple. These are one of the things that we've been doing in order to also increase our strategic partnership with Goodfarmer. So this festival runs for 1 month and it covered more than 300 retail stores and non-wholesale markets across China. Next chart. So we have now introduced -- due to popular request and popular demand so we've now introduced our S&W Deluxe fresh pineapple in the Philippine market. Very favorable response as to what we have seen in our international market, and we will continue to leverage and expand distribution in the course of the year. Just to summarize where we are with our S&W fresh market shares. Very strong market shares in North Asia in [ partway ] and net to net as far as leadership is concerned versus our major competitor. In China, we have maintained our market leadership position. Very steady in Japan. We took a bit in Korea, we have won some -- last year we did market leadership there, but [ we took a bit ] -- because of supply issues. So we're [ correcting ] that today and we hope to get back on track to our leadership position there very soon. Pleased to report too that our S&W pineapple -- within the frozen -- our frozen stick that we produce with a joint venture with large group of Spain. We are now in 7-Eleven in Taiwan, and the product is now available on 3,400 stores. So this is just the start. And if we are successful in Taiwan, then we expect to roll out to more 7-Eleven stores, not only in Taiwan, but in different parts of Southeast Asia. So this just summarizes our international innovation. So we've got the nice [indiscernible] and frozen snacks or sticks, which I just told you about, that we introduced in Taiwan. We also have our not from concentrate juice which is growing and is now the impact into consumer packaged formats. Our IQF pineapple chunks, and of course, our Deluxe pineapple line. And also, this now accounts for 19% of total international sales. Good to note our progress in India. We -- our retail business grew by 7% ahead of industry trends and primarily driven by e-commerce, very strong growth at 16%. Our foodservice business also grew by 6%. And despite high inflation, the strong improvement in our contribution margin of 214 basis points driven primarily by supply chain efficiencies. We also built a new factory in the north. As you know, our main factory there is in the south in Bangalore. We now have one in the north, and we believe that it is going to be very critical in developing our very underdeveloped North India market. And we will continue to invest in that building and continuing to improve our general trade distribution, these 2 being critical pillars of growth this year and [ into ] the future. That's all I have. And with that, I'll now turn it over to Iggy.

Thank you, Cito. I'm pleased to share some key highlights on sustainability in addition to what Greg -- and a little bit in the U.S. and outside of recycling and other initiatives. We use drones in our [Technical difficulty] to reduce water usage by as much as 90%. We continue to generate renewable energy to our waste-to-energy facility. And we are now installing solar power in 2 locations in the Bugo manufacturing facility as well as [Technical difficulty]. We are diverting post-consumer packaging waste as part of our extended producer responsibility for GPR program of plastic recycling. And we published our FY 2023 Sustainability Report, which includes early adoption of GRI 13 Sector Standards in Agriculture. Our contribution to the UNSDGs are highlighted as well as the 27 ESG metrics of the SGX. And our Sustainability Report is downloadable on [Technical difficulty] platform. So repacking our outflow. We'll continue to manage our operating expenses, including packaging materials optimization, power and fuel initiatives and improving efficiency, productivity and minimize wastage, as well as product bundling initiatives. We will continue to focus on innovation while increasing penetration in a number of high-growth channels in the U.S. and pursue new market development initiatives. We are increasing production of our superior MD2 fresh pineapple, as Cito described earlier, in our key Asia markets, including China. And as Parag highlighted earlier, we'll continue to work on working capital improvement, especially inventory reduction to generate more free cash flow and strengthen the balance sheet with lowered debt. Del Monte Pacific Group expects to generate higher net profit in fiscal year 2024, especially in the second half of the year. So with that, we would now like to open the floor to questions. I'd like to turn it over to Jennifer Luy, who is responsible for IR to inaugurate the Q&A.

Thank you, Iggy. Our first question is on costs. What costs were affected by inflation? Are these fertilizers, in canned, guideline boxes, power, transport costs? Do we see this tempering in the second quarter? And related to this, another shareholder asked, what is the expected time frame for the high-cost FY 2023 tax to be cleared out from the inventory?

