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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon to all of you who have come here this afternoon, as well as those who are joining us via webcast. Welcome to the Investor Briefing of Del Monte Pacific DMPL for the Fourth Quarter and Full Year Results FY 2018 ending April. Representing Del Monte today from Del Monte Pacific are Luis Cito Alejandro, Chief Operating Officer; Parag Sachdeva, CFO. And from our colleagues in the U.S. Del Monte Foods are Greg Longstreet, CEO; Bibie Wu, Chief Marketing Officer; Gene Allen, CFO, and I'm Iggy Sison, Chief Corporate Officer of DMPL. As you will see, this is the flow of our briefing today. We'll go through the fourth quarter and full year results followed by market updates with some highlights on Del Monte Philippines or DMPI. And then after this investor briefing, we will have a special presentation from our colleagues in Del Monte Foods to be led by Greg. So the presentation will run for probably an hour before we do the Q&A.
And I would like to ask now our CFO, Parag Sachdeva to present our results. Thank you.
Thank you so much, Iggy. I would like to draw your attention to Slide 5 starting with FY '18 highlights. We incurred a net loss of $28 million, mainly due to one-off expenses amounting to USD 74 million for divestiture of an underperforming business in the U.S. and 2 plant closures as part of a planned program to achieve operational efficiency and improve margins in the U.S. subsidiary, Del Monte Foods, plus the write-off of deferred tax asset due to a change in tax rates. Excluding one-off items, DMPL would have generated a net income of USD 12 million.
We continued to implement our commitment to reduce debt, lessen interest expenses and improve our cash flow. USD 300 million was raised from the sale of pref shares to repay loans and interest savings and one-off gain of USD 34 million were achieved from the purchase of USD 125 million of DMFI loans at a 30% discount to par value. The group doubled its operating cash flow to USD 358 million, primarily on lower inventory in the U.S. operations, leading to our gearing ratio being reduced to 2.3x as of April 30, 2018 from 2.9x in 2017. Next slide on the outlook. Barring unforeseen circumstances, the group is expected to be profitable for FY '19. There would be a major emphasis on responding to consumer trends through strengthening the core business and innovating. Healthier options and new products, mainly innovating outside-the-can would be a big focus and would be talked about more by my colleagues, Greg and Cito. Strategic investments in trade spending and marketing in the U.S. were incurred in FY '18 and would continue in FY '19. Focusing on growing our branded business and reducing non-strategic, non-branded business segments would also be an integral part of the strategy. Shifting to more branded consumer beverage in place of industrial pine juice concentrate is something which we have been continually driving in the base business. Introducing more value-added, less-commoditized foodservice products and rationalizing non-branded USDA business will be a big focus in the U.S. More importantly, improving financial performance through review of manufacturing and distribution footprint in the U.S. to improve operational efficiency, further reduce costs and increase margins will be executed through FY '19 and FY '20. Increasing cash flow, strengthening the balance sheet and reducing leverage and interest expense is also a big theme that you would hear more about from all of us.
A brief summary of our 2018 group results. Sales of $499 million, down 8.5%. U.S. sales lower by 5.3%, and if we strip out Sager Creek, DMFI sales would have been lower by 3.2%. Philippines has grown double-digit at 11% in local currency, and 7% up in U.S. dollar terms. Our S&W brand in Asia has declined by 2%, mainly due to softness in processed food category in the international markets. JV in India has grown at 1% in U.S. dollar terms, pretty much driven by the performance of Del Monte-branded business.
EBITDA of USD 34.9 million, down 41% from $59.5 million, due to lower U.S. EBITDA and significantly reduced pineapple juice concentrate prices and export sales. Operating profit of USD 19.1 million, down 55% from USD 42.8 million. Net loss of USD 2.1 million from net profit of USD 17.2 million. All the above profitability numbers are without one-off costs and are versus last year. Would like to also emphasize that we have successfully lowered our inventory in the U.S., and reduced the same by $63 million just in fourth quarter and USD 176 million for full year. On Slide 8, I would now provide a little bit more detail on our one-off expenses or non-recurring expenses. Would like to remind that as part of the group's strategy to improve operational excellence, DMFI divested the underperforming Sager Creek Vegetable business in the second quarter. This resulted in incremental one-off expenses amounting to $29.1 million pretax in the fourth quarter, including USD 13 million for write-down of Sager inventory that we are exiting from and other related asset write-down costs. Just to remind you all, non-recurring expenses for last year were mainly on account of 2 main restructuring initiatives: USD 2 million incremental cost for severance related to organization optimization. Another USD 4 million was on account of professional fee incurred to support restructuring initiatives. On Slide 9, we'll take you through more detailed results for Q4. Fourth quarter sales at $499 million, 8.5% lower than last year. Higher Philippines sales offset by decreased exports of processed pineapple products, an unfavorable impact of lower pineapple juice concentrate pricing as well as lower DMFI sales, will be explained more in the turnover analysis in the next slide. Gross margin at 17.4%. This was lower by 590 basis points. Several factors impacted it. Lower pine juice concentrate and USDA pricing were quite significant in impact. On the cost side, it was cost of tin plate, which is a major packaging item; sugar tax in Philippines that got imposed from January; lower yields and recoveries in the U.S.; higher logistics and warehousing cost, particularly in the base business; lower benefit from revaluation of biological assets and fixed cost absorption or under-absorption due to reduced pack in the U.S., which was a planned decision to reduce inventory that was made last year. EBITDA of USD 34.9 million and operating profit of USD 19.1 million, lower versus last year by 41% and 54% respectively, on a recurring basis. Profit performance for group impacted by significant one-off costs, lower gross margin as explained and strategic investments that we continue to make in the U.S. business. Our financing cost, lower than last year, mainly due to lower level of borrowings and includes one-off gain of USD 33.6 million from the buyout of second lien loan. DMPL's share in the FieldFresh joint venture in India was favorable at USD 0.1 million income from a USD 4.4 million loss due to improvement in sales and margin.
Tax credit of USD 8.8 million, mainly due to DMFI's higher net operating loss. Net income for the quarter of $12.3 million, higher versus last year, mainly due to gain from buyout of second lien loan at a discount. On a recurring basis, we incurred a loss of $2.1 million, down $19.3 million versus last year. Net debt at USD 1.44 billion, lower by 15% due to payment of borrowings following repayment of bridge loan amounting to USD 300 million and inventories lowered by $156 million in the U.S. Gearing ratio, consequently at 234%, lower mainly driven by decreased borrowings. Slide 10 on the turnover analysis for the group. Americas constituted 75% of total group sales, lower by 5.7% in the fourth quarter to USD 376.3 million, driven by USDA pine juice pricing, lower Sager Creek sales, distribution losses in branded veg and fruit with one of the retailers, offset by higher branded veg sales from lower [ ELBP ] pricing and displacement of Green Giant with our biggest customer, higher USDA food awards due to aggressive pricing and consequently DMFI increased its market share during the quarter across key categories in retail. That's canned vegetable, canned fruit, broth and fruit in plastic cups.
Asia Pacific sales in the fourth quarter declined by 9.5% to $112.5 million from USD 124.5 million on lower packaged and fresh fruit sales, partially offset by higher beverage and culinary sales. The decrease in packaged fruit was mainly driven by lower sales in North Asia due to increased competition from lower-priced canned fruit from Thailand. The Philippine market sales, which Cito will talk in more detail, were up 11% in peso terms and up 7% in U.S. dollar terms, driven by strong culinary and beverage sales as well as major wins in the foodservice segment. Prices were raised at below inflation rate across a range of products to mitigate the impact of sugar tax that has been imposed on beverages that contain sugar or artificial sweeteners. The company's thrust on innovation continued with the launch of 100% pineapple juice in Tetra Pak in the second quarter. Europe sales declined by 53% to USD 10.2 million, a very small component of our portfolio, from USD 22 million, mainly on lower volume of pineapple juice concentrate and canned pineapple in addition to significantly lower pricing on pine juice concentrate, which is a commodity. Now I would like to draw your attention to full year results, starting with the group summary. Sales of USD 2.2 billion, lower by 2.5%. U.S. sales down by 2.5%, driven by unfavorable pricing and higher trade promotion spending on the strategic investments that we made.
Philippines has grown at 7% in local currency. S&W in Asia has grown by 6%, driven by double digit sales growth of fresh pineapple and expansion into new markets, particularly Turkey. JV in India slightly increased at 1% in local currency and 5% in U.S. dollar terms.
