Del Monte Pacific Ltd

SGX:D03

Earnings Call Transcript 2020-Q2

[Ignacio Sison, executive]

Good afternoon to our call participants in Asia. This is the conference call for the second quarter results of Del Monte Pacific, DMPL, for FY 2020 ending October.

[Luis Alejandro, executive]

You are checking if we're okay? Is Jenny there?

[Ignacio Sison, executive]

Yes. Jenny's on the line.

[Luis Alejandro, executive]

Okay.

[Ignacio Sison, executive]

Representing Del Monte in this call are Cito Alejandro, Chief Operating Officer of DMPL; Parag Sachdeva, CFO of DMPL; Greg Longstreet, CEO of Del Monte Foods, DMFI, subsidiary of DMPL; Gene Allen, CFO of DMFI; and this is Iggy Sison, Chief Corporate Officer of DMPL. [Operator Instructions] So with that, Parag, our CFO, will now present our second quarter results from Slide 5 -- or Slide 4 onwards.

[Parag Sachdeva, executive]

Thank you very much, Iggy. I would just like to draw your attention on Slide 4. In the last bullet, you will notice that the group has adopted IFRS 16 from 1st May 2019. IFRS 16 introduces a single on-balance sheet accounting model for lessees. As a result, the group recognizes right-of-use assets representing its right to use the underlying assets and lease liabilities representing its obligation to make lease payments. And you may refer to Page 23 of the MD&A for a discussion of the impact of IFRS 16. On Slide 5, when it comes to key highlights, I would like to start with positive outcomes backed by strong sales growth in fresh pineapple in North Asia, increased sales in the Philippines market and the transformational initiatives at the U.S. subsidiary. Our gross profit, gross margin, recurring EBITDA and net profit recorded significant improvement. Without one-off expenses, operating profit increased by 65% to USD 47.2 million while net profit more than doubled to USD 15.9 million. One-offs, mainly noncash attributed to U.S. plant closures/sale in line with asset-light strategy, led to a net loss of USD 37.4 million. Slide 6 on the outlook. The group is expected to be profitable for fiscal year '20 barring unforeseen circumstances on a recurring basis. In terms of strategic initiatives, major emphasis continues on responding to consumer trend through strengthening the core business and innovating, particularly outside the can, and also focusing on growing our branded business. We also continue to improve our financial performance through measures such as: closure of 4 production facilities in the U.S. within fiscal year '20 to improve operational efficiency; further reduce costs; and increase margins amidst cost headwinds, including higher metal packaging prices and impact of tariffs imposed by the U.S. This is expected to improve the group's EBITDA margin by 225 to 275 basis points. Improving cash flow, strengthening balance sheet and reducing leverage and interest expense is the second leg of our financial strategy. Slide 7 summarizes our second quarter group results. Sales of USD 558.7 million, up 0.04% (sic) [ 0.4% ]; U.S. sales lower by 4.4%. And if we take out Sager Creek, DMFI sales would have been lower by 2.5%; Philippines higher by 5% in local currency and 9.1% in U.S. dollar terms; S&W brand in Asia surged by 26.6% mainly due to higher sales of fresh as well as processed; JV in India has grown at 6% in local currency driven by growth of Del Monte branded business; EBITDA of USD 69.5 million, up 42% from USD 44.8 million due to increased prices in the U.S. and Philippines to really negate the impact of inflation. Also contributing to improved EBITDA was improved sales mix and reduced sales of low-margin businesses, particularly in the U.S.; operating profit of USD 47.2 million, up 65% from USD 28.7 million; net profit of USD 15.9 million, a turnaround from the USD 7.3 million last year. All of the above profitability numbers are without one-off costs and are versus year ago. Slide 8, on nonrecurring expenses. As you could appreciate from the closure or sale of the 4 production facilities in the U.S., we incurred one-off costs in the second quarter, which is to the tune of USD 76.8 million on a pretax basis, USD 75.5 million was incurred in closure/sale of the 4 production facilities. On 1st November 2019, DMFI successfully sold and transitioned its Cambria plant in Wisconsin and related employees to Seneca Foods Inc. DMFI has also entered into an agreement to sell its production facilities