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

Good morning to our participants in Asia, and good evening to our callers in the U.S. Thank you for joining Del Monte Pacific's results briefing for the third quarter and 9 months ending January 2025. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer of Del Monte Pacific, DMPL, and President and COO of Del Monte Philippines or DMPI; 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. Parag Sachdeva will now present a few supplemental slides aside from the deck that we have uploaded. And these supplemental slides will form part of the video recording to be made available in Del Monte Pacific's corporate website. And thereafter, we will open the floor to questions. Thank you. Parag?

Thank you, Iggy. Good morning, everybody. Let me share with you a few insights to set up our -- set up the floor for Q&A. So first of all, let me take you through a quick update on the wins as well as the transformation that we continue to drive across the group, particularly in the U.S. First of all, inventory reduction. We have achieved a reduction of $291 million in the U.S. operations and in total, $312 million reduction for the group, as you can see from the bar chart on the right side. So from $1,274 million, we brought it down to $962 million. That translates to an improvement in days inventory of roughly around 42 days from 216 to 174 days. The next part, which is improvement in DMPI's gross margin. As you know, last year, we were impacted by inflation as well as we were also impacted by a reduction in our plantation productivities. That margin restoration is ahead of plan, and we are able to achieve that through lower waste, lower impact of inflation and also the appropriate pricing and sales mix that is driving the gross margin improvement and can confirm to you that as we improve the productivity of plantation in '26, this margin is expected to further improve and be very much restored to the levels that we have previously delivered. In terms of free cash flows, pleased to share with you that the group generated $145 million of free cash flows versus the $90 million of outflow in last year same period. And that was achieved through robust overall operating performance and results of the base business, where the EBITDA grew by 48% or $36 million and through better management, inventory management and working capital management of our U.S. operations, whereby we delivered $45 million decrease as compared to $251 million increase in 9 months for fiscal '24. As a result of inventory reduction and favorable free cash flows, we reduced our debt from $2.5 billion that you see here to $2.38 billion at the same time, which is a reduction of $64 million even if we net out the advances from Nutri Asia Group of $40 million. Without that, on an external debt basis, the reduction is $104 million and of which U.S. contributed $42 million and the base business contributed $62 million. So a major focus on inventory reduction, improving free cash flows and lowering our debt has been substantially delivered in the first 9 months, and we will continue focusing on this in fiscal '26 as well. Now an update on a few other transformation initiatives and priorities. We completed the sale of Hanford plant, which you can further ask any questions on, but we delivered cash proceeds of $56 million and completed it in March 2025. This will enable us to move to a co-pack arrangement, which will improve our gross margins substantially once we deplete the existing inventory in fiscal '26. So you may not see the improvement in our tomato margins in fiscal '26 or a large part. But once we are able to liquidate the inventory from our last year's pack and move to the new asset-light model, we will see a significant improvement in our gross margins. We successfully completed refinancing of our parent loans, which were due in Q2 and Q3 of this fiscal year, of which -- of the $357 million, $307 million have been extended for 18 months to 3 years. Most of it is 3 years and USD 50 million has been extended for the short term, but we are currently working with our partner bank to extend the same. On India, we successfully completed a stake of 14% in a larger food business and conglomerate called Agro Tech Food Limited (sic) [ Agro Tech Foods Limited ], which will improve the overall distribution capability, will provide the additional distribution capability to drive and grow our brand in a very important India market. And as a result of that, it also provides us immediately an increased market value of our investment in India at $52 million based on the credit price as of 10 March 2025. That would result in a net comprehensive income of $27 million after taking out the transaction costs. Reduction in excess inventory, pleased to share with you that we reduced almost 45% of excess inventory out of 14.5 million cases through reduction of the pack plan and also accelerated sales that Greg and team continue to drive so that we can generate the free cash flow that we need and restore our margins, which is extremely important for improving the profitability. Now let me also share with you what we would need to continue doing in fiscal '26, mainly related to the U.S. operations so that we can complete the turnaround and restore profitability. Number one, I want to share with you that in terms of profit leaks, that has been a major reason why our gross margins have obviously been lowered as compared to what we were achieving in fiscal year '22 and '23. There are 3 parts to this. One is the waste bucket, which is inventory which is either damaged or expired or we end up donating the same. The second is the incremental trade, which we incur on the business so that we can accelerate the liquidation of stocks that we think are excess. And the sundry loss would also be sales of items that are near expiry to a specific channel so that we don't have to -- so that we can minimize our waste cost. So these are more accelerated sales of products that are about to either expire or we think that they are excess in the system. So as you can see, the cost that we incurred in fiscal '23 was close to $21 million. Obviously, this is at a much lower pack cost because the inflation had not set in by that time. But still, if you look at it on an LTM Jan fiscal '25 basis, that cost literally was 4.5x as compared to '23. And on a 9-month basis, very similar to what I told you on the LTM basis, it is $66 million. So the incremental trade itself, as an example, would be an increase of close to 150 to 200 basis points from a gross margin perspective as compared to fiscal '23. So this is a big focus. And obviously, these costs are a result of overhang of inventory that we have explicitly laid out as to how we plan to reduce it and how we are really undertaking that challenge over a multiyear period. The second one is gross margin, which has gone down from 17.6% to 13.4%. Just to remind you, here, a big part of cost increase that we saw was driven by inflation, coupled with other operational areas. But here, the cost increase that you see is a number of things. One is your under-absorption of overheads because we have lowered our production volume to lower inventory and also increased distribution, warehousing, transfer freight because we are really amortizing that spend, which we had incurred in -- on a cumulative basis over a lower sales volume. So that's where your increased cost comes from. We also had unfavorable impact from [ wall mix ] as sales shifted and we were selling lower -- we had lower sales of Joyba, which I'll talk about and also sales shifted to multipacks in many of the segments. So that's where our challenges on gross margin have come versus last year, and we are working and will continue to do so in '26 as we lower inventory, which will lead to lower profit leaks, and we will also benefit from closure of plants and network optimization. Continuing with inventory. As I mentioned, we still have 8 million cases excess, which was brought down from 14.5 million. We will further eliminate this through pack adjustment and accelerated sales in fiscal '26. On Joyba, it has been a great story for us. Just in a couple of years, we have delivered sales of $25 million. But what we also realized in '25 was that in this beverage segment, we do need to partner with customers, distributors or principals, which have direct store delivery capability to drive distribution. So that's going to be a big focus for us and will continue to be a big part of our growth plans in fiscal '26. We also have to work and address on undercapacity in canned pears business, where the utilization of [ pear assets ] is at 37% levels in our 2 plants in California and Washington. Just very similar to what we had experienced with the Hanford plant for tomatoes in California. So this is an area which we are evaluating closely to see how we can address the issue, and it includes perhaps consolidation of plants, which will lead to improvement -- in improving our margins structurally for this business. Lastly, as our leverage profile changed and we had to refinance last year, our interest expense for the U.S. operations increased by $17 million, and we had to incur significant costs to arrange for that refinancing, which is being amortized over the life of the loan, which expires in fiscal '27, fiscal '28. So to recap, these are the key priorities for us that we will continue to work on in fiscal '26. Number one being continuing to lower our inventory and eliminate excess inventory. Number two, as we do that, we see a path to margin restoration along with the impact from closure of plants and network optimization. So this will take us to 6 to 9 months for the inventory from current pack, which is more expensive to [ tow ] down before we can see the impact of asset-light efforts that Greg has been driving. And as we lower inventory, we do expect our profit leaks to come down, if not to fiscal '23 levels, reduce considerably starting sometime in fiscal '26 and full impact of which will be seen in fiscal '27. So that's all from my side. Now we can open it up for questions.