EBITDA of USD 165 million, down 22% from $211.9 million due to planned higher trade promotion and marketing spend in the U.S. of more than USD 35.9 million.
Operating profit of USD 92.3 million, down 37% from USD 145.7 million. Net profit of USD 12 million, down 74% from USD 45.5 million. All the above profitability numbers are without one-off costs and are versus last year. Needless to say, as I explained, our cash flows improved and our inventory in the U.S. was reduced considerably from a full year perspective. Now on the non-recurring expenses full year, which is on Slide 12. Again, pretty much 2 major projects. Both of them were kicked off or conceptualized in the second quarter. We incurred USD 42.4 million from shutting down the facility in Siloam Springs, Arkansas, and impairment write-down of related assets, including inventory. Of course, this is the same site which was associated with the divestiture of Sager Creek business.
U.S. dollar $12.7 million was incurred for the closure of Plymouth plant, which is a tomato production facility. USD 7.6 million for the severance and professional cost was additionally incurred. Just to remind you, DMFI also wrote off USD 39.8 million of deferred tax assets due to the change in U.S. federal income tax rate from 35% to 21%. Non-recurring expenses for last year were mainly on account of 3 main initiatives: USD 10.2 million for severance related to organization optimization and incremental $3.7 million was incurred for the closure of North Carolina plant, which was shut down in FY '16. Another USD 4 million was on account of professional fee as I explained in the fourth quarter recurring expenses.
So in totality, USD 73.8 million of one-off costs was offset by USD 33.6 million of one-off gain from the buyout of second lien loan at a 30% discount. Total face value of the second lien loan bought was $125 million at the end of April, and we continue to look at opportunities to further deleverage in the U.S. and lower our group interest expense. On Slide 13, a little bit more detailed results. For the fiscal, sales at $2.2 billion, 2.5% lower than last year, mainly due to lower sales in the U.S. and exports, partly offset by strong sales in Philippines in local currency and S&W in Asia. We'll explain more in the turnover analysis.
Gross profit at $432.5 million, or 19.7%, lower than last year by almost 200 basis points due to unfavorable pricing impact from USDA foodservice and pineapple juice concentrate. Impact of unfavorable pricing was approximately 100 basis points, whereas the rest came from higher costs such as tin plate, lower yields and recoveries in the U.S., higher logistics and warehousing costs in the base business, lower benefit from revaluation of biological assets, fixed cost under absorption due to reduced pack in the U.S., and let me emphasize, that was planned. EBITDA of USD 165 million and operating profit at $94.2 million, lower versus last year by 22% and 36% respectively, on a recurring basis. Operating profits are lower due to lower gross profit as explained above and continued investments in trade and marketing spend in the U.S., in line with our long-range plan.
Financing cost lower than last year by $41.1 million due to lower level of borrowings and does include one-off gain of $33.6 million due to buyout of second lien loan amounting to $125 million at par value.
Tax cost includes USD 39.8 million of non-cash deferred tax asset write-off, partially offset by DMFI's higher net operating loss. Loss from FieldFresh, our JV in India, in which we own 47%, lower than last year, driven by improved sales of Del Monte branded business and margins. Net income for the year on a recurring basis at $12 million, lower than last year by USD 33.5 million.
On Slide 14, really providing you more color on the sales and turnover analysis by geography, with America (sic) [ Americas ] constituting 75% of total group sales, down 2.7% versus prior year period, largely driven by distribution losses in the tomato category, lower sales of Sager products, unfavorable pricing in foodservice, pine juice concentrate and USDA. The key retail segments of canned vegetable, canned fruit, broth and plastic fruit cup all grew in the 12 months despite some category declines. DMFI increased its market share across all the 4 categories in retail. That's canned vegetable, canned fruit, broth and fruit in plastic cups, driven by increased trade and consumer investment. Asia Pac sales of USD 518.4 million, in line with last year. The Philippine market sales were up 7% in peso terms. Del Monte continued to invest in driving inclusion of Del Monte products in consumers weekly menu behind marketing campaigns across the brands. All major categories of packaged fruit, beverage and culinary delivered higher sales. The company's thrust on innovation continued as non-canned beverages were the biggest contributor of growth with the launch of 100% pineapple juice in Tetra Pak and isotonic drink, Fit 'n Right Active. Foodservice sales also in the Philippines continued to expand growing by 15%, riding on the rapid expansion of quick service restaurants and convenience stores as well as Del Monte Philippines growth of its juice dispensers, meal partnerships and customized products. Sales of the S&W business, the fast-growing business of DMPI in Asia and Middle East was up 6%, driven by double-digit sales growth of fresh pineapple in North Asia and successful expansion into Turkey.
Europe sales declined by 22.1% to $33.5 million from $43 million, mainly on lower volume of pineapple juice concentrate and canned pineapple in addition to significantly lower pine juice concentrate pricing. With that, I would like to hand over to Cito to introduce Greg and the organization changes.
Thank you, Parag. Good afternoon to all of you. First to my left, I would like to introduce to you, Greg Longstreet. He's our CEO for Del Monte Foods in the U.S. And I don't know if you know, Greg has had a very long history. He started in Dole and eventually he moved over Hormel where he built his marketing and [ dual ] management career. And later on Greg will outline for everybody our 4-point growth strategy for the brand.
So Greg, would you like to introduce the other part of your team.
Yes, thank you. Thank you. Yes, I will. Good afternoon, and I'm pleased to be here today. I'd like to introduce 2 new members of the team that we've hired to help us execute our strategic growth plan and grow our top and bottom line. The first of which is Bibie Wu. And Bibie is our new Chief Marketing Officer. She comes to us with a decorated career in CPG and vast experience in growing and building brands. And she will be a key asset in our growth plans moving forward. One change we did make is to move the R&D responsibility underneath Bibie and her marketing and innovation team to help us accelerate innovation. You're going to hear a lot about innovation from us today as a key vehicle for growth for the organization.
We also were pleased to bring on board, Brian Pitzele, an executive from Hormel Foods to really lead this new foodservice growth plan that we built and help us accelerate that transformation. Under this new leadership, Del Monte Foods will become more market driven, innovative and aligned with consumer preferences. I'd also like to introduce Gene Allen, our Chief Financial Officer. Gene has been in this role now for almost a year and been with the company several years helping us lead a positive change in transformation at Del Monte.
On Slide 17, we'll reflect on our U.S. market shares. We continue to benefit from strong share leadership in our core business, holding #1 share in canned vegetables, canned fruit, #2 shares in growing shares in our plastic fruit cup business and #2 shares in our canned tomato business, all -- each category quite large, and we're continuing to promote new areas of consumption and growth for these businesses.
We did grow share in 3 of our 4 categories in the fourth quarter in our vegetable, fruit and fruit cup businesses. And these results were driven by compelling innovation, distribution growth, strong execution of fundamentals and sustained marketing investment in our brands.
One item featuring in this page is Fruit & Chia. Continued to be impressed by the success we're having with this innovative new product line. It's exceeding our hurdles for velocity and distribution in consumer acceptance. To drive growth in the market, Del Monte will continue to invest in brand-building activities and bring more and more differentiated and innovative products to the marketplace and to new channels. On Slide 18, we talk about Q4 performance. As Parag mentioned, our sales were down 5% in the fourth quarter, driven by lower volume of canned vegetable and canned tomato and Sager Creek products, lower pricing in USDA and foodservice business and the divestiture of our Sager Creek business in September, which drove down our sales in the fourth quarter.
New product launches included, as I mentioned Fruit & Chia, performing quite well in our adult fruit cup snack business portfolio. In the third quarter, we also introduced Grab and Go Fruit Cup snacks, single-serve, on-the-go products as well as a very -- a new product that we're excited about Fruit & Oats, the first ready-to-eat oatmeal product that includes fruit, and we are launching that product currently in market right now. These new products were launched to address consumer trends for healthy living and snacking in convenience, and our plans are to introduce more value-added, less-commoditized foodservice products, rationalize our non-branded USDA business and really innovate outside of the can. As we look forward, on to Slide 19, some Q4 marketing highlights include our continued investment to reach new consumers and promote more consumption of our vegetable products, a lot of new investments in new advertising efforts, including influencer campaigns. Our College Inn business and fruit business also benefited from increased digital and social media support as we continue to engage with consumers and promote new ways to consumer our healthy better-for-you products.
