Thank you for joining Del Monte Pacific's results briefing for the Q4 and full year ending April 2024. Representing Del Monte in this call are Luis Alejandro, Group Chief Operating Officer of Del Monte Pacific, DMPL, and President of Del Monte, Philippines. Parag Sachdeva, Group CFO of DMPL, Gregory Longstreet, President and CEO of Del Monte Foods, and I'm Iggy Sison, Chief Corporate Officer of DMPL. As advised earlier, we will now go directly to Q&A, which will be moderated by our colleague, Jennifer Luy. Jenny?
Hi, Iggs, thanks. Parag would like to give an introduction and a summary of our results first and address all the key questions that have been sent in. Go ahead, Parag.
Thank you. Thank you, Jenny. Just give me one second. Okay, let me know if you can see my screen, and good morning, everybody, from Asia, evening for those who are joining from the U.S. So what I wanted to do was start with a context on the results, really helping understand, how our margin really ended up in a significant reduction and decline versus last year. Giving some context across the board, both from a commercial perspective and cost perspective, and then, really sort of open it up for questions. So as you can see, this is really talking through the full year.
Our full year gross margin really declined from 607 to 423, or $422 million, which is more or less the shortfall we have in our cash earnings or EBITDA. So you will see, there was a significant impact that we saw from three major factors. Obviously, cost, and between costs, we have broken this down into inflationary and operational issues. We then have an impact from higher trade spend and direct promotion, and also unfavorable impact from volume mix. So this is what my focus would be. So inflation, easy to explain. As you know, in our business, we do end up selling in the first half of the fiscal, products, that were manufactured in the previous year.
And just to remind everybody, our costs in the U.S., in particular, significantly went up from fiscal 2022 pack to fiscal 2023 pack, driven by inflation, with just metal packaging that ended up increasing by 45%-50%. So with us selling inventory from fiscal 2023 in fiscal 2024, we saw an inflationary impact of $110 million when you compare the two. So 2022 inventory being lower cost, sold in the first half of 2023, was a benefit that we enjoyed, which obviously was not there in 2024, as we were already selling higher cost inventory in fiscal 2024. When it comes to operations, obviously, we had issues both on the U.S. side and on the base business.
So when you look at the U.S. side, we had a number of factors that went against us. Our damages and write-offs were higher, and that's mainly because of higher inventory that we were carrying from fiscal year 2023 into 2024, and that trend continued. That also impacted warehousing costs and also transfer freight, which is associated with that. In addition to that, it also impacts trade promotion spend. As you can appreciate, we end up putting more trade behind sales of our surplus stocks. And lastly, our mix also does get impacted because we do have inventory that we sell to sundry channel, which is at an increased loss. So you are seeing the impact of increased inventory in three buckets. One is under the operations issues, which is here.
Then you see it under trade spend, and you see it under volume mix as well. So these three buckets are directly attributed to, the increased impact of inventory in addition to warehousing, which is also directly correlated. So just wanted to draw your attention to that. In terms of pricing that we took, again, the annualized impact of pricing was $127 million, which is more or less offsetting the inflation impact that you see here. So we will provide a little bit more color. So this is really showing you how our waste has, performed, and obviously we had to undertake a lot of cleanup. And if you look at it by category, it was the fruits where we ended up most waste.
In terms of sundry loss, we incurred a loss of $21 million as compared to $6 million, which was fitting in the vol mix area. So that's where we incurred, again, higher loss, coming from increased inventory. So I wanted to share that with you, and in addition to it, again, when it comes to our conversion costs, we have seen costs increase in two of our major plants. One is Modesto, and the second one is Mexico. Mexico is a combination of a very strong Mexican peso, as well as our increased infrastructure cost as we are building up for Joyba. But our volume was obviously not in line with our plans and which led to increased costs, from an overall perspective for the Mexico plant.
Modesto was a combination of recovery issues which can happen in ag, in an agribusiness. We also had operational issues on the labor and overhead, plus lower volume, which led to an increased cost by 28%. Now, the reason I shared this with you is that it had some impact on last year's margin, but because this is the cost structure we carry into next year, we would see an impact which is unfavorable going into fiscal year 2025 as well. In addition to that, I would also like to draw your attention on why such a huge impact to our business as compared to other FMCG companies. So as you can see, these are the categories we play in, and I would request Greg to also chime in and help outline this.
You will see across the board, whether it's vegetables or tomatoes or fruits, the category trends changed dramatically in calendar year 2023. Fortunately, they are changing, which is going to help us going forward. Across the board, the decline was high single-digit to double-digit, month-on-month. As you can imagine, in our business, we don't get a chance to correct inventory once you have made a commitment to the pack. We make a commitment to the pack early on, towards the end of the calendar year or early calendar. This is where we commit, and our plans were based on the trends that we were seeing coming out of calendar year 2022.
