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Good morning our call participants in Asia, and good evening to our callers in the U.S. This is the conference call for the first quarter results of Del Monte Pacific Group, DMPL, ending July 2020.
Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer, DMPL; Parag Sachdeva, Group CFO of the DMPL, Greg Longstreet, CEO of Del Monte Foods in the U.S.; and this is Iggy Sison, Chief Corporate Officer of DMPL.
We hope everyone in this call has been keeping healthy and well. Thank you for joining us. [Operator Instructions] Thank you.
So Parag Sachdeva will now present our first quarter results.
Thank you very much, Iggy, and good morning to everyone in Asia, and good evening to all-in the U.S.
On Slide 4, I would just like to highlight that on 30th April 2020, the group recognized the sale of a 12% stake in Del Monte Philippines and started recognizing this as noncontrolling interest on 1st May 2020. In addition, DMPL's effective stake in Del Monte Foods, Inc. increased to 93.6% starting 15th of May 2020 and henceforth, recognized the 6.4% NCI. These 2 comprise the NCI line in the P&L. Net profit loss is net of NCI.
On Slide 5, starting with the 2021 highlights for the first quarter. Group sales grew by 9.9% due to higher consumption of healthy, shelf-stable food at home, and that was both across U.S. and in Philippines. U.S. sales are up 13.5%, and Philippines sales expanded by 21.6%, offsetting lower Fresh sales in Q1.
Our EBITDA increased [ by 16% ] to USD 42.4 million and net loss was significantly reduced to USD 3.2 million from USD 38.3 million prior year. DMPI, subsidiary Del Monte Philippines, Inc., generated net profit of USD 18.7 million.
Excuse me. Can we request everyone to please mute their phone? We hear some background noise. Can you please check if your phone is muted now? Okay. Thank you.
Okay. Thank you very much. Just to repeat, subsidiary Del Monte Philippines, Inc. generated net profit of USD 18.7 million. DMPI was rated AAA, the highest credit rating assigned by the Philippine Rating Services Corporation. We also reduced, from a group perspective, net debt and gearing on the back of improved operating cash flow, and we'll talk more about it in the upcoming slides.
Slide 6, outlook. It continues to meet the sustained demand for our trusted healthy shelf-stable products, and we will continue to optimize our production facilities while implementing strict safety measures. Our strategy is to strengthen the core business, expand the product portfolio in line with the market trends for health and wellness. And grow our brand business while reducing nonstrategic business segments. Aside from the DMPL based business, DMFI is also well positioned to improve performance in 2021 with better sales mix and management of costs. We do not anticipate material one-off items in the coming fiscal year. And the DMPL Group is expected to return to profitability in fiscal '21, barring unforeseen circumstances.
On Slide 7, we'll present first quarter group results summary. As stated previously, sales are USD 413.1 million is up 9.9% over the prior year quarter. U.S. sales up 13.5%; Philippines higher by 18% in local currency and 21.6% in U.S. dollar terms. Our S&W brand in Asia declined by 19.4%, mainly due to lower sales of fresh pineapple in North Asia. Our JV in India declined by 40% in sales as our B2B business did get impacted by COVID-19.
EBITDA of USD 42.4 million, up 10% from USD 38.7 million due to higher volume and better sales mix in Philippines, getting a lift from pandemic-driven higher consumption of trusted healthy, shelf-stable products. Our operating profit of USD 20.6 million, down 8% from USD 22.4 million due to higher cost of last year's pack and logistics cost in the U.S. Net loss of USD 3.2 million from a net profit of USD 4.1 million due to the above, higher net financial expense and -- includes the impact from minority interest changes explained on Slide 4. There are no one-off costs or items this quarter.
Slide 8 on nonrecurring expenses, as stated, there are no one-off items in the first quarter. Last year, one-off costs in the first quarter were USD 2.1 million on a pretax basis, out of which USD 1.7 million was incurred in partial disposal of assets of Crystal City plant in Texas.