And then lastly on Slide 20, we reflect on a new area of focus for the organization, very optimistic about the future of foodservice for our company. Like most U.S.-based CPG companies, foodservice has been a vehicle of growth and gross margin over the past several years. We are taking big strides to grow this business. We introduced 3 new products in the fourth quarter with success and a lot of interest, including our frozen riced veggie products, which are very innovative and differentiated in the marketplace. Nice Fruit, a new better version of frozen pineapple products and our premium fruit cups, including Fruit Refreshers and Fruit & Chia, all of which are gaining momentum in the marketplace.
Thank you, Greg. I will now talk about the Del Monte Philippines, the group's second largest subsidiary. 2/3 of the business comes from the Philippines and 1/3 from the export market.
Sales in fiscal year 2018 reached $540 million, up 3% in peso terms in the Philippines alone. The business grew by 7% to close to PHP 17 billion, offsetting the marginal 2% decline in export sales due to market oversupply of pineapple and very weak pineapple concentrate prices.
With better collection of its receivables, which already started towards the end of the past fiscal year and this was continued through this fiscal year, DMPI is well-positioned to lower its borrowings and interest expense this coming year. Looking at the history of the company on Slide 22, as you can see, revenue has really grown at a good rate of 8% year-on-year, and 67% of the revenue comes from the Philippines and 33% from exports. On a by-product segment basis, the portfolio is fairly balanced across the 4 categories, namely packaged fruit, beverage, culinary and fresh fruit. And all of them are very profitable segments for us. Chart 23 is a more detailed explanation of the P&L. Gross profit has been very healthy at about 24% year-on-year. In fact, in the Philippines alone, it is even beyond 30%. And as you can see, net income has doubled -- more than doubled from PHP 1.1 billion in 2015 to PHP 2.6 billion in the past fiscal year. Looking at our market share in the Philippines, the Del Monte brand continues to be a dominant factor in the Philippine market. We have very, very high market shares as you can see on the chart. The lowest market share actually and still dominant is in spaghetti sauce at 42% because this market has been very, very competitive off late with the entry of priced brands. Our foodservice business has expanded and now accounts for 18% of Philippine sales. And due to the competitive environment in Southeast Asia, targeting the Philippines to innovate, diversify and really increase its premium positioning. Going back to the Philippines, fourth quarter sales were up 11% in peso terms, but up 7% in dollar terms due to peso depreciation. Our business in the culinary and the beverage business continues to be strong. I just wanted to point to you that our latest introduction or entry into the juice with particulates market with the introduction of Del Monte Juice & Chews are very innovative, snack-in-a-drink, combining nata and pineapple with fruit juice blends, a drink popular amongst teens and millennials. Foodservice was the fastest growing channel with agreement to Jollibee, the largest local fast food chain. We also supply Pizza Hut with all of their pineapple tidbits requirements and our juices are also served in the major airlines.
The couple of charts coming in will just show you some pictures of how we do marketing in the Philippines. In the beverage area, we have a new format in the Tetra format for our juices. And this has contributed to not only increasing the business, but expanding our usage at home. We also have new seasonal variants like the White Grape and the Mango Peach, very, very popular. And as in beverage, we have a lot of event activations as this is very crucial in driving consumption during special occasions.
Moving to the culinary segment, you can see this -- this is our lineup of our spaghetti sauces. We continue to sustain A&P support for our tomato sauce line, our Quick 'N Easy mixes and our spaghetti sauce. And the recipe education is through Del Monte Kitchenomics. This is an online website for the Philippine market, and we have 3 million active members in Facebook and the highest rating branded content cooking show in the Philippines. The next would be fruits. Just to give you a flavor of what we're doing in pineapple, which is predominantly used for cooking. So we highlight a lot of consumption occasions in our advertising. And we usually feature this us being preferred by 3 out of 4 kids now, which has really driven consumption among children. The next one would be foodservice. As Parag mentioned earlier, we do a lot of meal pairing of the Del Monte dispenser juice in major QSRs. And we sell pineapple like to Jollibee for their Amazing Aloha burger. We have also started selling the pineapple to Burger King in China, and it has been very successful to-date. S&W in Asia and the Middle East, consumers are now moving towards less processed and more natural food. And S&W is expanding its sales of its Sweet 16 fresh pineapple, which in the past year has reached sales close to USD 100 million. E-commerce and digital are growing in North Asia, but we're still new in that. Right now, we are in JD.com in China and soon with Alibaba.
The next page, you will see here the S&W Fruit & Chia. This is straight from the U.S., which have introduced in Singapore and which we will soon introduce in the rest of North Asia. Next would be a new development that has happened to S&W. We are now in Turkey and Pakistan as you can see from these pictures. Very, very strong merchandising as well as in-store presence now. And we're now one of the leading pineapple products in Turkey.
Finally, FieldFresh India. I just want to report to you that after 8 years we're now on our way to profitability in this market and the business continues to grow. Last year though was very tough for us, we only grew by 5% in rupee terms because of the GST problems that were encountered in the first quarter of the fiscal year. Taking a look at the photo, you will see that we have entered the Tetra Pak for all of our juices. And again, this has become a key driver of our beverage business.
Further on Page 34, our sampling activities in one of the festivals in India as well as you take a look at Page 35, this is the International Food & Hospitality fair in New Delhi. Iggy, sustainability? Thank you.
Thank you, Cito. Improving sustainability is one of the 5 strategic pillars of Del Monte Pacific Group, supporting our vision, nourishing families, enriching lives every day. So Del Monte Philippines certainly very active in sustainability and promoting it. We published a series of articles recently to showcase Del Monte's rich history and sustainability initiatives in the Philippines in the areas of renewable energy where we have a waste-to-energy facility that has saved us more than 25% of our electricity cost in the cannery, almost PHP 40 million savings a year.
Our Del Monte Foundation continues to be very active in CSR, training programs, scholarships, medical missions and so on. In the plantation, we employ a lot of technology, precision agriculture like the use of drones and GPS. And we're proud also of our 2 or 3 generation employees, who have been with the company. In fact, we showcased 1 employee whose father and son worked for us for a combined 97 years. And up to today, she is still working with us as a consultant in the export markets.
Del Monte Foods in the U.S. is very active in promoting sustainability as well, recognized by Walmart for Project Gigaton, a program for suppliers like Del Monte to help reduce greenhouse gas emissions in the supply chain. And DMFI is also finalizing a system called Crop Trak, which includes data for vegetable growers that monitor tonnage, acreage, pesticide and fertilizer application, basically promoting good farming practices. So to recap our FY 2018 results, Del Monte Pacific continues to be committed to reduce debt, lessen interest expense and improve our cash flow as Parag has presented earlier. We raised about $300 million from two preference shares. Tranche shares in April and December 2017, which were used for debt repayment. We also purchased about $125 million. This is as of the end of April. To-date, we have purchased $129 million. So $125 million at the end of April. Close to half of the $260 million second lien loans of DMFI at a 30% discount in the secondary market. So this is the highest interest-bearing loan we have in the group. Currently, the interest rate is 9.75% per annum. And we estimate savings this year of $8 million to $10 million. And of course, as interest rates rise, our savings will continue to increase until August 2021 when that second lien matures. So as a result of all those we have done, we've reduced our gearing to 2.3x equity, which is better than 2.9x equity in April 2017. Del Monte Foods also successfully extended the maturity of its working capital facility. It is not due until February 2019, but as early as last April. We extended the maturity to November 2020. We pushed it out for another 18 months for a total amount of USD 442.5 million. DMPL plans to sell about 20% of its stake in Del Monte Philippines Inc. through a public offering on the Philippine Stock Exchange or PSE. We deferred the IPO in June, as most of you know, due to volatile market conditions, and we will announce when we relaunch this as the equity markets improve. And the group also doubled its operating cash flow to $358 million in FY 2018, primarily on a better inventory management, lower inventory levels in the U.S.
And this recaps as well our outlook for FY 2019, which began last May. And we will continue to strengthen the core business and innovate through healthier options and new products. And you will hear more of this innovating outside the can from Greg, Bibie and team. Our strategic investments in trade spending and marketing in the U.S. will continue.
We will continue to focus on growing our branded business in the group and reducing non-strategic, non-branded business segments, shifting to more branded consumer beverage in place of pineapple juice concentrate, which is commoditized, which is a commodity with volatile pricing, which is quite cyclical. We will also introduce more value-added, less-commoditized foodservice products and rationalize the non-branded USDA business.