in Sleepy Eye, Minnesota and Mendota, Illinois and expects the closure and sale of these facilities to be completed during fourth quarter fiscal year 2020. DMFI has also sold equipment at its Crystal City, Texas facility and is considering additional proposals to sell the balance of Crystal City assets. The sale proceeds from the sale of the 3 plants is expected to be USD 28 million to USD 29 million and has been considered in establishing the write-down of the assets. Slide 9. I will take you through the Q2 results on a reported basis: second quarter sales at USD 558.7 million, 0.4% higher than last year from higher sales in Philippines and S&W brand in Asia, partly offset by lower sales in the U.S. Excluding Sager, sales were up by 1.9%, will be explained more in the turnover analysis in the next slide; gross margin at 24%, higher by almost 300 basis points on an organic basis, led by price increase in Philippines and U.S. markets, exiting from low-margin businesses in the U.S., leading to a favorable sales mix. These more than offset unfavorable impact from some of our commodity products, higher cost of tinplate in the U.S. and under-absorption of overheads due to reduced pack in the U.S. last year; EBITDA of USD 69.5 million and operating profit at USD 47.2 million, higher versus last year as outlined previously by 55% and 65%, respectively, on a recurring basis mainly due to increased gross profits. On a reported basis, EBITDA and operating income are obviously lower, in fact, negative and are a loss, respectively, due to the one-off costs incurred following the closure or sale of the 4 production facilities; net finance expense cost is higher due to higher borrowings and impact from change in lease accounting, which has an impact of USD 1.8 million for the quarter; DMPL share in the FieldFresh joint venture in India was a loss of $0.5 million and lower than last year due to increase in cost of key commodities, higher overheads and continued investment in marketing and media to drive growth of processed food business; tax credit of USD 14 million reflects higher losses from the closure of production facilities; net debt at $1.74 billion, marginally higher by USD 54 million due to payment of dividend tax in Q1 as well as for general purposes, considering the cyclical nature of our business; gearing ratio at 3.63x, higher as equity is lowered following net loss due to payment of final tax on intercompany and closure of production facilities. Slide 10, on the turnover analysis, Americas constituted 71% of the total group sales, lower by 4.4% in the second quarter to USD 399.4 million mainly driven by divestiture of Sager business and lower USDA sales, which was in line with the strategy. Taking out Sager, sales would have been lower by 2.5%. We also had lower volume in packaged fruit due to impact of lower promotions and increase in list prices that we took in the fourth quarter of fiscal year '19. DMFI continues to fast-track its innovation pipeline, and it launched innovative products in the packaged vegetable segment with the launch of Del Monte Veggieful Bowl. When it comes to Asia Pacific, sales in the second quarter grew by 14.2% to USD 151.2 million from $132.4 million driven by increase in sales of S&W business, both fresh pineapple and packaged fruit, as well as retail sales in the Philippines. The Philippine market, sales were higher by 5% in peso terms, and the group continued to progress on the distribution transition in general trade, which Cito will talk about in more detail. Europe sales were higher at USD 8.1 million by 32.7% mainly on higher sales of fruit. Moving on to H1 results, starting with the group results summary: sales of USD 934.6 million, lower by 5.9%; U.S. sales lower by 11.7%. If we take out Sager Creek, DMFI sales would have been lower by 7.7%.; Philippines higher by 3.9% in local currency and 6.9% higher in U.S. dollar terms. S&W brand in Asia surged by 23.5% mainly due to higher sales of fresh as well as processed. JV in India has grown at 7% in local currency, driven by growth of Del Monte branded business. EBITDA of USD 108.2 million, up 50% from USD 72.1 million, again due to timely price increases in the U.S. and Philippines to negate the impact of inflation, improved sales mix and divestiture of low-margin businesses in the U.S.; Operating profit of USD 69.6 million, up 78% from USD 39.1 million; net profit, in line with