So with these trends, obviously our volume planning had assumed a more robust build up, even though in most segments we were predicting some category decline, but not to the tune of what we saw in the entire year. So this shortfall obviously led to a more complicated issue for us in terms of managing inventory and in terms of ending up with more surplus inventory than we had contemplated. And hence, you ended up with aging issues, you ended up with FIFO issues, which led to an increased waste. And even though we tried to clear it, it led to an increased cost by way of trade or higher sundry costs. Let me pause there to see if Greg would like to add anything to this.
Yeah, Parag, that's a, that's an excellent summary. You know, as you look at what happened in calendar 2023, that was not, that was not forecasted and anticipated by, by us or, or the grocery industry. This was a kind of an industry-wide phenomenon in the U.S. when consumers changed behavior, and some of this was due to the pullback in federal stimulus and SNAP benefits, which took out about 10% of grocery sales. Some of this was due to all the inflation that was flowing through consumers and putting pressure on their pocketbooks and changing the way they buy and stock up and behave. And some of this was just a return to normal, post-Covid, when consumers began to eat out more and, and cook less at home. So this gap.
In what was forecasted to what actually occurred is exactly what Parag described. It created the inventory imbalance, and in our business, we carry an inventory imbalance with us for the next 12-24 months. Now, what we've done this year, in that same time frame, in October, November, December each year, we make those decisions with our growers, with our seed varieties. We contract land, we contract acreage, we contract tons. So in 2023, in the fall, in October, November, December, we made a conscious decision to pull back our pack levels and production levels.
So this summer, our production is dramatically reduced by 30%-40% to even 50% in some categories, so that we get back to inventory balance, which will occur this fiscal year, and these inventory losses and pressures will be behind us, as we've taken this corrective action. So thank you, Parag.
No, thank you, Greg. So just building on it. Obviously, we are making significant cuts in our pack for fiscal year 2025. For example, in tomatoes, the reduction is between 35%-40%, to give you just a flavor of how much we are reducing, and hence our commitment in the press release as well, that we will be able to bring down our inventory by 25% or more in volume terms. So we are committed to it. It's now reflected in our cost structure. We understand that it is putting even more pressure on our gross margin due to lower volume being processed through these factories.
But it is also now requiring us to think out of the box, and hence decisions were made around changing the network and led to the two plant closures in veg segment that we made and announced it in Q4. We are looking at more opportunities in this space to see if we can have synergies with other players to improve our margin structure, and that dialogue continues with the rest of the industry players. In addition to it, as I said, because of the excess of the costs that we incurred in 2024 that would negatively impact our margin structure in fiscal 2025.
Plus, we would also have impact from lower volume, which is what we would call under-absorption in financial terms. So that would continue to come into play. Some costs would also be incurred because we still have aging inventory coming from prior years, so that risk is also there, though it is definitely mitigated as we have got better at it, and we would be able to bring the inventory levels down in the second half after the pack reductions have been achieved. So we feel that that would allow us to bring the inventory to a reasonable level. So to summarize, in terms of gross margin improvement versus where we have ended, we would see a modest improvement for DMFI. So we ended at 14.4% for fiscal year 2024.
So we would see some improvement in the results, particularly in the starting second half, but overall for the year it would be modest. When it comes to our base business, we expect that our recovery would be faster in terms of margin improvement, and we should see around 150 to 200 basis points improvement for our base business. So overall, gross margin should go up, but I would say 2025 would be a more reset year with all the strategic changes, all the tough calls that we are making to restore profitability for the group and particularly for DMFI. Let me now give it back to Jenny, unless Amit, Sito, and Greg have anything to add.
I think one more thing to add on this particular slide, Parag, is just that if you look at the right-hand side of this slide, Parag mentioned it at the very, very beginning, but we are seeing these categories stabilize and return to normal levels of growth. As the category leader, we're gonna benefit from that, and we expect to benefit from that in the year ahead. I would also say in addition to help us cut costs and improve margin, we have taken some other drastic steps, such as a large reduction in force that went into effect in April, cutting trade and promotional expense in 2025, looking for more price increases where we can, we have the opportunity to take those price increases in categories.
And we've also made some changes in the way that we forecast and plan supply and demand, and we have introduced a much more sophisticated tool and system to help us really forecast out 24 months in advance with greater clarity and accuracy on demand, so that this situation won't occur again. This is episodic in nature. We're taking corrective actions, and our new systems and process will prevent this from occurring again. I would also suggest that we have brought in some more advanced production and operations leadership, that is very focused on production efficiency, cost containment, and accountability across all of our factories, where most of our employees are. They're out in our plants, factories, and distribution centers, and this is where we need better performance, and we are elevating that performance each month.