We will continue to improve our financial performance through the review of manufacturing and our distribution footprint in the U.S. to improve our operational efficiency, reduce our costs and increase margins. And we will increase our cash flow generation, strengthen our balance sheet and reduce leverage and interest expense. So with that, Greg Longstreet, our CEO in Del Monte Foods, will now present a strategic overview of Del Monte Foods.
Thank you, Iggy. I'll begin by providing some background on some of the strengths that we have at Del Monte Foods and some of the reasons I was attracted to join this company recently.
To begin with, if you reflect on our 130-year heritage of innovation, Del Monte has been respected as a leader and innovator in the food industry dating back to the early 1900s. One of the first branded food products, the first to innovate our packaging, the first to do national advertising, a first and leader in nutritional labeling, and really recognized as one of the most trusted brands in the United States and globally.
And as you look at the next slide, what that has created is a solid foundation with U.S. consumers. That's really -- it's equity that we have, it's awareness with consumers, that respect and trust the brand for our health and wellness credentials. Consumers across the United States view Del Monte as a brand they trust, a brand that's nutritious, that helps them lead a healthier lifestyle. This is a great platform for us to build and expand as consumers look to eat healthier and live healthier lives. This brand awareness and positive equity has allowed us to maintain market leading positions, which is important in this U.S. marketplace, a lot of consolidation has happened across customers, retailers and within our categories. And it's essential that you are a leading number 1 or number 2 brand in the categories in which you compete in the U.S. marketplace. We've successfully done that. We've maintained our share leadership and in many cases seen strong growth over the past 52 weeks and 13-week periods. We're pleased with our growth in canned vegetables, canned fruits and plastic fruit cups. And through the work we're going to be doing to innovate our portfolio, expect more share growth to continue in FY '19. The next slide also represent some opportunity for us. This is a summary of our 4 joint ventures that we've established with our counterparts at Fresh Del Monte. And what these joint ventures allow us to do is together to grow and penetrate and develop some new areas, particularly in the perimeter of the store. We're going to be growing our chilled fruit and avocado platform, our chilled beverage platform, chilled fruit snacks in fruit and beverage -- food and beverage outlets. And in addition, what this agreement and partnership allows us to do at Del Monte Foods is to focus a lot of efforts in the frozen food category, which we now are the principal brand and company to market frozen fruits and vegetables under the Del Monte label, which will be a big avenue of growth for us. Slide 7 though reflects on some lessons learned. Obviously, with the results that we just described, we have some work to do as a company. We have to transform our business. There is a great sense of urgency to turn this business around and begin to deliver top and bottom line earnings that are in line with CPG best practices. Some lessons that I learned quickly in my first few months. Sager Creek was not a good decision. We should have not acquired that business. It was not strategic. It was not a good fit. Divesting that business was a good decision for us and will allow us to accelerate the transformation of our company and move forward in a much more profitable manner.
We have a supply chain that is not in balance. We have too much capacity, we have too many assets, we have too much inventory. We're attacking those issues and addressing them and rightsizing our operational footprint, so that we can achieve balance between supply and demand.
Our company is as we looked across our initiatives, is very much focused in the old. We were focused in center store. We were focused on canned fruits and vegetables capacity, and we really had an attitude and a business plan to just try to fill capacity at all costs. And what that led us to do was to build a private label business, pursue USDA business, business that was not profitable. That was actually margin dilutive and profit dilutive for the company. We've changed that approach. And immediately beginning this spring, changed our tactics within those areas, raised our pricing and changed our approach.
We also, due to our desire to drive canned capacity, spent too much money on trade, increased our trade investments every year and really relied on low pricing to keep our business growing. We're addressing that. We've already taken action, which I will describe and Gene will also describe. High fixed expenses, relative to industry norms and some duplication of tasks are other areas that we identify immediately that we're addressing in our turnaround plans.
On the bright side, I did -- was pleasantly surprised with our capabilities and our commercial efforts. Our marketing teams, our sales teams, our R&D teams are quite impressive. We have great talent, great resources, looking to do more to help us grow and transform the company. And we do have a bright and talented team in need of new leadership and new direction, which we are providing.
Slide 8 is a recap of the strategic plan that we launched this year. And this is going to be our long-term foundation for growth. This plan is designed to help us grow margin and grow profits. It's built around some cornerstones of branded growth and development. We're going to focus on our branded business, our value-added business. We're going to be keenly focused on innovation. You'll hear a lot about that today, and portfolio extension and expansion, reducing our cost to operate will also be essential to our success. The 5 pillars that we're focusing on include strengthening our core business, investing to grow and build our brands. But importantly, in the second pillar, we're going to enter new categories. This brand, as I first described, with the U.S. consumers and consumers across the globe is seen as a healthy contemporary better-for-you brand. We belong in more categories that are growing like frozen, like the produce departments, like the foodservice channel. These are areas that we intend to invest in and expand our growth and see some great potential with the work being done there.
We'll also be expanding internationally. We have a new focus on growing Latin America as well as supporting our growth in Asia. Improving operational excellence as I mentioned, our supply chain is going through an overhaul right now. We're taking cost out, we're streamlining our supply chain, getting more efficiency, balancing production with demand. And lastly, striving for commercial excellence. We're leveraging our leadership positions, our strength at our largest retailers like Walmart, Kroger and Target to platform into other categories where we can grow our businesses and strengthen our leadership positions as Del Monte. And we're building the right talent, the right capabilities, the right culture to deliver against this strategy.
So if you look at the next slide, this is really what we're doing at Del Monte Foods. We're building a culture of innovation. In recent years, we have been focusing on declining center store categories, mature businesses. We've been limited in our innovation and investment in our brands. We've seen pricing and margin erosion. We've also seen significant declines in profits, led by increased cost of goods and lower volumes that we did not pass along to customers and consumers. We had a bloated supply chain with excess costs and a lack of internal alignment and communication.
The Del Monte of the future is very much a consumer-driven packaged foods innovation company. Our portfolio is and will be extending into high-growth, high-margin categories. We will be revitalizing and strengthening our brands, led by category-leading innovation. Best-in-class revenue management, focused on the right categories and our brands. A disciplined cost-containment approach, which is critical for us. We must pass through net inflation and find savings and efficiency wherever possible. Streamlining our supply chain, you're going to see us rely on more co-pack, co-manufacturing partners to help accelerate our growth and establishing a dynamic culture that's aligned around growth, innovation and execution is our future. That's today. The next slide talks about today. In F '19, we're in the process right now of launching more new products than we have in the last decade. Lots of news going on, lots of activity, whether it's product improvements, line extensions or new platforms of growth. I'm very excited about our area of success within plastic fruit cups and adult fruit cups. We're also innovating with Grab and Go products, vegetable and bean platforms, new broth platforms of growth. The broth category is a very dynamic and growing category in the U.S., and we have the #2 leading brand with College Inn, and we'll be doing much more to extend that brand across the country. And this platform, these innovations are allowing us to enter new categories and new channels. As I mentioned, we intend and are in the process of expanding our business and our brand into new areas of the store like the perimeter that are growing, like frozen, which is also a high-growth category. And importantly, going into some new areas. We've not competed in the convenience store channel in the past. We've really not been a significant player in foodservice, and we're building an e-commerce platform as well. So these are all areas for new sales growth and new opportunities.
Some examples within foodservice that I mentioned previously that we're excited about, innovation with our new veggie rice products are going to allow us to penetrate more away from home consumption, college and university campuses, lots of end-user interest in these products as well as our new fruit burst squeezer products in foodservice helping us to address the opportunity with younger consumers, school businesses, a big platform and healthy better-for-you products for us going forward. The next slide, Slide 14 talks about innovation. So innovation will become very important for us. In the past, innovation has been less than 1% of our revenue base each year. This is going to be accelerating. A double-digit portion of our growth annually will come from innovation through this new product pipeline that we're creating. And this will change the look of the company. We will look different, we'll have less ambient product, we'll have more refrigerated products, more frozen products throughout the store and throughout our channels in which we compete. And importantly, to marry that, the work with innovation, we're laser-focused on gross margin improvement. We have to improve our margins. We are making and taking action right now. We, effective May 1, we took a price increase, we reduced our trade spending. We've also used a lot of work in network optimization to take cost of goods out to enhance our margins. The impact of Sager Creek is positive on our margins. Reducing our private label focus and reducing and raising our pricing in USDA are all contributing to significant improvements in gross margin that's happening right now, and we're already seeing those results in the first quarter. So a positive turnaround happening with Del Monte Foods, and I'm pleased to introduce Bibie to talk about some of the details on our marketing plans.
