Del Monte Pacific Ltd
SGX:D03
Earnings Call Analysis
Q3-2024 Analysis
Del Monte Pacific Ltd
The company's retail business has been described as very healthy, despite facing margin setbacks from non-strategic businesses such as co-pack operations and surplus sales. To address these issues and enhance profitability, a plan is in the process of development, focusing on improving short-term performance through pricing adjustments or reduced trade spending. The aim is to ensure a relentless pursuit of profit margins, even if it requires making hard decisions about certain business segments.
In an effort to improve operational efficiency, the company has undertaken asset light strategies, including the closure of two facilities. These measures are set to enhance capacity utilization and absorption, lower costs over the next several months, and enable a partnership with a cost-effective co-packing partner, leading to a decrease in the cost of goods sold.
Management is optimistic about the company's performance in the Philippines over the next six months to the entire calendar year. They have adopted a two-pronged strategy that includes increasing product consumption in categories with a large market share and aggressively capturing market share in others, like beverage. Due to ongoing inflation, a focus on competitive pricing and packaging—like low cash outlay and bundle packs—is essential. This pricing strategy is expected to represent 30% of the business this year, facilitating growth, especially in the value segment and small retail outlets.
The emphasis on inventory management has allowed the company to reduce inventory levels according to plan. For instance, the U.S. business is expected to lower its inventory from around 39 million cases to under 30 million by the end of the next year. This systematic reduction in inventory levels, despite softer sales, is projected to help maintain debt levels at approximately last year's figure of $2.3 billion. Additionally, a $150 million to $200 million cash generation from the continued inventory reduction is anticipated.
Concerning shareholder dividends, the company is unable to provide clarity on when they will resume, primarily due to current-year losses and high leverage. Dividend decisions are under the Board's purview, and given the financial situation, dividends are unlikely to be addressed in the upcoming Annual General Meeting.
To address the funding of the redeemed SEA Diner stake valued at $224 million, with $70 million raised, the remaining amount is expected to be converted to redeemable convertible preferred shares (RCPS). This aligns with the company's overall funding strategy in response to its financial commitments.
The company incurs a substantial yearly interest expense of around $200 million, which poses a significant barrier to profitability. Although there are no specific timelines mentioned, concrete plans are in place to significantly reduce debt levels. These include potential asset sales if the right value is presented, reflecting a strategic initiative to manage debt proactively. The sale of a vegetable plant illustrates this plan in motion.
The public listing plans for the U.S. and Philippine businesses are temporarily on hold, underscoring the company's priority to implement necessary operational improvements before pursuing capital market activities. However, there is a commitment to reassess the IPO strategy following business turnarounds and operational enhancements.
Dividends for the preferred shares and redeemable convertible preferred shares (RCPS) are set around an 8% rate, implying a fixed return rate for investors holding these financial instruments. It is part of the broader financial management strategy addressing investor returns.
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So good morning to all those who are joining us in Asia for this third quarter results briefing. Since we released the results to the public at the end of our Friday, March 15. In the interest of time, we'd like to go straight to Q&A. Some of you have sent your questions, which Jennifer Luy will read unless some of you would like to ask your questions live now, okay? So we're opening the floor for questions. Thank you.
Good morning, everyone. So we'll start with some questions sent by e-mail. The first one is to explain simply how Del Monte Pacific lost money during its strongest quarter. Why was this not anticipated by management? And what's being done to arrest the slide? How long would it take to restore profitability?
Thank you, Jen, and good morning to everybody. So to answer your question, yes, it's a strong quarter for us from a revenue perspective and it has always been. But from a margin perspective, it is also the quarter in which we have the highest trade promotions during the holiday period, particularly in our U.S. business. And generally, our trade spend is higher by around 200 to 300 basis points versus rest of the year. So that's why margins are expected to be lower in this quarter despite higher sales on a historical basis. However, we also made it very clear that we -- in the guidance that we gave that this year would be a net loss for the group. So would like to clarify that we haven't really said anything otherwise in the last call. And accordingly, we are seeing the results for the quarter, generally in line with our internal plans. Yes, versus our internal plans, we are marginally down on margin as well, would like to absolutely be transparent about that. We are lower on margin for the U.S. by 100 basis points. When I say margin, that is gross margin, mainly due to higher trade spend and also because of continued category headwinds where we saw one of our higher-margin businesses in canned fruit being lower than planned. So overall, just to summarize, we were expecting a net loss in the third quarter, and we had clearly given guidance in our MDA and also in our call last time, and we are very much in line with that. Marginal deterioration in the U.S. margin versus our internal plans because of increased trade spend and also headwinds on -- category headwinds on a higher-margin business. So that should sort of answer your question. Let me know if there's any more clarification needed.
