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

Okay. It's 9 in the morning. Good morning, and thank you for joining Del Monte Pacific's Results Briefing for FY '25 First Quarter Ending July. Representing Del Monte in this call are Luis Alejandro, Group COO of Del Monte Pacific, DMPL and President of Del Monte Philippines; Parag Sachdeva, Group CFO of DMPL; Greg Longstreet, President and CEO of Del Monte Foods in the U.S.; and I am Iggy Sison, Chief Corporate Officer of DMPL. In the interest of time, we will now go directly to Q&A, which will be moderated by our colleague, Jennifer Luy.

Good morning, everyone. You may type in your questions in the Q&A box or you can also raise hand if you want to speak up. We don't have any type in questions yet. So, maybe I can start for Cito for Del Monte Philippines. Can you share with us what were the measures you took to turn around Del Monte Philippines? And do you think these will be sustained?

I think if you look at the -- thank you for the question. If you look at our progress in Q1, it is really going back to our winning ways. We had that before. We had some problems in the plantation last year and we also had some problems with the Philippine market sales operations. So, those are the 2 issues that we tackled right away from the start of the calendar year, actually, and we have been at it for 6 months. First, in the plantation, we have also gotten a new leader in Luis Matamoros, our Plantation Director, who is a Costa Rican and brings with him decades and decades of experience in pineapple operations. And then in the Philippine market sales operations, I brought in a new leader who has been with the company for 22 years and that has also proven successful. We have also reinvested a lot in our advertising and promotions over the first quarter, heavier than what we had done last year and this will continue on through the second quarter. So, we are very happy with the Q1 results, but that's just 1 quarter. We're getting back to our winning ways and I'm sure that the coming quarters will be equally as promising and productive and progressive as what we have seen in Q2.

Thank you, Cito. We have a question from [ Sunny Ordaneus ]. He will be speaking. So, I'll let him talk now. Sunny, go ahead.

Go ahead, please.

Cito, I'm more of a creditor. I think Iggy is aware that I'm more of a creditor than the equity holder. So, for my clients, I think their concern is, number one, we read that in Del Monte Foods, you extended the loans. Would that kind of strategy apply to the maturing bonds in the Philippines? I think there's one in December. And 2, I think the other concern is since Del Monte Foods is having financial difficulties or let's say, operational difficulties, are you -- are the other subsidiaries going to help the foods in terms of financial or operations-wise? Those are my 2 questions for the meantime.

Parag, go ahead.

Thank you for the question. So first of all, your understanding about additional financing or new financing in the U.S. is correct. But just wanted to clarify that we have not extended the loans. The loans are expected to mature in fiscal year '28, so that's the first part. The second part was, are we going to extend additional support from the parent or from the DMPI. I would just like to clarify that as part of the new financing that we have just closed, the parent is required to contribute $30 million, but that's not a must do. But it is one of the areas that was agreed and it has to be done by January 2025. Other than that, there is no obligation and no plans of any of the affiliates to put in additional support to the MFI. The purpose of raising new financing was to make sure that DMFI stands on its own and which is what we had this very elaborate exercise undertaken for. Now on the last one, when it comes to the bonds, we are in discussions and plan to obviously settle the bonds when they fall due in December at RN for DMPL.

Maybe I'm not sure if it's Cito or Jenn or Iggy. Can you share with us the performance of the Philippine unit? How is it doing in the first quarter?

Do you want me to flush the slide for that, Cito?

Yes, can you flush the slide, I think, probably. I think it's Page 9, right?

Yes. I'll share the screen.

So, let me touch upon this -- the key points of this slide, Sunny. So, from a sales standpoint, very solid first quarter, 13% above year ago in peso terms. Total sales of $77.2 million. And again, if you look at what drove this number one is the resurgence of our Philippine market sales operations and the marketing efforts that we have put in to the brands. Beverage is showing recovery right now with our back-to-back programs. This started during the summer. And I think to some extent, the heat during that period also helped us. Our Culinary segment continues to grow, not only in volume but in market share and through our occasion advertising focused on children. And also to our today's Mixed Fruits for example, are also focused on regional events and celebrations, makes fruit double-digit growth behind the Del Monte Fiesta brand and Today's and e-commerce has also grown. Spectacular growth by our international market was 20% above a year ago, primarily driven by our Fresh fruit operations in China, South Korea and Japan. And we have also been fortunate that we had better supply in packaged pineapple that we were able to maximize our sales in the international market, primarily Asia, some in the Middle East, and Europe and Spain. So operating results, operating profit up 46% and net profit up 52%. So that, in a way, sums up our very good first quarter and a good start to the fiscal year.

Cito, how is the cash flow of the Philippines? Is it positive or breakeven or...

Do you want to answer that, Parag? Yes.