operating profit at USD 20.1 million, a turnaround from the USD 3.6 million last year. All of the above profitability numbers are without one-off costs and versus last year. Slide 12 on nonrecurring expenses for the first half mainly covered already in the second quarter, but just to summarize. One-off costs in the first half is USD 79 million on a pretax basis, includes USD 77.2 million for closure of production facilities that was largely included in the Q2 results. In Q1, we incurred USD 41 million on tax related to intercompany dividends as well as deferred tax on undistributed share in profits of a subsidiary. DMPL's Philippine subsidiary, Del Monte Philippines Inc., declared dividends to its parent, and the dividends were taxed at 15%. This was announced in Q1 results. Additionally, we also booked a deferred tax liability, again, on undistributed share in profits of USD 1.3 million in Q2 on undistributed share in profits of DMPI. Slide 13 will take you through H1 results on a reported basis: again, H1 sales at USD 934.6 million is 5.9% lower than last year due to the divested Sager business and lower U.S. sales, partly offset by higher sales in Philippines and S&W branded products in Asia. Excluding Sager, sales would be down 2.9%, will be explained more in the turnover analysis; gross margin at 24.1%, significantly higher on an organic basis, led by price increase in Philippines and U.S. markets, as explained in the Q2 results, exit from low-margin businesses in the U.S. that led to favorable sales mix. These are more than offsetting unfavorable impact on commodities such as pine juice concentrate, also higher costs that I alluded to in Q2 results on tinplate in the U.S. and under-absorption of overheads due to reduced pack in the U.S. last year; EBITDA of USD 108.2 million and operating profit at USD 69.6 million, higher significantly on a recurring basis due to increased gross profits. On a reported basis, EBITDA and operating loss in H1 are at USD 29.4 million and USD 9.3 million loss, respectively, due to the one-off costs incurred following the closure and sale of 4 production facilities; net finance expense, financing costs driven by slightly higher borrowings and in fact, from change in lease accounting is USD 4.2 million. Last year also included a one-off gain of USD 16 million on purchase of second lien loan; DMPL's share in the FieldFresh joint venture in India was a loss of $0.8 million and lower than last year due to increased cost of commodities, higher overheads and strategic marketing investments to accelerate growth of processed food business in India; tax expense of USD 24.7 million includes intercompany tax on dividends, as explained in one-off costs, offset by tax credit from higher losses due to closure of production facilities, particularly in the second quarter; net debt and gearing ratio has been covered in the Q2 update. On turnover analysis, that's explained on Slide 14. We'll start with the Americas. That constituted 68% of the total group sales and was lower by 11.7% in the first half to USD 639.6 million mainly driven by divestiture of Sager business and lower private label sales in retail channel, which is in line with our strategy. Taking out Sager, sales would have been lower by 7.7%., again, lower volume in packaged fruit was mainly due to the impact of lower promotions and increased list prices. DMFI has fast-tracked its innovation pipeline in sync with trends for health, snacking and convenience, and it launched innovative products in the growing refrigerated produce, packaged vegetable and frozen categories. Asia Pac sales in the first half grew by 11% to USD 288.8 million from USD 253 million driven by increase in sales of S&W business, both fresh pineapple and packaged fruit as well as retail sales in Philippines. The Philippine market sales were higher by 3.9% in peso terms and 6.9% in U.S. dollar terms, respectively, mainly due to peso appreciation and price increases that were taken in line with inflation. As mentioned, group continued to progress with distribution transition in general trade with distributor sales to their customers growing at 4% in volume terms in the first half. Europe sales were lower for the first half at USD 14.2 million by 14% mainly on lower sales both on fruits and pine juice concentrate with shortfall mainly coming in Q1. With that, I would hand it over to Greg to provide a market update on the U.S.