Okay. Thanks, Parag. Okay. Let's move on to debt-related questions. Regarding the loans and leverage, the level is now quite alarming. Aside from IPO, are there any other plans like private equity, stock options or rights? How do you intend to reduce your debt?
Again, yes, great question. We are very much aware of our very high leverage, which obviously is also compounded by our profitability for the year. So being in a net loss does erode our shareholders' equity. So to address other than the IPO of the 2 operating businesses, which we have made a couple of attempts at and we will continue doing so, we are looking at several opportunities. One, from an operational perspective, we expect our leverage to go down by $150 million to $200 million next year from the continued inventory reduction program for the U.S. We have aligned on this and a decision has been made and approved by the Board to reduce the pack for next year. The production of pack for next year by more than 30% on an aggregate basis. We have also clarified that in the press release. So that's one major operational improvement that we are embarking on. Second, is in addition to -- from a capital structure perspective, yes, all the options are being evaluated also including selectively some sale of assets that could also help us lower the leverage. So yes, we are looking at all options to reduce leverage in addition to the IPO.
Okay. Thanks, Parag. If I remember correctly, SEA Diner bought Del Monte Philippines 13% at around $10 million per 1% share last 2020. How much was the redemption price and how many percent did they sell back?
SEA Diner invested USD 130 million in 2020 for a 13% stake in DMPI. As we announced last February '19 to the SGX and PSE, there is settlement of certain rights redemption and acquisition of their shares in [ pref tranche shares ] amounting to about $224 million. So what was paid to them from the proceeds of the issuance of the perpetual securities was $70 million, representing about 30%, 31% of their stake in the company.
Okay. Thanks, Iggs. For Cito and Greg, can the company not go after market share? I think investors don't care about losing 50% of market share as long as the company is profitable. There's no point going after market share. Can't Del Monte Foods just implement a big time hike in prices to recoup its losses, may be spread over a few months. Of course, taking into consideration the additional initiation in the next few quarters, which I think is slowing down anyway.
Yes. Do you want me to start, Greg, or you will take it?
I'm happy to add some comments, Parag, if you like, and then please add any and see them as well. But we completely are aligned with the need to grow and improve gross margins. That's our #1 objective here over the next 12 months, and we're taking a number of steps in that direction. We are seeing some natural deflation occurring. And we do plan an intense cost reduction around this year's [ co-pack ] to reduce our cost of goods. But separate from that, we are evaluating additional pricing increases, trade promotional efficiency. And I would add that we're also intensely reviewing our portfolio to eliminate underperforming SKUs that just rose too high with inflation and no longer makes sense to market. So a holistic approach to margin improvements. We agree. Profitability and gross margins are number one, and we're not chasing brand share. We're not lowering prices. We're not increasing trade promotion. We're not doing those things. We want a solid fundamental business, but it has to be profitable. Go ahead, Parag.
No, I would just substantiate that, Greg, that our branded retail business in the U.S. is quite profitable. We are making on an average, 25%. But even with all the inflationary headwinds and increased waste that we have seen in our business, our margin on retail business on a year-to-date basis is still around 21.5%. So I just wanted to assure you that overall, our retail business is very healthy. We did see some setback in our margin from nonstrategic business such as co-pack, and also from some of the increased losses that we had from sale of what we call surplus [indiscernible]. So these businesses also ended up diluting our margin. And that's what we saw in our year-to-date month 9 results. We, as part of our planning process, which is underway, not completed yet. We are completely aligned that businesses, which are stretched where the margins are low, we will be looking at a very clear short-term improvement in the plan. And that would include pricing or reduced trade spend so that we are very clear that we are not running an aftermarket share and taking tough choices when it comes to these businesses.
I would just add that the recent asset light work that was done to close 2 facilities will further help -- what Parag described, to help us improve capacity utilization and absorption, lower cost and also partner with a low-cost co-packing partner. That will also help us drive down cost of goods over the next several months. So a holistic approach. The branded business is healthy, but it should be better, and it can be better. Go ahead, Jen.
Okay. Thanks, Greg. Thanks, Parag. Cito, we have a question on the Philippines. Can you share your outlook in the Philippines for the next few months? How do we encourage consumption of Del Monte products?