Yes. The operating free cash flow continues to be very strong for Philippines. And in fact, our working capital parameters are also very, very strong. For example, receivables is at an all-time low, both for Philippine market and also exports. Our inventory is also down to PHP 6 billion from close to PHP 7 billion last year. We are -- one area that we obviously will be addressing is our payables are stretched and we need to make sure that we lower the pressure on payables to make sure that we keep our commitment with the vendors.

Sorry, my last question, Jenn, if you will allow me.

Please go ahead.

Yes. Just to recap on Jubilant Year, the newly issued bond, which I think it's guaranteed by the Philippine unit. So that one -- I'm trying to recall, sorry. There is no cross default with the other units of the NPL, am I correct? So basically, it is for the Philippine use only.

What's the question Jenn?

Sorry. There is no cross default for the Jubilant Year bond.

No.

And I'm trying to call, if it is used -- maybe Parag, you can refresh my memory. What was the purpose of the bond issuance of Jubilant Year? It is for which unit?

It was for the purpose, as you know, was to buy out part of the minority stake that SEA Diner has in DMPI. That was the ultimate objective of the per parts.

So, it is [indiscernible] in the Philippines business only.

Thank you, Sunny. Okay. We have a number of questions now in our Q&A box. So, let's start with U.S. for Greg. How has the pack and the U.S. has been playing out relative to expectations in terms of costs? What do you see as explaining the muted core category performance, which was offset by broth and Joyba this summer?

Yes. Good question. We have been pleased by the performance of our pack season. There have been headwinds in certain areas of the country in our U.S. harvesting of vegetables of fruits and tomatoes. And we've also completed a much smaller pack season in many parts of the country. We took proactive steps to cut costs, reduce labor, eliminate overtime, reduce expense across these operations and have largely been within our targeted range for conversion cost. So, encouraged by how the pack season has performed. And the second part of that question, those questions are now Jenn, I'm sitting off my screen.

The category weakness that we see in other -- outside Joyba and broth.

Yes. I think what's encouraging in the U.S. marketplace is after a very difficult 2023, we are seeing in calendar year 2024, and in the most recent months, we're seeing our largest category, the vegetable category stabilize and even show some pockets of growth. We've seen tomatoes stabilize and show pockets of growth. The broth and stock category has been quite healthy. We are seeing explosive growth with our Joyba boba tea product. And I think the category that we're concerned with, which we are actively addressing is our center store fruit business. And we are seeing consumers post COVID migrate back to fresh and refrigerated fruits. So, we're working hard to secure distribution in the perimeter of store and provide more closer to fresh products, but also address the center of store packaged fruit business.

Just to build on that question, particularly on the pack. The biggest impact we are seeing is on veg from unfavorable perspective, more balanced on others. So, the negative impact versus our standards as per our latest forecast is around $15 million to $16 million versus our plan. So, mainly coming from veg. So, that's a little bit more additional color that I wanted to provide.

Thanks, Parag, and Greg. I think the sender would probably like to know whether -- when we will see a lower cost level of inventory because we're seeing in 1Q, we have a high cost that was carried over from previous years. So, are we seeing that in 2Q when it's normalized already?

We'll begin to see improvement in the second half of the year as we begin to sell the inventory from this pack season, but we will see the largest benefit come forward in fiscal '26, because we're still carrying a lot of inventory at higher cost, but actively working to ensure that we can lower cost this season and set ourselves up for success next pack season with even lower cost. And that's a combination of the asset-light rightsizing that we're doing in terms of consolidating our manufacturing footprint. It's doing all the cost reduction work around the organization is helping to reduce those pack costs and certain deflationary factors are beginning to benefit us. We're seeing lower logistics costs. We're seeing some lower overall product costs and key areas of packaging and ingredients, we're also seeing some deflation, which will help this season and importantly, next season. Anything to add there, Parag?

No, I think you summed it up. We just want to clarify that the impact of excess inventory and how you see the same in the P&L or in the income statement is also a function of inventory related to prior year that is being sold in this year. So, some of the warehousing costs, transfer freight, all of which have increased in the last year or so are being expensed in the P&L when we sell that higher cost inventory in fiscal '25. So, while we are taking action, our incurred costs are going down, the impact of those will only be seen in 2016. But yes, our margin, as Greg said, will it improve versus Q1 in the coming quarters and versus second half that we saw last year that we feel good will happen.

Thank you, Parag, and Greg for the clarification. Also for the states, what are the assets that would be the potential target for selective sales going forward?

Yes. We're working on several production assets and brand assets that are marketable assets that would facilitate the need to further consolidate our manufacturing footprint and they're looking for opportunities to look for certain brand asset sales to help us delever the company. We're in the process of several of those projects as we speak. So, we can't speak with complete transparency on those yet, but those news releases will be coming out in the coming months. Anything to add there, Parag?