Our one-off expense for the group included USD 41 million of tax on intercompany dividends and deferred tax on undistributed share and profits of a subsidiary. DMPL's Philippines subsidiary, DMPI, declared dividends to its parent, and the dividends were taxed at 15%. Just as an information, this quarter, the deferred tax on undistributed share and profits has been considered a recurring cost and not [indiscernible]. On Slide 9, will present you more detailed results. Again, on sales at $413.1 million was 9.9% higher than last year, again, from higher sales in the U.S., Philippines and S&W packaged sales in Asia, getting a lift from the pandemic. This will be explained more in the turnover analysis. Our gross profit at USD 94.1 million, higher by USD 3.2 million, driven by higher volume. Gross margin at 22.8%, lower by 150 basis points, which was led by higher product costs, mainly in the U.S. from sales of inventory packed in fiscal '20 that had a higher cost. Higher cost was driven by metal packaging and poor yields from weather-related issues.
Margin for the base business, excluding the U.S., improved by almost 240 basis points during the same period, offsetting partly the lower gross margin in the U.S. EBITDA of USD 42.4, up 15.8%, mainly due to the increase in volume. I would also like to note that increased depreciation from change in accounting of leased assets is USD 7.4 million in fiscal [ '20 ]. OI of USD 20.6 million, up 1.9% on a reported basis.
Net finance expense. Our financing cost of $24.6 million reflects higher interest costs. DMPL's share in the FieldFresh joint venture in India was a loss of USD 0.7 million and lower than last year, driven by lower sales for foodservice and key accounts were impacted by COVID-19. And in India, almost 50% of the business of our process business is B2B, or foodservice and key account driven. Higher tax expense last year, as Del Monte Philippine declared a dividend to its parent, which was taxed at 15%, amounting to USD 39.6 million.
Net debt, very pleased to report that we were able to bring it down to $1.24 billion, lower by almost $318 million due to significant improvement in cash flow from operations both in fiscal '20 and fiscal '21. Cash flow from operations improved by (sic) [ to ] $59.3 million from a negative USD 38.8 million, primarily from better capital in Q1. Our gearing ratio at 2.2x, mainly driven by significantly lower loans due to higher cash flow from operations, as explained.
On Slide 10, a brief update on our bond issue. In August, Del Monte Philippines applied for a regulatory approval of its maiden bond issuance of up to PHP 5 billion with an option to upsize to PHP 7.5 billion.
The proposed offering consists of 3- and/or 5-year maturity tranches. And as mentioned in the highlights, the credit rating for this bond is tripling, the highest rating assigned by the Philippine Rating Services Corporation. The proceeds of the offering will be used to refinance existing loans.
On Slide 11, a good perspective on reducing our gearing. DMPL Group's net debt decreased to USD 1.2 billion from USD 1.6 billion. The gearing improved to 2.2x from 2.8x equity in the prior year quarter. Cash flow from operations, as [ operated ] previously, improved to USD 59.3 million from negative USD 38.8 million, primarily from better working capital in Q1. Additionally, in the last 12 months, net cash flow from operating activities, net of capital spend and financing costs was an inflow of USD 236.2 million.
In addition to the significant improvement in cash flow from operations, we also raised $105 million net of expenses from sale of 12% stake in DMPI. The reduction in inventory that has been achieved in the last 12 months and reflected in the cash flow from operations is $201 million. DMPL, as we previously mentioned in the last quarter, infused $379.5 million equity and successfully refinanced the loans of DMFI.
So from a DMFI perspective, this does provide a solid foundation to improve its financial performance and capture market opportunities. DMFI's credit rating was also upgraded by the rating agencies and outlook improved to stable and positive by both S&P and Moody's.
Slide 12. A bit more perspective on the turnover in Q1, starting with Americas, which constitutes around 66% of total group sales. We achieved higher sales by 13.5% to USD 272.5 million, mainly driven by higher volume due to increase in demand from COVID-19 across categories, higher sales for Contadina from distribution gains as well.
DMFI benefited in the categories and segments with strong leadership positions as consumers initially turned to trusted names. When you look at our share performance, whether it's 52 weeks, 13 weeks or 4 weeks, in terms of volume share, the growth outpaced category growth across all categories where we operate.