Thank you, Parag. Some of you sent your questions in advance to Jennifer, so she'll read some of them, and also field questions in the Q&A box.

So we have a number of questions related to U.S. tariffs. So this is for Greg. How are you assessing the impact of tariffs to the U.S. business? I see input costs for canned goods rising. But given the U.S. reliance on Mexico for fresh goods during the off-season, these tariffs could also make imports more expensive. I'm trying to understand whether they net out as a tailwind or headwind.

Yes. So we are obviously closely monitoring the evolution of tariffs in the U.S. and that's changing by the week. But what we face, there's 3 specific areas that we're currently planning to face tariffs, products, imported from China, which is largely our mandarin products. And we've already taken some pricing to offset those tariffs, and we'll take more pricing to help offset the tariff penalties. The next, our products out of Mexico. There's another item that we source in Mexico that's the primary source of growing the product, which is red grape fruit. So the products grown in -- the red grape fruit grown in Mexico and import into the U.S. will likely be subject to tariffs, and we'll also pass through those tariffs via pricing action. And then lastly, the cost of the can itself because of the steel and tinplate tariffs is also likely to increase. We source most of our steel domestically. We source and buy from the largest can producer, but we will have some impact that will likely require up to mid-single-digit price increases on our metal packaging products. So in the end, it is something that we're going to manage, but there will be some headwinds in terms of pricing impact on demand.

Thank you, Greg. Is Joyba...

I'm sorry. Anything to add, Parag?

No, I think, Greg, you covered it. We are obviously watching it, and we will have some negative impact, particularly on steel and the mandarins that we get from China, in particular. And we will take appropriate decisions, which may impact some -- will have some impact on volume as we take pricing.