Thank you for the question. We are very positive with regards to the next 6 months all the way to the entire calendar year. Our strategy of growing our brands are twofold. Number 1 in categories where we already have huge market share. The name of the game is to increase consumption of our products, whether they be in providing more variety in cooking or other uses of the product. In other categories, we are -- we have taken a market share grab approach, particularly in beverage. And we see these 2 strategies coming together in our ability to increase our business in the coming year. More importantly, in the Philippine market today, due still to inflation, and that is not abated really. There is a need for a very rigid price pack architecture in our portfolio. We have actually adopted that by providing low cash outlay packs as well as bundle packs to encourage continued purchase of our products. And these low-value packs are very critical as we grow our business in the emerging low-end segment of the market, whether these would be groceries or Sari-Sari stores. These low cash outlay packs are usually priced very, very competitive between PHP 10 to PHP 20 per pack. And the bundled packs offer as much as a 10% discount to consumers, which is very substantial to continue to grow the category. This price pack architecture right now in portfolio will account for 30% of our business going forward this year. So those are the things that we're working on. And in addition to that, we are introducing new products into the market. We have new flavor lineups for our beverage category. We also have a new lineup to penetrate the meal mix category, which is a multibillion market in the Philippines where we are not present. So all of these things will come together as we start our fiscal year this May. Thank you.
Thank you, Cito. Can management provide some visibility into the group's inventory levels, stock levels and profitability into FY '24, '25 and beyond with the current action plan? When are dividends likely to resume?
Parag, do you want to take that?
Parag, that's for you. The first question in the chatbox.
Yes. Sure. So our inventory reduction is going as per plan despite our sales being soft in the U.S. I would say that the emphasis on inventory has allowed us to lower the inventory levels and come within our plan. So we are expecting to end, for example, our U.S. business with an inventory level of around 39 million cases. And we expect to bring that down to less than 30 million cases going into -- by end of next year. So that plan is working. And despite some of the headwinds category issues that we talked about, which led to lower sales, we are definitely on track with the focus, which has been brought into inventory management by Greg and Cito in both the businesses. And in the base business also, we are seeing inventory reduction as well. Because of our inventory reduction despite the loss situation and lower profitability, our debt levels won't be that different to what we had at the end of last year, which was around $2.3 billion. So that should give you a good sort of perspective that because of what we have done on inventory overall, we would be able to sustain the debt levels at the same -- more or less at the same level as last year. And this will continue, and we expect to generate another $150 million to $200 million from inventory reduction, particularly with the actions that Greg is taking in the U.S.
Thanks, Parag. Do you want to touch on dividends or...
Sorry, what was the question on dividends? My apologies.
When are dividends going to resume?
Again, difficult to answer that, particularly in the -- due to the losses that we are incurring this year. But obviously, it's a Board matter. That's not a decision that management takes. But considering our losses and leverage, I would say, it would be not something that what we looked at in the upcoming AGM or before that at the Board.
Okay. Thanks, Parag. Going back to SEA Diner, the amount redeemed SEA Diner stake is $224 million, you raised $70 million. How do you fund the remaining?
So right now, the way we are looking at it, it's -- the rest will be converted into RCPS or redeemable convertible pref shares. And we will continue working with SEA Diner on when the right opportunities, but there is no definitive plan to execute that in the short term.
Okay. Thanks, Parag. We have additional questions on debt. Just looking at the income statement, Del Monte Pacific incurs around $200 million in interest expense per annum. That's clearly the biggest obstacle to profitability. Debt levels has remained consistently high for several years and have been highlighted vigorously by shareholders at its AGMs. Are their concrete plans to reduce debt levels significantly? And if so, what is the expected time line? A $100 million to $200 million reduction in the context of debt in excess of $2 billion clearly doesn't appear to make much of a significant debt to the interest expense of the group. Our plans to list the U.S. and Philippine businesses now on hold, what is holding back these plans?
So yes, the question is very relevant, and we agree that $100 million to $200 million reduction in debt is not sufficient, considering our leverage. The IPO plans are certainly on hold because we got to make the operational improvements first and then get back to the market. But we will do so at the first opportunity as we see the turnaround taking place in both the businesses. So definitely, that would be on the cards as we look at it. In addition to it, as we mentioned, there are other opportunities being evaluated as well, which includes selective sale of assets if we get the right value for it. So that would be also something that we would like to initiate and sale of veg plant is a small example of the same. So that should also give confidence to the shareholders that we are on the right track.
Thanks, Parag. What are the coupon dividends payable for the preference shares and RCPS?
I think it's around 8%.
8%, yes, Parag.
I don't see any more questions on the chatbox. So are there any more questions from our participants? No more questions, Iggs.
Thank you, everybody.
So thanks to everyone for joining. If you have other questions, you can just reach out to Jennifer or myself.
Thank you.