New products contributed 6% to DMFI's retail and foodservice sales in the first quarter. On the Asia Pacific sales, we increased by 4.8% to USD 135.9 million from USD 129.6 million, mainly due to increase in all major segments, including Philippines, S&W package and exports of packaged pineapple products, partly offset by lower sales of fresh pineapples in China, mainly due to lower demand attributed to the aftermath of COVID-19.
Sales in the Philippines domestic market were up in both peso and U.S. dollar by 18% and 21% -- 21.6%, respectively, mainly due to higher volume, both in general, modern trade, favorable sales mix and also sales price variance. Group continued to progress with distribution transition in general trade. Our sales in Europe declined at $4.7 million by 23%, mainly from lower sales of beverages.
With that, I would like to pass it on to Greg Longstreet, who would give you an update on the U.S. market.
Thank you, Parag. If we move on to the market updates portion of the presentation. On Slide 14, you'll see a review of our USA Del Monte Foods business. Within the quarter, we maintained our strong leadership share positions across our 4 key business segments: #1 in canned vegetable, #1 in -- #2 in canned fruit, #2 in fruit cup snacks and #2 in canned tomato. I would add that in addition to this, our fifth major business, our broth and stock business was quite healthy in this most recent quarter.
Importantly, in all 4 of these segments and as well our broth segment, we gained share in the quarter. And it was a unique quarter for us. We continue to see very strong category growth and momentum in these business segments. Very strong double-digit growth. We are outpacing category growth [ in ] brand. But we're really seeing an incredible uptick in consumers' shopping center store, preparing more meals at home, looking to snack and looking for more healthy meal solutions for themselves and their family. While most of these consumers in the U.S. market have been under a shelter-in-place or had limited access to restaurants and out-of-the-home meal consumption. So those meals have moved home and we've benefited.
Our grocery store business has grown tremendously again in this quarter as it did in the fourth quarter. And what consumers are looking for, in addition to, as I mentioned, healthy and safe products that they trust, they're looking for leading brands. And certainly, with Del Monte, Contadina, College Inn and S&W, we have the brands that consumers are very aware of, they recognize and they trust.
On the next slide, Slide 15, this improved category growth and gain in brand share led to an 11% improvement in our sales to $268.2 million in the first quarter. As I mentioned, the trends that are in place right now is certainly benefiting us. And we're winning with our base products, our canned food portfolio, but we're also winning with innovation outside of the can.
We continue to bring new ideas to market. And I've been encouraged by retailer interest and consumer interest in our new product lines that we've introduced this past quarter, which are included on this slide. On the right-hand corner, you can see our new line of plant-based foods that are frozen handheld sandwiches. These pocket pies that we've launched really fit to today's consumer trends that are looking for healthier grab-and-go products and looking for plant-based foods. So very encouraged by the success there.
The item below that is our College Inn savory infusions. And what this product enables consumers to do is simply add flavor to any meal preparation, very simple, convenient, one-stop addition of really tasty, powerful flavors to their meals. This product tested very well with consumers in our research studies and has done very well as we've gone to market on shelves. So encouraged by those 2 launches, the versatility and the on-trend nature of those products.
I'm also pleased to report that we took a major step forward in the pineapple business this quarter. We launched a premium product with our parent company with the help of DMPI and DMPL, launched new Del Monte Deluxe Gold Pineapple, and this product has been very well received. We've exceeded our distribution goals, several large retailers, including Kroger, are already carrying this product. It's already on shelf and performing well across the U.S.
The fourth product that we launched, which really ties to the morning breakfast occasion, consumers really told us they were looking for healthier, more convenient ways to consume oatmeal. So our new Oats To Go product is a great solution and really encouraged by the [ receptance ] of that product line and the future growth potential. Also, within the quarter, our EBITDA was up 10.3% to USD 10.4 million.
On the next slide, Slide 16, we'll look a little bit more at some of these new products with some of the [ creative and healthy supporting launches ] of our new Pine DELUXE GOLD product. The Black packaging has been very powerful stands out on shelf and is viewed as very premium by consumers, really a delicious product that's unique in terms of what consumers can find in a packaged environment in the U.S.
And then on the right is some of the support behind Oats To Go, as I mentioned, really a convenient product, ready to eat, really the only ready-to-eat oatmeal with real fruit in the marketplace. This is being merchandised right in the middle of the oatmeal sections next to brands such as Quaker Oats, 10 grams of protein, half serving of fruit, no artificial flavors, very, very good product.