Sito, anything else to add?
No, no more. Greg, thank you, Parag, and thank you, Greg, for the good introduction. Jenny, let's proceed with the rest of.
Thanks. Thanks, Parag and Greg, for that detailed explanation. Just, to go back to the inventory, is it correct that the current level is about $1.1 billion? And is there a target by the end of 1Q, fiscal 2025?
For the U.S. business, the inventory is less than PHP 1 billion. I can confirm that. In terms of number of cases, we are at 39 million cases, and we plan to bring it down to less than 30 million cases. So that should definitely help us bring down our inventory to less than PHP 90 million.
That's for Philippines or U.S?
Just U.S. Yes.
Okay.
Yes. And over and above that, for Philippines, our inventory is very much in control at less than $100 million, and we would expect it to be very able to manage that in the same ways.
Okay. Thanks, Parag. There's a suggestion on managing inventory. Since it's running high, why not offer house labels, very competitive prices to cut inventory, at the same time preserve margin of the Del Monte brand?
Greg, do you want to take that, please?
Yeah. No, we're doing everything in our power to, as Parag stated earlier, to increase levels of promotion, the frequency of promotion. We're doing more second and third brand work to move inventory through multiple outlets. So that work's gonna continue, and that's why Parag and I have confidence that this inventory will be restored. This plan has been in place now for the past many months, and we are having success moving through excess inventory and rightsizing inventory. That's why it's come down below that prior threshold, and it's improving each month. We have very specific targets for inventory reduction each month, and as Parag suggested, in H2, you'll really begin to see the benefits of all this work.
Okay. Thanks so much, Greg. Parag, going back to gross margin, so for FY 25, you mentioned it's a slight improvement, maybe flat to slight improvement. There's a follow-up: How about for FY 26?
So thank you, Jenny. As I said, modest improvement for DMFI, and around 150-200 basis point improvement for the base business. That's what we are expecting in 2025. As we normalize inventory, and get to fiscal 2026, we would expect definitely more, more improvement on the U.S. side, and we should be getting close to 18%-19% levels by that time.
Okay. Thanks, Parag.
Yeah.
Back to Greg. On the closure of non-strategic co-packing business, when will this end?
Yeah. I mean, our goal has been, you know, each year to reduce the level of what we call non-strategic sales, which would be anything that's not in one of our brands. That's where we command much less margin than we do in our branded sales, and we've made great strides each year. That's gonna continue this year in F 25. So we're looking at the kind of the last big operation where we're required to produce more non-strategic business to utilize capacity. So, Parag and I are taking action on that facility and believe we'll have that rectified here in F 25. So largely, if we look into F 26, we'll be in a position where the level of non-strategic sales will be very small and non-significant to our overall performance.
Okay. Thank you, Greg. On Joyba, why is the number of stores growing much faster than sales?
Yeah, we just launched Joyba nationally in May, and so for the first time we had enough production capacity to, you know, meet all of our customer demands. So we went national with all U.S. and even into South America customers, and that's a pretty quick rollout. So the number of stores quickly exceeded 30,000 stores. The level of ACV distribution quickly reached 63% in the last two months. So we're ahead of schedule in terms of getting more distribution and more real estate in store to sell our product line of Joyba. And now that we've kicked in all of our promotions during the summer beverage season, Jen, we expect to meet our objectives.
We have built a very large business that is going to approach $170 million in U.S revenue this year as a new product. In the accounts, Jen, where we are national, we and have been national for several months, like Target stores, we're one of the top brands of premium tea and do quite well. So we're by the velocity, particularly the dollar velocity, given its high price point and the acceptance in the U.S market. So we're on track for a very strong first half of Joyba sales and are excited about the future of that business.
Thanks so much for that, Greg. Okay, let's move on to the base business, DMPL ex, DMFI, so outside of U.S., do we expect a much better year for FY 25? And what are the driving forces for a better year?
Do you wanna take that, Parag, first?
Yeah, absolutely, sir. Yeah, I can. Yeah. So, we seem to have been driving the reset plans in the second half of fiscal 2024 for the base business and really setting it up for the 100 years that we would celebrate in DM in the Philippines in the next 18-24 months. So pleased to share with you that we are seeing good momentum and recovery from a number of areas. One is Philippine market is showing good trends, particularly on the retail side. Our fresh business has continued to be very strong. We had a very strong fiscal 2024 for fresh business, and our growth and investments in that business continue.