You want me to -- let me take that, Jen. I think I did explain that in my commentary. The costs that obviously have gone up are in several areas. Some of the major items which have impacted us both in the U.S. and Philippines are metal packaging costs. We saw the metal packaging cost increase in fiscal '23 by as high as 45% to 50% in the U.S. and significant increase in Philippines too. And as you can imagine, metal packaging is a major component of our cost of production. We saw increase in raw produced costs driven by fertilizers and weather-related issues, both in the U.S. and Philippines. And again, to explain, as you would appreciate, being an agri-business, generally we cycle our costs over 3 years when it comes to pineapple. And when it comes to the U.S., we generally carry 6 to 7 months of inventory across the board. So when it comes to cycling these costs to the P&L, that's why we are seeing more impact starting from H2 of fiscal '23. That will continue for 1 year or so when it comes to our business from a P&L perspective as we cycle the cost, or even beyond. So those are some of the examples. Plus, as I said, transportation, both ocean freight and also domestic transportation impacted us in the last 6 to 9 months. And it's again about releasing these costs to the P&L as some of them are capitalized to the balance sheet based on the inventory level.

Related to inventory, please comment on the high inventory levels at the end of Q1 compared to the end of Q4 despite the reported efforts to sell down inventory?

I think that's more a function of our seasonal nature of the business. In fact, happy to share with you that versus our plan, which we are tracking on a monthly basis, inventories were lower in the U.S. as compared to our plan. And we do continue to very diligently make improvements. Our goal is to lower our inventory by $80 million to $100 million by the end of the year group wise. So we are on course to do that. Of course, it is subject to us delivering our planned volume.

Any price increases expected in the Philippines and in the international markets?

Yes. Price increases are expected in Philippines. We are executing the same, and they are expected to be in place from October onwards. But we are very -- we are cautious at the same time to make sure that we stay in line with the competition and also make sure that we continue to be relevant and affordable for our consumers. On the international business, also in fresh, wherever we see the right opportunity, we are expecting to take some pricing action on that front as well. On international processed exports, it's more difficult because we are obviously competing with other countries such as Thailand and Indonesia. So we have to step with caution when it comes to pricing or exports of international process business.

Can you comment on the reasons for the lower export sales of processed products? Are they supply side or demand side issues?

Not on the demand side, per se. Demand continues to be steady. As I said, it was more a function of the supply chain disruption that we have seen in the last couple of years, which did lead to a lot of product being shipped to the U.S. in the second half of fiscal '23. And that has led us to making some corrections there and accordingly reducing our overall shipments to the U.S.

On CapEx, why is it still at $47 million level as last year? Is there a continuing replacement of PPE?

No, we also continue to invest in driving growth. And as I said, we also are looking at every opportunity to lower our conversion cost through automation. Plus, as consumers are looking for value proposition, we have made investments and increasing our capability on [ multi-items ]. That's where we have invested.

On the outlook, you said the very unforeseen circumstances, the group expect to generate higher net profit in FY '24, especially in the second half of the fiscal year. So how about second quarter?

On the second quarter, I would like to highlight that we expect margin improvement. We have taken pricing action in the U.S. and we are taking more pricing action in Philippines as well. Plus, our sales in the second quarter is expected to be also strong, particularly on the branded side in the U.S. We would see some impact in our base business due to weather-related issues on -- and that will limit our supply on fresh pineapple, which obviously is profitable for us. So that will be an unfavorable impact. Plus, we would see some productivity impact again on our gross margin of the base business. So overall, I do expect our margin to improve from 21% that we had in Q1, which we know is not the place where we want to be in. So our margin improvement is expected in second quarter. And we would have definitely better for profit performance despite some of the challenges we are facing on the cost side and the activity side in the base business.

For Greg, on weather. What's the effect of the recent typhoons and weather disturbances in the [ state ]?

Fortunately, they have not had any impact on our core growing regions. As we look at the Midwest and Northwest, California and Central Mexico, we have not been encountered by any major weather events this year and our yield and productivity has, by and large, been on track. And in some cases we're seeing better-than-expected yields in certain crops this year.

Moving on to loans. Since our loans are composed of fixed and variable rates, may I now for every 100 basis points of increase or decrease, what's the estimated corresponding value in terms of dollars, for Parag?

My apologies, can you repeat that question, Jen?

Since our loans are composed of fixed and variable rates, may I know what for every 100 bps of increase or decrease, what's the estimated corresponding value in dollars?

For every 100 bps, the increase in interest cost to us is roughly around $10 million to $11 million. To give you a more clear answer, if our borrowings are [ $2.3 billion ], what we have fixed or hedged by way of various initiatives is around $1.1 billion. That's what we are having a fixed rate at and the balance is more on a floating basis. So increase in cost is roughly around $10 million to $11 million for every increase per 100 bps.

DMPL's current debt levels are at $2.2 billion. I noted the target for FY '24 to bring it down to $2.1 billion, which is a 5% reduction. I would be glad if management could shed some light of this fairly modest target despite all the attention and efforts made towards its debt reduction program?