The next slide talks about some of our PR efforts. We continue to invest in them, and this investment is paying off especially during the [ introduction ] to the grocery store business in the U.S. So our brands are being supported by significant media placements garnering many, many incremental impressions. We're driving a lot of online content right now. We're reaching consumers at home and on their cell phones and through social media. We're doing a lot of content development. One example is through our website we've provided -- and our partnership with GrowingGreat. We provided some online lessons for healthy eating for parents to provide their children.
We've also done some incredible work on this new product front in terms of awards and recognition. We were named with our Blueberry Crunch Parfait, Best New Product Award from Convenience Store News, and that's a growing segment for us, reaching that convenience store consumer is somewhat new for Del Monte Foods, and this new product has really helped us.
And our canned mango product was also selected by Parents Magazine as a pantry item that they could not live without. So really encouraged right now. Consumers in the U.S. are certainly stocking up their pantries, but they're also consuming food from their pantries in record fashion. So we're encouraged by the recognition. There's some additional showcases of areas where we've been focused and recognized.
Another one is R&D. We have a really incredible R&D organization at Del Monte Foods here. And we were recognized by Food Processing Magazine as Large Company R&D Team of the Year, and this is across all large consumer products companies. So very proud to be recognized, the work we've done in innovation.
The next slide, Slide 18, is interesting. In the U.S. Foodservice business has suffered in the face of what's happened here with the pandemic. But we found ways within the quarter to grow our business. We've actually seen an almost 10% growth in our foodservice sales. This quarter, through some really creative work we've done and some new distribution, we've really pivoted to help different relief agencies and governmental organizations and food banks with products and we've also established some new distribution with customers like the Bojangles chain, and with the largest contract supplier, Foodbuy. So encouraged by the continued focus.
We feel, in foodservice, as the buffet occasions are going away, foodservice providers need to provide healthy packaged product solutions that are safe for consumers when they're traveling, whether it's on an airline or in a hotel or at an event, and we are uniquely positioned to capitalize on that trend [indiscernible] and continue to be optimistic about the opportunities in that channel in addition to what I described is a very, very healthy grocery store business in the U.S. right now.
I will next hand over the presentation to Mr. Cito Alejandro.
Thank you, Greg. I'm now going to Chart 19. First quarter was a period of very strong growth for the Philippine market. And as you can see on the chart, the growth towards the expansion of our market leadership across nearly all categories. Under the pandemic, Del Monte products were sought after by consumers because of its trusted, healthy and high-quality reputation.
One of the exciting developments we've witnessed is the growth of e-commerce. Still in its early stage for our products, but already we're investing resources. We're gearing up to keep pace with industry trends. Chart 20, our retail sales surged 32% across all categories, more than offsetting the decline of foodservice, which took a beating on the COVID lockdown. Retail sales was led by flagship Del Monte brands, 100% pineapple juice, actually all juices for that matter, our pasta sauces, our premium condiments line and our quick and easy meal mix is just to name a few.
We are pleased to announce that last July, we formally entered the dairy category with the introduction of Del Monte, Mr. Milk, a healthy fruit yogurt milk drink. Also pleased to report that the product is so far doing very well in the market.
Chart 21. The next couple of charts, including this one, will show our marketing activities across our core categories, all towards accelerating growth, specifically increasing the consumption of our product. In this chart, you will see our advertising initiatives aimed at enhancing the relevance and versatility of pineapple in home cooked meals. Pineapple can indeed make food and desserts more fun and exciting for the family.
Excuse me. Chart 22. This talks about our anti-COVID message of health and fitness, how our fruit juice products provide immunity, protection, as we call it, and extremely sought after benefit during these times. Pleased to report that our entire juice beverage business has exceeded historical growth trends, and this has been very favorable for us.
After beverage comes our second fastest growing category, obviously, our cooking portfolio. Here are a few of our initiatives capitalizing on the growing trend towards more home cooking. Our goal is to make the family's longer time staying at home, never a dull moment when it comes to delicious, healthy food cooked with Del Monte products.