Great. Thank you. So it's a pleasure to be here today. As mentioned earlier, I'm one of the newer members of the leadership team. So I thought I'd start with just a little bit about my background. I have 20 years' experience in consumer packaged goods and 13 of those years has been in the food industry. I started my marketing career with General Mills. I was there for about 10 years and then moved on to Campbell's Soup company. And then the last 6 years, I've been with the Laundry & Home Care company. And I'm delighted to join Del Monte company today. So on the next slide, what I'd like to do here is talk about our overall macro environment that we participate in. So I think, we are all very well aware that food companies today face a whole host of challenges. Consumers are looking for more closer to fresh options. They're changing the way they cook, they're changing the way they shop. But within all of this, there are still many trends that can work in favor of a company like Del Monte. We know that there is a rise in culinary, [ enormous ] trends there that are really putting fruits and vegetables at the center of the plate. More and more people are looking for plant-based nutrition. And we see a blurring of the line between snacks and meals. And that really is giving rise to the need for more healthy on-the-go options. And then on the retailer side, we also see that many of our retailers are looking to simplify assortment within many of our categories. And here this is an area where we as the #1 player within canned can actually come out on top. So as we reflect on this past year, there are actually very many instances and examples of how Del Monte has been able to succeed within this challenging environment. So for example, in vegetables. On the vegetable business, we've been able to leverage our strong consumer and our category [ in pipe ] as the #1 player within canned vegetable to displace some of our biggest branded competitors at several retailers this past year. And that's actually right in line with what the retailers are looking for. Many of them are looking for a simplification at the shelf and really getting to a set, which is primarily 1 major brand plus private label. And the retailers, who have done this, we've seen on average is growing much faster than the rest of the market. And this in turn is helping to generate sales growth, share growth as well as increases in consumer loyalty for our business. In addition to that, we are continuing to act like the leader that we are within canned vegetable, and we are investing in marketing to not only grow our own business, but also to help defray and offset some of that category decline that we see within the center of store. And that in turn is also bringing some new users to the aisle. So we see this as another -- as a primary growth vehicle for us in the future, and we're going to continue our efforts in brand rationalization going forward. On the next slide, another example of where we've been able to succeed is in the area of fruit. So Greg mentioned earlier that we really need to grow our sales outside of the can. And we have in fact been doing that within our fruit business. We are up almost 3% -- or 3 points in market share this past year. And the good news is it's really been through successful innovation. So the Fruit & Chia line that we launched this past summer has really been outperforming our expectations, very strong in terms of distribution and in velocity.
And as you experience the product, you will see that it features very on-trend ingredients, so things like dragon fruit and chia. And everything about this product is really designed to get us to a new consumer base. When we talk about the flavor profiles, when we talk about the health benefits and the Omega 3s, and even when you look at the marketing that you see here on the slide, it's really geared to appeal to that younger millennial shopper. And so not only is it helping to grow our own business, but importantly, it is helping to grow the category. So 44% of the sales of this item is actually incremental to the category. This has also created a really strong foundation for us in our adult fruit cup platform for future growth. And that's where we're launching our new Fruit & Oats platform this year.
Another area that we're driving growth outside of the can is with our broth business and our brand College Inn. So the broth category has been on fire this past year. It's up almost 6%, and we've been keeping pace with that very fast growth. And again, the growth is not coming from canned broth, but it is coming from this premium aseptic carton format. So like you see here with our stock in organic. And it's really this carton format that has been the basis for our geographic expansion of the College Inn brand. So we achieved national distribution when we got into Walmart back in 2015. And today, we are in about 3,500 Walmart stores throughout the U.S. But in addition to that, we've also been growing our geography in grocery. So from our kind of stronghold in the northeast, we've been radiating out and penetrating areas like the mid and South Atlantic. And then similar to what I just talked about with Fruit & Chia, College Inn is also helping to grow the category. So at the 4 Southeast retailers where we significantly increased our distribution this past year, we see that those retailers are growing the category at pretty much double the norm. So a lot of great examples of how we've been able to compete in this challenging environment. So as we look to the future, we really have 2 key imperatives. And the first one is to build relevance by driving differentiation in our core business across metrics like product and packaging and communications and at the shelf. And then the second key imperative is to think outside of the can. This is a phrase that we use a lot around Del Monte. Think outside of the can and bring innovation that's going to expand us into new consumers, into new [ need ] states and eating occasions. And this will also help us penetrate those high-growth adjacencies. And right now, we have a very robust pipeline of new product ideas that we're actively working on to help get us into areas like Greg mentioned, frozen, refrigerated produce, refrigerated deli. And many of these ideas we are going to target bringing out as early as late fiscal '19. Okay. On this next slide, really, as we look at the environment and how it changes, we know that we have to change with it. And so what we say at Del Monte is we're on a journey to modernize and ignite passion for our brands and our products. And we're certainly very, very proud and committed to everything we've always historically stood for, right. So taste and quality, it's so fundamental, it's part of our Del Monte brand mark. We've always represented the goodness of fruits and vegetables. And certainly, 100 years ago, the can was the ultimate inconvenience. So in the future, we're going to build on these pillars, but we're going to evolve. We're going to be more than just a quality ingredient. We're going to actually deliver to the consumer delicious and exciting on-trend meals and snacks. We're going to bring the elevated health benefits of fruits and vegetables, but also extend into areas like super grains and plant-based proteins. And we'll also extend into new packaging formats and temperature states so that we can deliver the best in convenience. And so when I say the future, the future is really now. Because we are committed to bringing all of these ideas and benefits to life in fiscal '19. So now what I'd like to do is to take you through each of our business unit strategies, and I'll start first with vegetable. So the context right now, I think we all know it's a declining, challenged category. But in the face of that, we have actually been able to grow. Our retail sales have been up over 2% over the last 52 weeks and that's led to about a 1.5 points share growth for us. Again, as we discussed about displacing competitors like Green Giant, it has been about staying committed to marketing to grow not only our brand, but also the category. So going into fiscal '19, we are going to continue to act like the leader that we are within this category. And we're going to continue to work on brand rationalization, which is both to our advantage as well as to the retailers. We're also already leading in pricing as the #1 player. We are leading pricing. We've actually seen that our price points have gone up in both Walmart and grocery over the past month to 2 months. And while it's still early yet to see exactly how that performance is playing out, we see that despite the price points going up on shelf, that our momentum in share that we just talked about and our momentum in shipments continue. So that's a really good early sign. And then we're going to stay committed to brand building and marketing. In fact, we're launching a new campaign this year around the Del Monte brand, and we're really going to take a master brand approach that we have, effectiveness and scale and efficiency. And that campaign area is called Growers of Good. And just recently we received some copy testing results from this, and the storyboard actually tested in the top 10% out of all the advertising that our research supplier has tested in the past. So we feel like it has really good potential. Second strategy is, as the leader in this category, retailers continue to look to us to bring news to the center of store vegetable. So we'll be bringing out some great renovation news. We have a new line of vegetable and beans, which is a blend of veggie and beans and a very flavorful seasonings. So these are things that you can't really find from a basic canned vegetable, and we have some premium line extensions that are very exciting too. And then importantly, we're going to extend our innovation efforts beyond just the can and really get into new areas like frozen and refrigerated, very fast growing areas of the store. The second business I'll talk about here is fruit. So the current context is we are #2 in fruit behind Dole. However, when you break down the fruit category, you can see that we're right on their heels. Within plastic fruit cup, we've gained 3 points of share, while they are down almost 2 points in plastic fruit cup. And then in canned fruit, we're really neck and neck. And honestly depending on the time period that you look at, we're sometimes the same size or even a little bit ahead of them. But you can see clearly, here too we have more momentum. So our goal is to take this #1 position from Dole and I think that we're well on our way. So in terms of our F '19 plan, we're going to accelerate our growth within fruit. We're rolling across our 4-ounce plastic fruit cup business on various strong product improvements. We'll be going to 100% juice medium and that move will enable us to say that we have 25% less sugar than Dole, which is fantastic. We're also reformulating our no-sugar added line, so that we can claim all-natural, and we've taken out the artificial sweeteners. We're going to leverage innovation to continue building our very successful adult snacking platform. I'm going to talk about our Fruit & Oats launch in a little bit. And we also have some new varieties of fruit refreshers. And then lastly we're also going to make fruit more accessible and more exciting. We're going to grow our perimeter of produce