Number three are waste and profit leaks, which have also impacted us, just as you saw in the U.S. in the last couple of years, whether it's due to the extraordinary supply chain situation that we saw post-COVID or due to higher inventory that we were also carrying. That is now behind us, and we are seeing improvement in our margin and profitability as we see the back of that. A lot of effort being put in terms of bringing back or restoring the productivity of our plantation, which obviously was a major factor in terms of our lower gross margin on the processed fruit business and also on our Beverage business.
On that particular note, I would request Sito to further elaborate on it, particularly the improvements we are driving on the plantation side.
Okay, thank you. Thank you, Parag. So I would say that as far as the commercial demand is concerned for the Philippine market and international, they are solid, you know? And particularly for fresh, where we have greater demand than supply. The key... There are two key things that we're addressing right now, and we're making progress. So the first one is in the Philippine market. General trade channel had been weak in the past fiscal year, and we have been able to find ways to resuscitate this with increased competency and new people managing the business, as well as increasing the coverage of our distributors, no? So that we are able to address the growing demands of the business, particularly the new products that we have in the market, and there will be new products.
There will be more new products coming in the second half of the fiscal year, as well as the first half of next fiscal year. The second challenge that we are addressing and we're making progress is because, as you know, our C-74 plantation operation, C-74, meaning the fruits that go to the cannery for packaged pineapple, you know, have declined in productivity last year, and this is due to two fundamental issues. So number one, the weather that affected us back in 2022, which was the height of La Niña, the highest ever La Niña recorded in the past 50 years, and that impacted our operations, our planting and everything, as well as our productivity, you know, as we went through the following two years.
There was really no choice but to cope with it at that point in time. But unfortunately, it affected our productivity. We're cycling off that now, and we should, we should recover by FY 2026, so 2 years to recover. But, good to note that this year is a much, much of- much improvement versus last fiscal year, no? So as we look at that, we are also looking at restoring the levels of productivity, starting FY 2026 and all through our long range plan all the way to FY 2028. So that's about it, no? I think those are the two challenges that are confronting us, and we're addressing them, and we're making good progress in addition to all of the things that Parag had, had covered. Thank you, Jenny.
Okay. Thanks, Vito. Thanks, Parag. In moving on to asset sale, any additional color on sale of assets and strategic partnerships with equity injections, what is the scale in $ of these asset sales for FY 25, if any, and timeline for these activities?
So, overall, from the capital restructuring initiatives, we are expecting to raise around $0.3 billion, as we have mentioned in our press release. And that would be through a combination of private placement and sale of assets, mainly in the U.S. Those activities are in progress. Obviously, we would focus on brands and plants that would make more sense and would be easier to divest. So, that's how much I can share at this stage, and really can't go into more details or more specifics at this stage. We are working with our advisors on this particular initiative. And we are also in the process of working on raising additional equity in the base business.
That is also an initiative which has been, which is now in progress. So through that, we would be able to raise $0.3 billion in fiscal 2025, which should improve our leverage profile or debt to equity for the group and bring it between five to six.
Thanks, Parag. Are you also looking to issue rights?
No.
No.
Not at this stage.
Okay, thanks. For the group loans, first, good work on market shares and positive corporate governance, but we need more information on management efforts on debt reduction. What are the debt levels at DMPLX, DMFI, and DMFI respectively, and what are the respective strategies to reduce debt at both entities?
Okay, let me share a few things here to answer that so that, we can explain this. Just give me one second, please. This is in the MDA, so, it would be easy to explain. So this is our cash flow for fiscal 2024. And you will see overall, we had a, we had a reasonably good year from a, a free cash flow perspective, especially if you look at, what we were able to accomplish, in terms of our working capital improvements, in, in the... In fiscal, in fiscal, in fiscal 2024. So that was overall positive, and as you can see, we ended up with a, a much improved free cash flow, despite the reduction in EBITDA, that, that we experienced. Sorry, let me take you to the right slide.
This is for the group. So this shows the improvement that we made overall in terms of cash flow from operations, really driven by the changes in working capital. So, it's a huge turnaround as compared to last year, and despite the reduction in cash profits, we saw our cash flow continuing to be reasonably strong, and our debt did not increase in absolute dollars significantly. Our increase in debt was nominal, and that was due to the working capital improvements that we made. Now, going forward, we see a similar trend. As we mentioned, our inventories would come down. Obviously, our interest expense would continue to be high, as we saw in fiscal 2024, which would put pressure in terms of our overall debt servicing and also overall debt levels.