Chart 24. Moving now to S&W. As you know, COVID started in China and thus, this major market, accounting for 50% of our fresh pineapple volume, was the one that affected the S&W business the most. However, pleased to report that as of today, our China fresh has begun to recover. Although not yet to the level prior to COVID, it's steadily getting there. We are also present across digital formats in China. But that's not enough to offset the huge decline we witnessed in fresh retail.
More on S&W in Chart 25, total sales of S&W branded in Asia and the Middle East declined in the first quarter compared to last year. While we benefited from higher sales of healthy shelf-stable packaged products, the decline in fresh overshadowed whatever gains we realized in our packaged business. Not all is lost in fresh. You can note that on top of the resurgence in China orders, all other markets have shown steady improvement in demand over the recent months. So that's all positive for us. Next chart shows there has been no letup in our efforts to resuscitate our fresh business in Singapore, in China, in Korea, be it foodservice, in-store retail or e-commerce.
Now going to Chart 27 on India, which was not spared from the impact of COVID. DMPL share loss in India was higher than a year ago due to lower sales of branded packaged products, primarily driven by foodservice or B2B, which comprises 50% of our business portfolio. It was severely impacted by the lockdown. We have now adjusted our strategy towards accelerating the expansion of our retail business, both in-store and e-commerce. We have modified our product portfolio, given the demands of the times. We have also embarked on major productivity and cost savings programs to ensure we optimize our costs, protect our margins and prepare for a rebound in the future. That's all I have.
I now turn you over to Iggy Sison.
Thank you, Cito. Improving sustainability is one of the 5 strategic pillars of Del Monte Pacific. To support our vision, nourishing families, enriching lives every day, in the first quarter, the Del Monte Foundation continued donating food and beverage to private and local government organizations. Since March, when the COVID lockdown started, we have assisted over 220 organizations, which includes over 50 medical facilities to support medical professionals and other frontliners and marginalized communities in the Philippines during the pandemic. Following the publication of Del Monte Pacific annual report, we just published last week, our sustainability report for FY 2020, which features new sections on our pandemic response, sustainable development goals, human rights, plastic solutions and reforestation.
Del Monte Foods in the U.S. established a Diversity Leadership Council to provide leadership in building a more diverse and inclusive company. And in the first quarter, Del Monte Foods continued to partner with organizations like the American Red Cross and Feeding America to provide aid to victims of the recent Hurricane Laura and the ongoing California wildfires. So to recap, our outlook for the rest of the year continues to meet sustained demand for our trusted, healthy, shelf-stable products, as Cito Alejandro and Greg Longstreet have described in our markets. We will continue to optimize our production while implementing stringent safety measures against COVID-19. Del Monte Pacific strategy is to strengthen the core business, expand the... [Technical Difficulty]
Okay. Sorry, we got cut off at the last slide at the outlook. You reminded the participants to stay on the call, but we're not sure if there are any questions from the callers.
We can hear you now. Sorry, we have cut off here.
Okay. Can I ask my question?
Go ahead, please.
Please, Mr. [ George Tan ].
First, before I raise my question, can you please confirm how much is the net loss of Del Monte Foods?
The net loss of Del Monte Foods prior to the noncontrolling interest is $15 million in the first quarter.
So that's our bottom line, $15 million?
Yes.
Okay. My question really is, I know this is the weakest quarter. But our sales are up, our products are doing well with encouraging news from product development, positive consumer response. We have 0 asset write-offs and yet still were unable to manage to break even or perform positively.
The main reason for that, [ George ], is that we are really going through the sales of products that were packed last year and which was a pretty high-cost pack for us. And the reason for the high-cost pack was, as expected, our metal packaging costs were significantly higher last year due to all the tariffs and changes that took place in the U.S. which increased our cost by around 15% to 20%.
In addition to that, we also had -- we were also impacted by poor, poor weather last year in terms of several crops. So that led to a very high-cost pack for us, especially [ as looking at ] the first quarter. We expect to see that thing getting reversed in the second quarter. So our margins should start improving in the second quarter as we have sold most of the pack from prior year.
I see. So it's really a higher inventory cost.
It's a higher inventory cost that we had from last year, which was a little bit extraordinary.