business with an expanded Fruit Naturals line. And we are also working on what I'll call new value-added fruit-plus innovation platforms within produce. And then we're going to leverage packaging and special packaging to help further penetrate areas like convenience and club. So to talk a little bit more about food innovation on the next slide. The big news for our fruit business in FY '19 is the launch of Fruit & Oats. And this is very exciting because it gets us into a new eating occasion, that breakfast and morning occasion, and that very large category of oatmeal. It's also very innovative. We are the first and only ready-to-eat shelf-stable oatmeal product out there. We deliver a full serving of fruit. Fruit is something that Americans add to their oatmeal. It is one of the top things you add to oatmeal. And we bring 100% whole-grain oats. And as you try it, hopefully on later on day, you'll see that it's delicious both at room temperature or you can simply pop it in the microwave and enjoy it warm. I would say retailers are extremely excited about this. In fact, when we presented this idea to Walmart, they said it's the best innovation idea they've seen all year. And so to support the strong news we have an equally strong marketing campaign. And here we are really taking a page out of the very successful playbook of Fruit & Chia. We have a full 360-degree marketing campaign behind Fruits & Oats. We're really going to highlight as the main communication point our unique benefit that we are the first ready-to-eat oatmeal with luscious fruit and wholesome oats. And then as you can see from this communication vehicle here, we're also going to play up that morning and breakfast occasion to make sure that we take share not only from competitive fruit cup users, but also that oatmeal occasion to really grow our brand and the category. So then switching gears on the next slide, I'll talk about tomato. So tomato historically has not been a focused area for DMFI. And so as we look at the last 52 weeks, it is one of the only categories where we've not grown share this past year. But with that said, if you will note here, Contadina has really held its own this past year with very, very little focus and support. And going forward, we see Contadina as a great opportunity area. We believe that has a very strong Italian equity and that can be a big point of differentiation for us. It's really seen as a more premium and authentic brand than the leading tomato brand out there, which is Hunt. And so our vision is to drive growth by building Contadina into a leader in contemporary meal solutions. In F '19, we have a very, very full plan to restage Contadina with packaging and product improvements and a strong new claim, that I'll talk about in a second. We'll support that news with dedicated marketing. And we're also working on new innovation platforms for Contadina. So today Contadina plays only in canned tomatoes, but you may recall that over a decade ago, this brand appeared in many, many different Italian food categories. And so with that latent equity, to this day consumers see that brand as a really strong fit in many different categories. And so we'll be taking it into new areas, including Frozen next year.
For the rest of the category, we're going to help stabilize Del Monte by incorporating that into the master brand campaign that I talked about, and then, we're going to protect S&W with retail kind of level blocking and tackling. But our focus next year is really going to be on Contadina. And we really do think it's a hidden gem. And so we're going to be putting a dedicated marketing campaign behind it for the first time in really countless years here. We have a full 360 plan as I mentioned, a product improvement, packaging restage. And really at the heart of the restage is this claim of 100% fresh Roma tomatoes. And when we tested this claim with consumers amongst a whole set of other claims, it rose and skyrocketed to the top, and it even beat the claim from our leading competitor, Hunts, which has flash steam-peeled tomatoes. So we feel very good about that. And know, by the way, in F '19, we too will have flash steam-peeled tomatoes. So we're going to catch up on Contadina very quickly. And then the last business I'll talk about today is our College Inn broth on the next slide here. As I mentioned earlier, broth, the category is growing very quickly, and we're keeping pace with that. So we're seeing very strong growth. The news we see here is the leading player, Swansons, is down quite a bit and it's pretty much all at the expense of private label. But in addition, we're also keeping our eye on Pacific, which is a smaller brand. They're growing very fast. And as you may know, recently purchased by Campbell's and now it's a sister brand to Swanson. So our vision for College Inn is to be truly national, differentiated brand with really exceptional products and rich flavor. And the strategy #1 is we want to protect our core market leadership in the Northeast. We'll be launching a new platform of bone broth. We also have a highly unique and delicious mushroom stock line extension. This past year, we went to an all-natural formula on our aseptic cartons. We'll be rolling that improvement across our cans in F '19 and we'll continue our geographic expansion outside of the Northeast and really address these distribution gaps throughout the rest of the geography. And so on the next slide here, let me just highlight the big news for College Inn in F '19, which is the launch of the bone broth product line. Bone broth is a small, but fast-growing segment. It's very on trend. Bone broth is the result of simmering that broth longer to really draw out the nutrients of the bone. Our point of difference is that we have a better-tasting product, while still retaining those superior health benefits. And in fact, here we have a point of difference as well. We're going to deliver 10 grams of protein whereas the competition delivers only 9. And then just to sum up our support here on the next slide. We will be supporting the bone broth launch with a dedicated campaign, primarily print and digital. And again, the key communication is highlighting that we have that great rich flavor you would expect from College Inn, but the superior benefit of 10 grams of protein. And this plan is on top of a national TV campaign across the more general base College Inn brand because as we continue our geographic expansion, it is very important to really be building that brand awareness and credibility. So on the very last slide that I have here is just to sum up. We have 2 key imperatives this coming year. One is to build relevance by really driving our advantage as that #1 or #2 brand within our current categories and really emphasizing and accentuating our points of difference. The second one is to drive innovation, so that we can get further outside of the can. As mentioned, we already have strong businesses in plastic cup and aseptic carton, but we're actively working on many ideas and new formats that will get us into high-growth frozen, produce and deli adjacencies as well. And in order to do all of this, we're going to go back to our roots and really market like the brand leader that we are. We're going to be packaging and product innovators as I just discussed, and we're going to continue to lead in plant-based goodness. So if there is one thing that I could leave you with today, it's really the belief that we have the right to win. So as mentioned, College Inn, Contadina and Del Monte, these are trusted and extendable equities. And in a day where 70% of consumers are looking to eat more fruits and vegetables, fruits and vegetables is exactly what we represent and what we have unique access to. And we are that #1 brand within our current categories of canned fruits and vegetables. And with that, we bring strong consumer insights, we bring strong category insights and strong retailer relationships. And then importantly, last, but not least, it is all about the people. And we have an energized team of both new and old folks, and we have significantly more resources. That plus we have new strategic partners, both on the front-end with many idea houses that get -- help us get to bigger and better ideas as well as on the back end with agile, co-manufacturing partners that help us get those ideas to market faster.
So thanks very much. With that, I'll turn it to Gene.
Hello. So you just heard about what we're doing to adapt to a changing consumer landscape. And also what we're doing to improve profitability. So the question really is when will we see improved results? As noted by Greg, it's now. So we've taken action against every one of the initiatives that Greg had identified: improving our portfolio,; lowering trade spend,; and lowering cost. So we expect to see improved results in the coming quarters. We're seeing great sales execution, not only with revenue management, managing the price increase, reducing inefficient trade, but also with the new products selling. Year-over-year, we're expecting G&A to be flat. There are a couple of reasons why we should feel pretty good about that. One in F '18, we realized $14 million worth of savings. So we're expecting to hold on to these savings in F '19. But the second, probably most important, we continue with our offshoring strategy. We're moving our routine transactional work, the back-office work, to our outsourcing center in Manila. Okay. And we replaced that with in-market kind of capabilities that are going to help us win in the marketplace: e-commerce, category management, et cetera. Next slide. So adapting. Aligning our supply chain with future demand. Heard a lot about our oversized manufacturing footprint and the fact that it comes with a lot of fixed cost. So we have an opportunity, and we have a plan to get ahead and increase asset utilization, increase productivity and to go ahead and reduce our footprint, all of which is going to reduce our cost and improve gross margins and EBITDA. Next slide. So balance sheet management. You've heard a lot about what we're doing to improve the quality of our earnings with top line, with cost management, but we're also focused on improving our balance sheet. You heard from Iggy and Parag what we did with inventory year-over-year. $175 million, $176 million worth of inventory that was converted to cash. So pretty good job, but we still feel that we have a ways to go. We have another $175 million to $200 million that we're going to convert from inventory to cash. That will take us about 24 months. Additionally, we're reducing our CapEx. For quite some time we were spending $40 million to $50 million a year. We reduced it to about $30 million in F '18, and we feel that we can get beneath $25 million. $25 million is sufficient to get ahead and support all kind of positive ROI investments, all regulatory requirements as well as maintaining our manufacturing assets in great condition. So working capital management. We're focused not only on reducing our finished goods, we'll reduce our finished goods, and we'll reduce the amount of write-offs we have with obsolescence. We'll reduce the handling costs that we have. We also have an opportunity to get ahead and reduce our packaging and ingredients that we keep on hand, all of which in total will amount to about $175 million to $200 million worth of cash flow over the next 24 months.