[Gregory Longstreet, executive]

Thank you, Parag. On Slide 16, you'll find a summary of our share positions across our core businesses in the U.S. market. We're maintaining solid share across our legacy categories while we do important work to expand into the perimeter and frozen food categories. Innovation is capitalizing on growing consumer desire for convenient, healthy and great-tasting, plant-based foods, and much of our innovation is centered around capitalizing on these trends. Our business fundamentals remain on solid grounding with: Very strong shelving and share positions; new innovation, both in center store and perimeter store; and increased and sustained marketing investments in our brands and in our product launches. We continue to expand our presence in new and underdeveloped channels such as foodservice, e-commerce, convenience and club. To drive growth in market, we're going to continue to invest in building our brands, bringing differentiated and innovative products to market and expanding our distribution channels. On Slide 17, you'll find our Q2 results for DMFI. Sales down 5% to USD 396.2 million as a result of some strategic decisions to divest low-margin Sager Creek business, to reduce sales of low-margin and margin-dilutive non-branded business; as well as the timing of holiday shipments this year due to a later Thanksgiving, a large percent of our sales shifted into November into the third quarter; and overall lower packaged fruit volume as a result of price increases. We are pleased with our gross margin performance, having improved 340 basis points to 21.2% from 17.8% the prior year quarter due to our pricing and sales mix improvements. On the new product front, we continue our ambitious agenda to accelerate and diversify beyond the canned goods aisle. We've introduced some innovative plant-based products that do cater to today's consumers' demand for health and wellness, snacking and convenience, including a new launch this quarter of Del Monte Veggieful Bowls. They're veg and grain bowls that include a serving of vegetables blended with ancient grains such as quinoa and flavorful sauce. These items have been well received, and it actually exceeded initial launch projections in the U.S. marketplace. We also introduced College Inn Culinary Stock with very fine premium ingredients, such as free-range chicken and grass-fed beef this quarter, as well as new College Inn Simple Starter, a convenient solution for 1-pot cooking and simplicity in home meal preparation. We're also very pleased with the expansion of this Simple Starter line across the U.S. grocery chains. On Slide 18, you'll see some examples of how we're supporting our innovation. On the left, this features some support that we've done through digital media, social media as well as in-store and shopper marketing efforts to really draw attention, create awareness, drive trial and excitement around this new product launch. And really, this is our first effort to bring vegetables outside of the can. This is clear packaging, very fresh ingredients packed with ancient grains, very contemporary package. So we're quite pleased with the initial feedback and response for these new products. On the right is our first attempt to take the Contadina brand outside of the canned tomato category for some time. We're pleased with this launch into the frozen section of frozen appetizers. These are healthy, better-for-you pizza bites that compete in a very large category, and we're doing a number of things to drive innovative awareness, sampling and trial. So very encouraged by the work that these efforts are having on these new product lines. Slide 19 looks at how we're supporting some of the College Inn business that I referenced with social media, consumer promotions, couponing and quite a few innovative efforts to really help attract attention to these compelling on-trend offerings and encouraged by what College Inn is doing to achieve growth in a growing category and outcompete some large players such as Campbell's. Slide 20 takes a look at our aggressive efforts to promote back-to-school consumption of our fruit cup snack product, some display activity both in our shipper displays and our end-cap merchandising. We're driving more quality merchandising against our exciting base business, but also supporting the launch of our new Del Monte Bubble Fruit product, which is a very innovative, unique product in the category that combines the on-trend excitement of boba with our healthy, better-for-you fruit products, and we're gaining a lot of traction in the category and creating a lot of excitement in this fruit snack cup space. Slide 21 examines our foodservice initiatives this past quarter. Our pouch pineapple business continues to expand. This innovative new packaging is ideal for pizza operators, and we're gaining quite a bit of distribution as a preferred pizza topping product. This is one example with a large chain in the Arizona market. We'll also see some digital promotions as we attempt to expand College Inn with foodservice operators. We're doing a lot of education and promotion with operators, and we're seeing some strong interest in the College Inn portfolio for foodservice operators. And then our riced cauliflower product. This item is a replacement for traditional rice. It's a very exciting portfolio, and we're gaining new sales each week and new distribution each week across the foodservice channel and are encouraged by a lot of restaurants seeking to offer this product as a gluten-free, healthy, better-for-you alternative to traditional rice dishes. Slide 22 is an important summary of an initiative we put in place this past quarter and both announced and successfully executed the sale and transition of our Cambria, Wisconsin operations and facility. We also entered into an agreement to sell our production facilities in Sleepy Eye, Minnesota and Mendota, Illinois, and we will be closing and exiting these facilities in Q3 and Q4 this year. We've also advanced our efforts to sell equipment in our Crystal City facility and divest assets and expect to complete that process soon. And then this work was really done to help rationalize our footprint across the U.S. and better match our branded demand with supply. As a result of these efforts, our sites will now be at 95% capacity utilization. We have removed extensive amounts of fixed cost, and these cost savings are going to help improve our EBITDA margin by an estimated 325 to 375 basis points, USD 50 million to USD 60 million, over the next 24 months. So very important actions as we help reduce costs, simplify our operations and gain efficiency in our existing sites and very encouraged by the progress made here this quarter and the outlook for F '20 as we head into the new year and our new pack season. I'll now transition the presentation to Mr. Cito Alejandro.