Okay. That's good. So finally, those items are already sold. So well, I'm looking forward to that [ vertical ] next quarter.
Largely, largely sold. Just to clarify, [ George ], we still have some cases that we will process in the balance of the year.
Okay. Well, my second question is really about the infusion of capital in Del Monte Food.
Okay.
I think we reported $379.5 million put in, in Del Monte Foods, and yet our ownership was only increased by 4.2%. Can you comment on that?
The ownership was [ increased ] by 4.2% because what was common equity was -- the second lien loan that was converted to equity. The $150 million was invested as pref shares.
So how did we arrive at 4.2%?
We can share the computation separately with you, [ George ]. But as I explained, what was converted to comp was only the second lien loan that was purchased over the last couple of years. Not the $150 million, which was invested as pref shares.
Preferred shares, yes. So actually, about $229 million, I think, is in equity.
Yes, that's right. And we can share the computation separately with you.
Yes. Because I'm looking at what valuation -- implied valuation was given to Del Monte Foods, given that it's not really performing so well.
We'll share the details with you.
I know this is a forward-looking, but when can we see Del Monte Foods looking like Del Monte Philippines.
We are on the right path. That's what we can say, [ George ].
Yes.
Because I understand your plants are already at full capacity. So I don't know how production will increase or what, if you are already utilizing it at almost 90%.
Yes. We have -- we are also getting products from other stores including co-packers as well, [ George ]. So we continue to have the right opportunities to grow the business.
Okay. Yes. So I'm just trying to understand what is the upside and how it will happen, given that all your plants are basically patiently operating. But there's no room for growth at all.
Well, we have 1 more -- 1 major factor, which Greg can talk about, is that we are also changing the mix of our sales in the U.S.
Yes.
[ George ], we are focusing more and more on branded and less on private label. I would let Greg talk more about that, so that you can get a good perspective on how that will lead to margin improvement.
Yes. There's 2...
Yes, that will be a...
Yes. Parag brings up a great point. First and foremost, we think we can still make more in these plants. Where -- we've got a comprehensive plan to increase efficiency, to extend the pack season and to get more utility out of these plants in a more year-round basis. So there's room to grow. But mix is a big part of this. We're cycling out of high-cost of goods, and we're cycling out of an unfavorable product mix that had a lot of unprofitable, quite honestly, unprofitable private label business in it. This is the last kind of leg of private label for us. We've exited those agreements, and we're focused on our high-profit, high-margin branded business. And you'll continue to see -- without providing too much forward-looking information here, you'll continue to see improvements in our margin and profitability on a go-forward basis because of the changes we've made.
So basically, the trade of the private labels and which are our own brand. And hopefully, we will be able to command a better price?
That's right.
That's right.
I see. Okay. And then with some, well, I guess, efficiency impact of lower cost in production on account of the new products that are being -- for -- the old products that are already sold out, and most of them basically charged to the first quarter.
That's right.
Correct.
Correct.
Okay. Yes. At least I have some idea of how these things would happen. And looking forward to management, delivering this turnaround in the soonest possible time, yes.
[ Xi Qiong ] from Singapore. Can I ask some questions?
Go ahead, please.
Actually, my question is regarding about the Philippines bond. Okay. According to your [ flight ], it says that actually you'll be a raise maximal of USD 155 million. Okay. I would like to know when are we expecting the bond to be sales? And where is it? The follow subsequently, the question I have is regarding about the refinancing, what bond are we going refinance? And what is the interest rate like?
So if I follow you, we expect to complete the bond issuance by October. And number two, in terms of tenure, it's 3 to 5 years. Interest cost that we are expecting is [ D. Val ] plus 75 to 150 basis points depending on 3 to 5 years.
Okay. Can you just give me a rough -- how much interest are we going to pay for this bond for this point [ for the business ]?
Yes, roughly 4%, and it would be mainly used to refinance our existing loans. So it's not going to increase our debt.
Okay. Existing loan is which loan? Is it the 12% DMFI loan?
No, these are DMPI loans for -- of a short-term nature.
If there are no other questions, we'd like to conclude our conference call. Thank you for joining us and keep well and safe.
Thank you very much.
Thank you as well. Thank you.
Thank you.