So with that, we will take Q&A.
[Operator Instructions]
This is [ J.D. Agarwal ] from [ Red Intelligence ]. It would be nice if you could help me understand how you brought down inventory by $180 million. What were the large components of that? And also how you plan to reduce $230 million over the next 24 months.
So in F '18, what we did is we actually reduced our pack plan. We continue to go ahead and match our pack plan with the current year demand, ignoring the fact that we had excess inventory. So we actually reduced our pack plan in F '18, and we'll do the same for the next 2 fiscal years.
Just to build up on that, we also got reduction in inventory through divestiture of Sager business.
How much was that?
It was $60 million to $70 million in FY '18 and more to come in FY '19.
Sorry, how much came from divestiture?
$60 million to $70 million.
$70 million. So of the $176 million, $70 million is associated with Sager Creek.
Of the $176 million, $70 million was Sager Creek?
Yes.
Understood. And what was the cash inflow when you sold Sager Creek?
We got $45 million in FY '18 and another $10 million we're expecting over the next couple of years.
So let's say, $55 million and you acquired it for $75 million?
Yes.
So there is a $20 million loss, did you...
$75 million was also for inventory. So inventory was part of that, whereas now $55 million that I mentioned is excluding inventory.
Okay. So you got in a way $75 million -- sorry, $55 million and $75 million. So you made a profit on this sale.
I won't say we made a profit on sale because with the impairment of assets and other write-downs that we took, I would say we overall incurred a loss on it. But from a cash perspective, just wanted to give you a broader picture that inventory was over and above the $55 million.
Understood. Any other divesture plan in the next 24 months?
None at the moment.
Just a couple of questions. On your operating cash flow, could you break it down between DMFI, and as well as DMPL ex DMFI?
Yes, we can do that.
And then, I guess, secondly, my question is so if I look at your DMPI that you're selling, it's about $60 million of operating profit. What valuation are you targeting to do an IPO of DMPI?
Sorry.
So $60 million of operating profits coming from the DMPI approximately.
Yes.
I guess, what kind of valuation are you targeting and how much are you planning to raise from the IPO?
To be more clear. It is more close to $50 million, $50 million. $52 million, $53 million.
How much is the EBITDA from that -- investments?
The EBITDA in DMPI?
In DMPI, that's right.
I think, we're roughly talking about PHP 4 billion. That's the EBITDA.
[indiscernible] So $75 million EBITDA?
Yes.
Okay, understood. And then I guess, how did you fund that buyback first, secondly?
We have a couple of areas. We have existing lines with the banks that we are using, plus we also have taken and secured incremental lines with one of our strategic bankers just in case we need to use them to acquire more loans under the current scheme that we have gone with.
Understood. Is that structured at DMPL level or DMPI level?
It's at DMPL level. Yes.
It's at DMFL level. And how much debt is there at DMPI?
At DMPI, we are roughly talking about a total debt of PHP 14 billion.
PHP 14 billion. So all the [indiscernible] borrowings right now are mostly at the DMPI level?
Yes. Half and half. So you're talking about $300 million roughly at DMPI level and a similar amount at DMPL level.
Okay, got it. Understood.
Any questions from the webcast? Questions?
Can you again repeat the capital structure of the U.S. subsidiary? So there is 700 in first lien and about...
260....
Yes, in the second lien. Yes and is there any unsecured loan in the U.S. subsidiary?
It was a pretty low at the end of April. The working capital line, I think, Gene, was $10 million?
Yes.
Understood. And what's the cash flow from operations you target, let's say, over the next 24 months? You're reducing CapEx, there will be a onetime [indiscernible] of working capital of let's say, $230 million, $240 million. How should we think about this operations being able to pay for debt interest?
Gene, do you want to?
Yes, absolutely. And so if you look at our projections for the current year, we would end up turning net cash positive. And if you take the improvements in working capital, reduction in CapEx, we're going to end up using that over the next 24 months to start paying down debt deleveraging.
How much sales would you lose because you don't have Sager Creek this year?
So for this year, for F '19, the reduction is just a bit under $100 million. $96 million.
Okay. And then you said, you are looking at increase, this is excluding the Sager Creek?
I'm sorry?
When you said, you're looking for revenue growth increase, this is adjusting for this $100 million loss, I guess. Is it apples-to-apples, right?
Revenue growth increases over the years, not necessarily in FY '19.
Yes, that's right. So by design, in F '19, we're expecting a reduction in revenue as we improve our portfolio. So we spun off Sager Creek. We are de-prioritizing some low margin business, our private label business. And there are couple of other categories. So, all of which is going to improve, just with the revenue management, that's going to improve gross margins roughly 200 basis points.
Sorry, 200 basis points will come from....
From improved product portfolio. So de-prioritizing that low margin business and then better revenue management reduce trade spend.
But you're targeting about 700 bps of increase in margins?
Yes. For the -- that's over quite -- several years. For F '19, the increase, you call it 350 basis points, 200 of which will come from revenue management. We're going to get 120, 130 from cost and you have a couple of other areas.
If I can ask one more. Just at the strategy level, what was -- I mean, the way I understand the debt at the subsidiary is ring fenced and the parent has -- it doesn't have any records to the parent. So why borrow at the parent level and pay that debt? You are increasing the liability of the parent, which is really the cause of it, which is what matters. I mean, you don't know where the business will be in 3 years. This is supposed to be repaid in 2021. Why inject more cash into the subsidiary now? What's the thinking there?
I think 2 main reasons. One, overall from a group perspective, we are able to reduce our interest expense pretty significantly because the second lien loan in the U.S. is at a pretty high interest cost of close to 9.75% now. So one is reduced interest expense of almost $15 million to $20 million depending on how much we are able to finally acquire. And secondly, we are also able to get onetime benefit of reducing the debt through the discount we are getting on the buyout, which is also quite significant as you saw from the update. So overall, it's making financial sense from a group perspective to do the same.
In addition to what Parag said, in addition to the reduced interest expense and the reduced principal because of the discount, the arrangement we have with the lenders in the U.S. is the interest on the loan that we have purchased so far, which is $129 million at 9.75%. Say that's almost $30 million a year. It's paid to us by DMFI, but it goes back to them in the form of equity. So there are really different benefits to buying back second lien. And of course, as interest rates continue to rise, the savings will be quite significant all the way through FY 2021. And it would be good for DMFI with all the innovation, strategy that Greg and Bibie and Gene outlined, with a $30 million that goes back to them, it will be good for them to have more of those funds to support marketing spending, innovation, and so on.
Just on the receivables, is there any intercompany receivables? Because you have the receivables about $360 million in the Philippines subsidiary. I don't know what that number is as of April, and then you have $630 million in the U.S., but your consolidated receivables are only $760 million.
Yes. We do have intercompany receivables in Philippine books as you pointed out. The overdue component of that is around $250 million approximately at the end of April. And this is being reduced from Q4 of last year. I think [indiscernible] touched upon that. We are already settling that overdue from Q4. We have further settled another $60 million to $62 million in May and June, bringing down the DMPI receivables. And through the IPO, we further expect to use the proceeds to bring down the intercompany with DMPI to the tune of roughly $60 to $80 million. So we have a plan to address the issue that we have on intercompany receivables in FY '19.
How are these receivables created? Are these like loans to the parent company from Philippines to the parent or...
Combination of a couple of things. One was as you know, historically, DMPI sells pineapple products to the U.S. even prior to acquisition. So since we acquired, for 3 years that is starting '15 to '17, we were selling the pine products, which is on an average $40 million to $50 million annually at an extended credit. Okay. So that is one reason why it led to receivables in DMPI books for 3 years. But from FY '18 onwards, we are current. We get -- we're settling the receivables on a current basis, no issues with that. Secondly, we are also consolidated -- consolidating purchases of major packaging items, particularly during or before the pack season, whereby we are making the purchases at the group level for items such as tin plate, which is again done at an arm's length. It is -- it includes a markup and that's settled by the end of the year or in Q1 of the following year. So that's pretty much done by our offshore entity and is -- it used to involve DMPI in the past, but we have now got mechanism and lines in place to do that at the holding company level.