No, I think, thank you, Greg, you covered it.

Thanks. Moving on to Philippines for Cito, will the harvest be back to normal level, plantation harvest? And I think corollary to that is that since we cannot control weather, are we expecting to see like large swings due to this and the impact on our profit?

Okay. Let me give you a backdrop first and let me start with what happened with fiscal year 2024. The harvest and the productivity in fiscal year 2024 last year was impacted by the severe rain conditions back in 2022 in our plantation where we saw the highest rainfall due to La Nina in the 50 years that, that plantation has been farmed. So, that resulted in the low productivity and the low tonnage -- total tonnage last year. We have implemented a lot of corrective measures. In fact, we're very lucky that we have the new Plantation Director leading that together with the rest of the team attending to it now. And we see that the recovery will take place in about 2 years from now, the full recovery. Meantime, we have implemented specific measures and corrective measures across the spectrum of the plantation operations, be it in land preparations in the growing stage, field maintenance, good nutrition, disease control and harvest. So, we are seeing improvement this year and we think that it will take another year also to get back to our previous level. Our previous level was at about 160 to 170 tonnes per hectare productivity. We believe that we will get to that in about 2 years from now in a very gradual state. As to weather, whether the weather that disrupted us in 2022, will it reoccur. We have done all of the analytics on the weather forecasting, not only from our side but all from the weather bureaus and all AI that we could get hands on. And we believe that the next 4 years, we will not suffer the same state of La Nina as we had in 2022. However, as you know, it is a cycle though. We just finished El Nino past 3 months from now, but it was a very short one and we're entering La Nina right now. So, we just have to manage with these weather conditions. And as you know, the pineapple is a very resilient crop now. The only thing that really hampered us was the unexpected record-breaking lending year that happened in 2022, which we do not expect to happen again in the next 5 years based on our analysis of weather patterns and everything else that we have done to take a look at what future weather would look like in our plantation area. Hope that answers your question.

Thank you, Cito. Moving on to loans. Has the company already completed a drop-down transaction in the U.S.?

Yes. We've largely completed the drop-down transaction. We're in the final stages of the Stage 3 of that drop-down, but yes, largely complete with that work, Jenny.

Okay. Thanks. For Parag, as of April 30, DMPL has $30 million of undrawn loan from Rabobank. Will DMPL consider to draw this facility to pay the $30 million in January 2025, as mentioned?

No, it won't be the case. If we have to inject the $30 million, it would be a new facility, which would be meant specifically for contribution of that facility into DMFI. It won't be from the Rabobank.

Thanks, Parag. The parent DMPL has peso loans due in October and November before the U.S. dollar bonds are due in December. Will the company repay those loans or the banks have already agreed to roll over those loans?

First of all, they are not peso loans. They are dollar-denominated loans, which we have with our partner banks and we continue to work with them and are certainly hopeful that those loans prior to the bond would be refinanced.

Thanks. And related to that, what progress has been made on addressing near-term maturities at DMPL, the DMPI level?

I think that sort of is covered in my previous response. We covered -- we continue working with our partners, partner banks and are certainly hopeful that those loans would be refinanced.

Okay. And we have a last question on what's management's level of confidence in turning around DMFI. So, maybe we can outline our steps to turn around the DMFI.

Yes. I think if we look back at our initial turnaround plan, we knew that there were going to be phases to the turnaround actions. We completed those phases back in 2020 just prior to COVID and that delivered 3 very successful years where we averaged $200 million in EBITDA. Now that the categories in consumption and consumer demand have reset post COVID and we've dealt with inflationary costs and higher interest rates, we know that completing the second phase of that asset-light work is essential. And we've started that process. We're accelerating the work around the turnaround of this phase 2 work and that's more manufacturing consolidation, more cost reduction, streamlining the organization to being more nimble and agile and then leveraging the power of our brands through diversifying the portfolio, leveraging the power of our brands through pricing and trade activities. All that work is underway, and we do see, as Parag alluded to earlier, we see improvements in the year ahead and we see improvements in F '26 and F '27 through executing a various agenda of turnaround initiatives really designed around just simple streamlining and agility in the supply chain to remove risk and volatility in our supply chain and then really rethinking organizational size and structure and doing our very best to keep expanding a great portfolio of brands. As I mentioned earlier, seeing these categories stabilize and seeing some growth again in '24 within our categories gives us a lot of confidence that we'll be able to execute our plan.

Let me just build on it. Jenn, if it's okay, can I share my screen?

Yes, please go ahead.