This is more on an operating improvement basis. If we are able to successfully complete certain capital structure programs, we would obviously see further improvement in debt.

The planned equity research is at which level in the U.S., Philippines or at group DMPL level?

As we have mentioned in the last couple of calls, including the AGM, our current initiative is being actively pursued in the U.S.

How long is it expected to take before Del Monte Pacific debt reaches its target 2x leverage?

In the short to midterm, our goal is less than 3x. Again, it's a little bit speculative to comment when it would be. But we would like to achieve and bring it down below 2x in 3 years' time.

With interest rates not likely to go down in the next few months or maybe years, improving DMPL's leverage would be of utmost priority. Can we know of the upcoming plans like IPO, additional share offering or any type of funding?

I think we have covered that.

You have covered it, yes. For Greg, Kitchen Basics contributed $5.4 million of sales. What's the profit or loss contribution of Kitchen Basics? Considering the company spent $100 million to acquire, can management give some kind of assurance to investors to stop acquiring companies that are not immediately profitable? DMPL should focus more on reducing debt to improve overall profitability. Since the purchase of DMFI in 2014, DMPL's leverage has been greatly compromised. So I do hope acquisitions like Kitchen Basics would be the last of this kind?

I agree. They had a [ broader ] range. I'll follow up.

Okay. So great question. Thank you very much for this one. I would like to report that last year, we did indicate that in fiscal '23, we did $35 million, because you just can't look at the -- at one quarter, especially Q1, which is very low seasonal from a business perspective for broth and stock category. So we did [ $35 million ] and happy to report that our gross margin was around 31% on the business, which is much more than our weighted average for the U.S. operations. And we made an operating income which was in line with our goals of approximately $6 million plus. So we are on track, but we do appreciate the caution on reducing debt before we make further acquisitions.

Is that -- are you adding anything Greg or you're good?

No, I think that was a great summary by Parag. And we very much believe in this business. The Kitchen Basics business is a highly profitable business, as Parag suggested, 30-plus gross margin, double-digit growth category. We see a clear path to adding revenue in this business. Our projections are to create a $70 million, call it, business here with Kitchen Basics. We're establishing a dominant national presence in broth and stock, which is a category that, again, is very vibrant and profitable.

Last year's 1Q net profit would have been $19.6 million if there was no one-off. This quarter we had a loss of $13 million or a difference of [ $32.7 million ]. And we -- if we take into consideration that this current quarter already included the savings from the refinancing of the U.S. loans last year, so if you add the savings plus the one-off, that difference would have been $34 million to $37 million range. Can the management focus on maintaining profitability instead of focusing on the revenue or market share as investors' profitability would be more important than market share or revenue?

We agree. But we also would like to highlight that some of the cost headwinds are unprecedented. And as deflation sets in and we sell the high-cost pack that we obviously are being bound on, we would see improvement in margin through that as well. So we absolutely agree. And we are focused on growing our profits. But growth of branded sales is at the heart of it, and we are happy to report the continued growth.

In terms of our outlook, in the last quarter, we mentioned that there's going to be a better outlook for Q1. But here comes the results, it didn't materialize, unless there will be sufficient price adjustments. The 4% price increase on July 31 might be a little too late. Are there any more increases? And for 2023 versus 2024, gross margin was up by 7.9%. So clearly, the 4% price increase is not enough.

Parag, I'm happy to begin that response. I think if you look at the business, as Parag and I have each described, restoring gross margin and improving profitability isn't all just about risk price increases. There's a lot of work going on across the company to drive down conversion costs, driving more supply chain efficiency, productivity, more automation. That combined with outside of list pricing, we each have businesses that have annual contracts outside of list pricing that we constantly monitor and raise that -- this will by no means be the only pricing action we take to drive margin restoration this year and are confident the combination of that risk price, which was mentioned with our various other activities, will restore profit in Q2, 3 and 4 this year. So go ahead Parag for other detail.

Yes. No, I think, Greg, you've covered it. We are taking so many measures, plus improving on our waste and lowering waste, et cetera, packaging optimization, moving to lower conversion costs through measures such as use of solar energy or more sustainable form of energy. All these are being pursued. But yes, I mean, it does take time in executing some of these plans. Plus when due -- to higher inventory, adjusting and reducing waste also gets a little bit more complicated.

Our next question is, what is the expected inventory levels in dollar terms that we should see at the end of FY 2024 and going forward?

As I said, we expect a reduction of $80 million to $100 million group-wide as long as we deliver on our sales volume. That's the reduction we are expecting.