Is Joyba produced in Mexico? And will it be impacted as well?

It is. And there is some impact that we'll also face on the Joyba product line. And as we evolve the portfolio and drive sales, we'll manage those price impacts accordingly and work to protect our margins.

It's Joyba and our fresh fruit, particularly grape fruits that we get from Mexico that will be impacted, and we will have to take appropriate pricing action on that.

Thank you, Parag. Thank you, Greg. Our next question is also for DMFC. Can you provide an update on warehouse costs and waste? How much of a headwind has this been over the past 9 months? And when do you expect conditions to normalize?

Well, I'll comment first. I think Parag did a very nice job of summarizing this very specific question in his data. As we look forward over the next 9 to 12 months, as we continue to lower inventory, that will lower our warehousing expense and lower our related waste. And that's something we're very much focused on, and we will see improvements in fiscal '26. Anything to add, Parag?

No, I think on an incurred basis, we will see improvement in fiscal '26. P&L-wise, it would be more normalized in fiscal '27 as we also amortize our warehousing cost as well. So I just wanted to clarify that. And Greg and team are also doing some great work as we restructure, we are also looking at restructuring our warehousing footprint.

Could you comment on pricing and the use of trade promotions compared to a year ago?

Yes, I think we can both tackle this. We continue to find ways to generate efficiency in the overall promotion and trade investment for our base business and continue to do a good job relative to industry averages and the level of promotion required to maintain our leading market share. However, as Parag cited earlier, we have had to spend incremental trade dollars to move surplus aging stocks, and that has increased our overall trade spend this year. Anything to add, Parag?

No, I think you covered it. We are also seeing that in some of the categories where competition has been very aggressive, particularly broth and tomatoes, we may have to reinvest next year and increase our promotions to regain our market shares.

This next question is for Cito. It's a difficult question, and some shareholders have been asking us this. Is Del Monte Foods worth keeping given its problems? It's almost a decade-long capacity reduction, but it's still not yet finished.

I might say that's a tough question, but I only have one answer to that. Our task right now, as you have seen in the presentation of Parag and what Greg has echoed earlier, is to fix Del Monte Foods. We want to turn it around. Our task is in reducing our waste, which has been a key driver of our margin erosion. Second is making sure that we reduce our overhead costs because in this day and age, we have to be more efficient, and we're going to do that. And also to make sure that we focus on the branded business that delivers the right gross margin for us, and that is our task right now. I think we have done a lot of network optimization of late. There will be more. We sold Hanford, and we're looking at other options. But at this point in time, I don't want to answer that question because that question at this point in time is not answerable. The task right now is to focus on how to fix the business. So that's what I can tell the group.

Thank you, Cito. Next question is, can Del Monte Philippines unlock the value of DMPL to impact the stock price?

How does that go, Parag? I'm trying to understand.

I think we -- as we outlined on Del Monte Philippines, we are, first of all, focused on restoring the profitability of the business, which, as I said, we are ahead of plan. And based on what we are seeing in our long-range plan, we expect Del Monte Philippines to further improve and has great opportunity, both from a commercial perspective, sales, innovation as well as optimization of costs. So we are confident that we have a robust plan, and we definitely would continue executing on that and improving results, which will definitely help Del Monte Pacific Limited.

And just to add to that also, if you recall, 2 years ago, we had a very bad year and the collapse happened in the agricultural front. Today, I can tell you that recovery has started. And it is a recovery that I do believe is solid that will pave the way for the achievement of our long-range plan. I say sustainable because the people responsible for that disaster in 2 years ago are no longer with the company. We have new leaders in place, new people that have not only the technical skills, but the leadership to lead the next generation of leaders. We would be celebrating our 100-year anniversary in January 2026. And I do believe the sustainability of the plantation, which is a critical part of what has happened 2 years ago has vastly improved. And we're very optimistic in that place. I think unlocking the value also of DMPL does not rest alone with DMPI. And as I said earlier, our task is to fix the U.S. We have seen improvement, but we're not yet there. And this coming fiscal year is going to be a critical year for all of us. If we're able to fix and turn around DMFI, it will not be overnight, but I think the steady progress is critical. And the most important thing is if the fundamentals of the business are solid, then that, to me, that combination of DMPI's continued success and the improvement in DMFI, that combination will unlock the value of the DMPL share.

And Jen, I would just add that I am accountable for the results and the turnaround of DMFI and as is my team, and we take this very seriously. We're committed to this, and we're going to work closely with Cito and Parag to execute immediate improvement in F '26 and beyond.

Thank you, Greg. Jenny, go ahead.

I don't have any more e-mail questions. Are there more questions from the audience in the floor?

Thank you so much, Jen. Thank you, Iggy.

Are we done? Okay. Thank you very much.