[Luis Alejandro, executive]

Thank you, Greg. Before I go to the exhibit on Philippine market shares, allow me to report that Del Monte Pacific outside of the U.S., from a declining trend same time last year now delivered a combined all-time high volume in October quarter 2 and in the first half as well primarily driven by the Philippine market and the fresh business. We shall take advantage of this momentum in extending our growth over the second half of the year. On Page 23, you'll see that Del Monte has expanded its leadership share across our categories. Equally important, it contributed to market consumption growth. All our categories have shown increases in market shares, except spaghetti sauce, which is facing stiff competitive pressure. It is noteworthy that both the general trade and modern trade segments have begun to grow, unlike last year when volume declined. In summary, future growth will be driven by our continued success in the core business, plus innovation, new products and new categories, all forthcoming next fiscal year once we have completed strengthening this year our distributor operations and route to market. Moving to Page 24. The Philippine market reversed last year's decline. Our sales grew 5% in peso terms, 9% in dollar terms on the strength of organic marketing and sales programs. Sales in general trade grew 6% with continued progress in our 10-month old distributor restructuring and operational improvements. Modern trade, our key barometer of consumption, likewise grew 9% versus last year. Page 25 gives you a flavor of our marketing in our most profitable culinary category. On the upper left of the chart is our full line of ketchup favorites now available in convenient stand-up pouches, same superior product, same content as the bottle, but 20% more affordable than the bottle. We expect this packaging initiative to further drive consumption and market share. On the upper right is our Quick 'N Easy meal mixes, very popular among working and challenged mothers in the kitchen. Here, we have a strong #2 position in the market behind the local market leader. Page 26 is all about our beverage, our major volume driver in the Philippine market. Very evident from the 100% juices, to our Fit 'n Right weight management product and the unique Heart Smart Juice that health and wellness is our right to succeed in this category. In October, our category share grew 2 share points, our consumption by 9% while the entire market grew 4%. Page 27 is our traditional fruits and snacks business. We also have a dominant share in this category. But with market shares in the 70s to 80s levels, the only way to drive growth is through more consumption of the products and innovation outside the can. You will see that all our advertising are meant to stimulate more usage, more engagement with the product. Let us now go to Page 28, S&W, another strong pillar of growth after the Philippine market. From its early years of driving growth primarily behind fresh pineapple, S&W has now expanded its product range and equally important, its channels of distribution, from traditional grocery to now e-commerce, particularly in China through Alibaba and jd.com. On to Page 29. S&W in Asia and the Middle East grew 27% in the second quarter through higher sales of pineapple in North Asia and the turnaround of the packaged food and beverage business which declined last year. We are also happy to report that McDonald's and Burger King have remained our valued partners in China for their pineapple burgers and juices. Next, Page 30. This simply showcases pictures of S&W's excellent merchandising and promotion activities in Singapore. You can call this our home court. And finally, on Page 31, this is about our India business. Del Monte India sales grew 6% from Del Monte branded products in retail and foodservice, coupled with similar growth of the fresh produce under the FieldFresh brand. The main issues confronting India today are commodity price headwinds and cost increases that led to lower margins and higher loss in the second quarter, but we do expect better results in the second half of the fiscal year. I now turn you over to Iggy for the report on sustainability and finally, our outlook.

[Ignacio Sison, executive]

Thank you, Cito. Improving sustainability is 1 of the 5 strategic pillars of Del Monte Pacific Group, supporting our vision, nourishing families, enriching lives every day. In the U.S., Del Monte Foods' collaboration with Walmart in reducing greenhouse gas emissions. DMFI also partners with other companies and brands and institutions for Feeding America and nutrition education. In the Philippines, we convert our company's plastic waste into school chairs. We conduct occupational health and safety workshops, among others. We also participated in sustainability conferences with leading companies in the Philippines and Southeast Asia to promote the Sustainable Development Goals or SDGs of the UN. And finally, on Page 33, to recap our outlook. DMPL Group is expected to remain profitable in FY 2020 on a recurring basis. We will continue to respond to consumer trends through strengthening the core business and innovating, focusing on growing our branded business. We will continue to improve our financial performance through the 4 plant closures and the sale in the U.S., which we just described, in order to improve operational efficiency, reduce costs and increase margins amidst expected cost headwinds. And finally, we will continue to improve cash flow and strengthen the balance sheet. With that, we would like to open the floor to questions. Are there any questions?

[Luis Alejandro, executive]

Questions? Anybody going to ask a question? Any questions, please? Are you sure they're on the line?

[Ignacio Sison, executive]

Jenny, do you have any questions that were sent to you?

[Luis Alejandro, executive]

Jenny, are you there?

[Jennifer Luy, executive]

Yes. I'm here.

[Luis Alejandro, executive]

Yes. Any questions sent to you? Anything we need to respond to?

[Jennifer Luy, executive]

So far, none.

[Ignacio Sison, executive]

Okay. So if there are no questions, please reach out to Jennifer or to Iggy or any of us here, and we'll be happy to speak with you directly. And thank you for joining our call.

[Luis Alejandro, executive]

Thank you.