This one is for Greg. Looking deeper into segment reporting in press release and SGX, it was shown that the U.S. 1Q sales and packaged fruit was the #1, but the biggest operating loss. Well, please explain this? Please square the circle? Please explain this, why was it growing and #1?

First, let me ask Parag and I'll add some color because I know you say a big part of the SGX filings.

Yes. So, I mean, a couple of reasons. When you look at our segment performance, when it comes to fruits, it does comprise and include a number of categories, which have been impacted by significantly higher costs. Just as an example, pineapple or mandarins that we get from China, or our plastic fruit cup business overall. So while these are categories where we would like to invest, due to exceptional cost increases driven by ocean freight, driven by a number of other factors, plus overall competitive nature of plastic fruit cups, our profitability has been challenged recently. We are investing in automation. We are continuing to bring more of our production in our manufacturing sites to address the issue and also improve the efficiency in our plants to lower the cost and improve profitability. So these are some of the factors and some of the categories that stand out within fruits that have led to a challenging margin position when it comes to the U.S. in fruits.

And I would only add to summarize that, it's really a mix issue within the quarter. We have a variety of profit levels of performance across the portfolio. The domestic fruits that we grow and produce and process and sell across our branded business is quite profitable. So it really is a point in time that we are addressing as we look at overall mix and the development of our total fruit business. So looking forward to seeing that improve in future quarters.

But for us, is the cost recognition FIFO, LIFO or blended weighted average?

It's FIFO.

For Iggy, sustainability question, in FY '23, 19% of Bugo manufacturing facility's electricity was generated by its renewable waste-to-energy facility, installation of solar power in 2 locations are underway, expected to generate energy in 2024. Solar energy installation costs have dropped significantly. It's now at MXN 30,000 to MXN 35,000 per kilowatt hour. Hope the management will be able to take advantage of the price drop globally of solar panels.

Yes, certainly. We are taking advantage of the lower cost of solar panels in the past few years, mainly due to the China production. And these 2 facilities will actually be [ leased ] from 2 vendors, but we have an option to buy the solar energy after about 5 years. So certainly, it would generate a significant saving. But we're also looking at the third location as well [indiscernible].

A follow-up to that, how much is the [ per ] kilowatt hour for the PPA?

Solar power?

For the grid, it's over [ MXN 10 ], but for solar it's less than [ MXN 4 to MXN 5 ].

Less than MXN 5.

Less than MXN 5.

Less than MXN 5. Yes.

So you can see the difference is 50% --

50%.

[indiscernible]

Just to add to that, not only are we installing solar power in our Bugo facility. We are also installing solar power -- ground solar power in our [ plantation ]. And this is going to be significant because it will be underground and we have the land for it. And it will support our facilities where primarily the packing houses and the juicing plants, and also the Nice Fruit plant. The requirement that we have there is about close to 4 megawatts. So we think that we will be able to build the facility that can support at least 50% of the total requirement for the plantation.

Our savings into plantation and to [indiscernible ] combined will be close to $1 million a year. [Technical difficulty]

For Greg, Mexico. Mexico is benefiting substantially from the shift from China. How is the MFI [ quotient ]?

Yes. We've been working on this for some time, Parag and I, on ramping up production in Mexico and insourcing in Mexico to help us avoid tariffs and lower logistics costs, given the relationship that the U.S. and Mexico have. So we are seeing more and more production. We are investing to expand more capacity within our Mexico operations. And we are taking advantage of that shift.

Next, if any update on the DMFI IPO?

Really nothing more than what Parag has provided. We mentioned several quarters ago about our filing and continue to do preparation work in the background to explore a potential listing.

And our last question is on the international market. Can we have a rough idea of the revenue for our country to [ reach ] the scope of brand acceptance and potential? In [ sense ], how much revenue do China, Japan, India and MENA bring in rough numbers?

Yes, we can share. But I would rather provide you on what is the contribution from North Asia so that we are not -- we can maintain confidentiality. Overall, when you look at North Asia, we are talking about our business being roughly around $150 million. That's what we do. When it comes to our exports to the U.S., you are looking at roughly around $60 million to $70 million. That's what our sales of pineapple products would be to the U.S. So, [ $150 million ] for North Asia, around $60 million to $70 million to the U.S. And when you are looking at Europe, we are talking about that business being around $50 million in total sales. So those are the rough numbers. When you look at Middle East, overall, you're talking more like $20 million, $25 million.

We don't have any more questions.

All right. Thank you so much.

Thank you to everyone for joining us. So we see you with our call again.

Thank you.

Thank you.

Good bye.