But with the capital restructuring initiatives that we talked about, inventory reduction that we are continuing to do in the U.S., we think we have a very good chance of bringing down our leverage to 5 and between 5-6 times and raising $0.3 billion in our debt.
Thanks, Parag. Okay, what would be the source of funds for the repayment of the PHP 100 million loan to BDO in line with the perpetual issuance in March?
So we are getting continued support from our partner banks in across the board, and we expect to be able to extend the loans that are maturing with BDO in fiscal 2025.
... Thank you. Follow-up is, do we have enough cash flow? Do we need to take additional loans or equity?
We are continuing to work on improving our liquidity and funding the plant in the U.S. That continues to be a work in progress, and we feel good about really having a normal back year for us without any challenges. We are in a fairly reasonable shape when it comes to the U.S, and we are working with our banks on the Philippines side to make sure that we are getting sufficient debt to make sure before we can inject equity, we are able to run the business okay.
Okay, thanks. Do we have visibility on when we expect operational cash flow to be positive?
As I said, our operational cash flow was positive in 2024. And with the inventory reduction plans that we have, we expect it to be in a similar place in fiscal 2025, as well. And it won't be in the same. The working capital reduction won't be of the same levels in 2024, but it would still be positive working capital-wise in 2025.
Okay, thanks. How much of the inventory glut in DMFI impact export sales of Del Monte, Philippines, for FY 2025? Sorry. Yeah. Basically, the impact on the base business with the inventory glut of Del Monte Foods.
Yeah, I mean, it was not much, to be honest. As you saw, with the reduction in productivity that we had, if we can say the timing was optimal, perhaps this was the year. With the significant shipments that we made of pineapple products from Philippines in the second half of 2023, we were obviously not able to ship more in the U.S., but with the productivity declines that we saw, it was not a major issue, and that's reflected in our inventory levels for the base business, which have dramatically come down.
In fact, just to add to that, just to add to that, Parag, we knew of this development months ago. Excuse me. We were able to prepare for it and whatever... And of course, the fruits are on the ground already. So whatever was allocated to DMFI, that was not going to be shipped to them. We were able to reallocate them to other markets, so in international, no, and equally profitable at that, if not better.
Thank you, Sito. Thank you, Parag. Moving on to India. When will India be profitable? Yeah, it's been a few years, so when do we expect it to turn around?
Yeah, I mean, what is encouraging for India business is our continued growth of retail business. As you might remember, the business did get significantly impacted during COVID, because fifty percent of the volume comes from food service. But with the emphasis on retail, that was the only silver lining in our portfolio, where our contribution margin increased by 300-400 basis points last year. So that's a very positive sign. And in terms of net income, yes, it was a very small loss, which we would be able to really turn positive in the next year or so. So don't see any issue with the momentum that is there in the Indian economy, despite the challenges we always had of scale, which we need in India.
More to come, but, but overall, positive developments in India.
Thank you, Parag. On the one-off items, companies spent $10 million for IPO and professional fees. How much professional fees are related to the canceled IPO?
Yeah, it's half an hour. $5 million is what we expensed for the IPO. That includes all costs, including the significant legal costs that you incur in when you run a process like that. So we thought it was best to write it off, considering that we have to stall our plans, IPO plans in the U.S. So, that's what we incurred and expensed in, in fiscal 2024.
Thanks. How out of the $127 million loss, how much can be attributed to the repurchase of DMPI shares from SEA Diner?
I would say that in terms of PNL, or net income, particularly in fiscal 2024, not much impact would be attributed to the SEA Diner.
... Okay, thanks. For SEA Diner's residual shares in the DMPI, they will be converted into the redeemable convertible preferreds. Is this part of the transaction completed?
Yes, to my knowledge. Iggy, do you want to confirm that?
Yes, that's right. We entered into a new RCPS agreement last February with Seadiner.
Okay. And for DMPI, what's the current level of related party transactions and any guidance for FY 25?
Yes. So the total RPT that DMPI has at the end of April is around $171 million. That excludes the deposits that were also paid for inventory purchase or for potential inventory purchase. So without that, you are looking at $171 million plus $85 million not being included there. In addition to that, obviously, we have the guarantee of $70 million of the perpetual bonds that have been raised by Jubilant, which is a subsidiary of DMPI.
Okay, thanks. We have a last question. Just now, you mentioned GPM target, gross profit margin target of 18% for FY 2026. Is that for DMFI, the base business or for the group?
DMFI. That was the focus.
DMFI. Okay, thanks, Parag. We don't have any more questions. So thank yous to our panelists for answering our questions quite extensively.
Thank you, guys. Appreciate it.
Great. Thank you
Thanks, everyone.
For joining the call [crosstalk].