I also want to share with you the key issue that we have been facing because of excess inventory is the significant increase, obviously, in the spend that we have to incur in making sure that we proactively liquidate the stocks, which leads to increased trade and obviously, higher waste and also, we end up selling these stocks at a loss. That has been tracking at around $75 million to $85 million in the recent years, including our estimate for '25. We expect, as we get rid of excess inventory, as Greg alluded to, we are expecting a 30% reduction in inventory by end of this year. And more will happen in fiscal '26 where we would be lowering our inventory and bringing it down to lower levels, including fruit, which is where we have more excess that would be cleared by next year. So with those plans, we would get significant benefit from the lower profit leaks we have associated with excess inventory in addition to lowering our warehousing costs, transfer freight, benefits from the network consolidation that Greg mentioned. All of that will start reaping results from fiscal '26 as we address the inventory situation plus also get the benefits of some of the structural changes and deflation that Greg alluded to. So, I just wanted to share very openly with you what has impacted us and how we would really expect the turnaround to take place from a margin perspective as we get behind -- as we get the excess inventory behind us.

And I'll just add the one other benefit that Parag outlined is just the reduced working capital requirements and ability to lower leverage by reducing our average ABL usage and the high carrying cost of having excess inventory. So, we put the tools in place, the systems and the process in place to make sure we don't put ourselves in that position again with excess inventory and excess waste.

Thank you, Greg. Thank you, Parag, for the clear explanation. Another question is on the Fed. The Fed is expected to lower interest rate by 0.5%. How much will this reduce DMPL's interest expense 1 year forward?

Yes. I mean every -- we are waiting for that to happen. As you all know, the increase in interest rates over the last 12 to 18 months had a phenomenal impact on the business. So, every 1% reduction in SOFR would actually lower our interest expense by a good $15 million to $20 million annually. That's the impact of 100 basis points reduction in SOFR. As you all know, our borrowings are close to $2 billion and $2 billion at 100 basis points would equate to $15 million to $20 million annually.

Thanks, Parag.

Obviously, I just want to be clear that we did see some increase in credit spread recently, particularly on ABL, which has unfavorably impacted us. But other than that, SOFR reduction will only help us.

Thank you. We have another question on loans. Some of the U.S. dollar loans that DMPL incurred are secured by DMPI shares. What is the percentage of DMPI shares that are encumbered as of now?

35%.

Thank you. And for Cito, what are the growth drivers going forward for Philippines and the international markets?

Let me start with the international market. The #1 growth driver is obviously the fresh MD2 pineapple, where we believe we have not maximized our potential, particularly in our main China market. We will -- as you know, we -- I don't know if you -- can you show the market shares of fresh, just to emphasize the team, our potential. Okay. First, in international, the key focus is fresh, okay? It is our #1 volume driver, revenue driver and profit driver. And as you can see, over the past 10 years or so and beyond, we have been able to grow our market share and China is our leading market today. And even in China, we have not fully maximized the potential because we are only in the Tier 1 and some of the Tier 2 cities. So, we have a long way to go. In Korea, we just took over the #1 position. And of course, in Japan, that will be a difficult project for us given the dominance of Dole under the Itochu company. So, we believe that in the next couple of years, all the way to FY '28, we should be able to grow this fresh business in the mid- to high double-digit CAGR, okay? So that's our main focus. In the Philippine market, can you show the market share in the Philippine market? Okay? The Philippine market is a combination of maximizing our core and at the same time, introducing new products. So that's the name of the game. So, if you look at these high market shares, one would wonder whether there is still room to grow these categories. You will note that even with our dominant share because of our marketing activities, in our sales dominance in the trade, we are able to grow not only our market share but even category growth. So, if you look at this, for the pineapple category, it is a consumption building strategy that we're going to employ. For the pasta sauces and the ready-to-drink juices, it is a share grab strategy that we would employ. And for the remainder of the line, it will be more of a combination of share grab and consumption building. Beyond this, we also are going to further expand our dairy business. As you know, we entered the Dairy segment a couple of years ago and that has been doing well for us as well as our snacks. And we also have a slew of other new products coming in, in new categories beyond the categories that you're seeing right now that will flow through all the way to fiscal year '28. If you look at the composition of the business probably 5 years from now, 15% -- 10% to 15% will come from new products. So, it is very important for us not only to grow the core categories in front of you because these are the ones that pay the bills and give us the funds to invest in new products. But at the same time, we realized that the growth potential of this beyond 5 years would be challenged and therefore, we're investing in new categories. So, I hope that enlightened view on what are the key drivers moving forward for the Del Monte Philippines. Thank you, Jenny.

Thank you. Just see if we have other questions. We don't have any more questions. So, that ends our call for today.

Thank you so much.

Thank you. Thank you very much.

Thank you for joining us.

Thank you, Iggy. Bye-bye.

Thank you, Cito, Greg, Parag.