And just on the cash flows, you spent about $18 million in CapEx in Philippines. What is that regarding and what does that entail and how should we -- that as a percentage of sales has been falling over the last 3 years. What should be the trend there?
So you make a good point. It comprises of 2 things. One, due to change in accounting, the additions to biological assets is now part of CapEx. So that's around $40 million to $45 million annually. So from a business perspective, we don't see that as CapEx. CapEx for the business is in the range of PHP 1 billion to PHP 1.5 billion annually or $20 million to $30 million if you take out the biological asset change. Yes.
But even with that, just to clarify, around the CapEx in the Philippines. Even with that CapEx, that already includes projects that will generate incremental revenue and profit for us. For example, one of the most profitable products in our portfolio is the fresh pineapple, which today from 0 8 years ago, we have built that to $100 million this past year. In order to further support that, we're now at the [ $40 million ] carton business. And in fact, we are close to #1 in most of countries in North Asia. To support further growth, we have upgraded our packing house. So that is included also in the CapEx, a major portion of the CapEx. The other thing that I would like to highlight is we have a juicing plant. Beside the packing house for our fresh pineapple, we have a plant that will now produce not from concentrate, from this variety of [indiscernible] which is unique to us and is only available in Costa Rica. Now it is available with us. [indiscernible] has it also in that plantation. So net-net, most of the CapEx is also to drive further growth in profitability in the business. But the basic CapEx for maintenance is not really that big.
Thanks for the presentation. I have 2 questions, if I may. So number one, in the outlook, you mentioned that FY '19, you're expecting profits ex any one-off items that may come up unforeseen. Is there anything that you're seeing or like I mean, in terms of financing, which might come up or which is in the plan? Number two, my specific question to Greg as well. To try and understand, there's a lot going on with a lot of changes, new products, so in terms of milestones, how should we look at in terms of performance for the next 6 months, 12 months or 24 in terms of revenue, EBITDA or profit performance coming out to just evaluate whether we are on track or not?
You want to go...
Yes. So we do have some very specific milestones for the business. EBITDA, we have a plan, a quarterly plan for EBITDA targets to meet and exceed $100 million EBITDA this year. We're on track for the first quarter and first half and are working to build the second half of the year. That as well as gross margins we described, and Gene and I have both described that is acceleration from 16.2% gross margins in F '18 to 19.8%. And we have a plan by quarter to achieve those milestones. So as our primary focus this year is about improving profitability, while we see a slight decrease in sales due to Sager Creek and due to us exiting some bad business. And then with this innovation pipeline that we're creating, we now have a pipeline for future growth that we'll deliver growth in '20, '21 and '22. That retail, that sales growth may, with improved margins, is going to bring profitability to a level it should be to support the overall organization.
Now with the improved plan that Greg mentioned, we're expecting that to really help the group to deliver a profit, and our outlook is profitability, including one-offs of any nature that we would incur. So we are saying on a reported basis, we should be seeing profits barring any unforeseen circumstances. So based on the plan that you just heard from Greg, we should be profitable.
I think also important to mention is we have revised the incentive program of the management team. We have moved away from EBITDA, right. And we are now focused on net income. I think that is a critical portion of the incentive program and that has -- and Greg has in fact embarked on that now. So that there are 2 components of that. One is net income and the other one is net sales. Even on net sales, we're focusing on the quality of net sales. And not just about volume. In the past, we would wrap up the volume. And at the end of the day, we find that a significant portion of the volume is driven by low net sales value products that eventually lose margin for us. We have gotten away from that. And we will continue to go away from that. Sager Creek is a clear example of how we deliberately decided to improve the quality of our revenue. So with the improvement of the quality of the revenue and the focus on net income, I think, those are 2 critical points of focus for us in addition to driving our cost down. And more important, I think, it depends on how you measure the performance of management because eventually at the end of the day, what gets measured gets done.
Agreed. Absolutely.
Any questions on the webcast?
Sorry, just a few questions about the U.S. business. Greg, obviously, you mentioned about a lot of growth initiatives and one of them basically includes actually expanding into to South America. I do understand that you guys actually hold distribution rights into South America for many years, but nothing has really been done. And I think previous years you pulled out of that market. So I guess, if I were to look back into that slide, how much of the incremental capital spending or marketing spends, which I need to budget going forward to basically help carry out your growth initiatives?
Yes. We do have a new plan to grow South America. As said that we've owned the rights to for some time and haven't had a concerted effort. We've recently positioned a new leader for that group. And we have very specific countries that we're targeting to build a portfolio. It won't require very much capital at all. We're going to be using local co-manufacturers in addition to our own production base to supply that business. We do have a manufacturing asset in Venezuela as well that we do source some production from. And we're watching that situation closely, but we will be fine in our expansion efforts based out of our headquarters in Mexico City and our growth plans across Central and South America. And it will bring revenue. We've got some modest revenue growth this first year for the business. But we believe that can be a very significant source of [indiscernible] for us moving forward.
So I guess, you've been leveraging off your -- I guess, you only have 1 footprint in South America, which is Venezuela, which is...
Yes. It's a difficult time. Yes. But if you look at -- we do have -- we own a manufacturing facility in -- actually 2 in Mexico, in [ Mimosa ]. It's a facility today that produces many of our fruit cup products. So there's a good base. They're a citrus fruits and plastic fruit cup business that we can expand upon and many of the local co-packers that we're working with right now to establish relationships.
You mentioned a quite a bit about co-packers. How should we think about costs going forward if you're actually kind of gradually moving towards copackers as opposed to try to source internally?
Yes, we're using co-packers, where we find differentiated innovation. Where we -- example the frozen foods. And in frozen, there are some innovative partners that we're currently working with to help us develop healthier products, different products. It is not [indiscernible] as we have today. So rather investing in CapEx and putting expensive equipment into our facilities, we're going to use co-manufacturing partners to build the business, scale the business and then internalize the business over time. It is kind of one of our primary growth strategies moving forward.
So I guess, those should not -- we should not expect, I guess increased marketing spending or capital expenditure?
Not on the capital side in short term and...
On the OpEx side?
Not necessarily. We're going to be finding these [indiscernible] agreements with partners that we're going to support through differentiated products, which will allow us to command more margin and be a revenue stream of growth for us. We will invest in marketing innovation and new product introductory fees to support this, but that will be within our marketing plans.
Okay. And I notice that you're also kind of moving away from canned products more towards the aseptic packaging as well. Pardon my knowledge, but how should we think about cost? Is that going to increase -- materially increasing cost with that?
Yes. We are migrating -- it's an [indiscernible] strategy. The can will always be important for us. It's always going to be a core business, but we expect growth to come outside the can. And those products typically offer the potential for higher pricing, higher retails and higher margins. So our costs will increase in many cases due to some of the packaging and line speeds, but, however, we can pass those costs through to the customer and consumer and they're willing to pay for that.
Okay. And I do recall that you mentioned in your March presentation that you were looking to increase your price points sometime in May and June. And how has that sort of been absolved in the market and what -- how are your competitors sort of responding to that?
Our pricing activity?
Yes.
Yes. That has been very successful. Our sales team has done a nice job passing through those increased costs and decreased trade expenditures to our customers. We have seeing followership in the marketplace. And we're seeing -- there's a number of inflationary pressures currently in the U.S. market due to packaging with our steel tariffs and tin plate costs. Transportation costs are skyrocketing in the U.S. market. Labor costs are increasing. So our efforts to lead through our pricing advances have been followed. And we're even seeing private label pricing rise as well.
Are there any other questions? As you will notice, we have a lot of exciting products around the room from the U.S., Asia and the Philippines, products, which Cito, Greg and Bibie talked about. So please browse around and have a look, and we'd also like to invite you for refreshments, which includes our products, our juices. And please, to try our nice fruit, frozen pineapple, which is from our superior Sweet 16 variety. And we'd also like to remind you that this webcast will be uploaded on our website, delmontepacific.com. and would like to thank you for joining us today.
Thank you very much.
Thank you.