Good morning to our participants in Asia, and good evening to those joining us in the U.S. Thank you for joining Del Monte Pacific's results briefing for FY 2024 first quarter, ending July. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer of Del Monte Pacific, DMPL, and President of Del Monte Philippines. Parag Sachdeva, Group CFO of DMPL. Greg Longstreet, President and CEO of Del Monte Foods. And I am Iggy Sison, Chief Corporate Officer of DMPL. Parag Sachdeva will now present our results.
Thank you, Iggy. Good morning to everybody in Asia, and good evening in the U.S. Overall, for the quarter, the theme is very strong revenue growth across the group, but profitability continues to be challenged due to higher costs and interest expense. On slide five, continuing with the highlights, Del Monte Pacific Group sales grew by 13.2% to $517 million on higher U.S. and fresh pineapple sales, which were up by 18% and 23%, respectively. The group continued to maintain leading market share positions across core products, both in Asia and in the U.S. Demand also was on the increase for fresh pineapple in our key China market, where we are the market leaders. Strong consumer responses in the U.S. for expanded portfolio of new branded products.
We achieved EBITDA of $51.1 million, which was down by 27% on higher costs. Lower operating income and increased interest expense, as I outlined, led to a net loss of $13.1 million. However, this is lower than the net loss of $30.5 million in the prior quarter, which included one-off costs related to refinancing of high-yield bonds. Next slide. When it comes to the outlook, as we all know, the global environment does remain volatile, with consumers becoming more cautious with their spending and persisting cost pressures. We, as a group, continue to remain vigilant in managing our operating expenses and are taking several measures, such as packaging material optimization, investments that we are focusing on to improve efficiency, productivity, and also minimizing waste. On the commercial side, in the U.S., we are more focused...
We continue to be more focused on innovation while also increasing penetration in a number of high-growth. Our momentum on international sales growth is expected to be double-digit from Mexico and South America. In our base business, we continue to strategically invest and expand in our MD2 fresh pineapple in the coming years. A big focus for the group this year and also in the coming years would be working capital improvement, especially inventory reduction and optimization, to generate more cash flow and strengthen the balance sheet with lower debt. To improve margins, we have taken a 4% price increase, which has come into effect from end of July and should lead to gross margin recovery from second quarter onwards in the U.S.
We are also expecting some respite from commodity headwinds and are seeing some deflationary trends, such as lower metal packaging costs, favorable rates for ocean and domestic transportation, and more normal increase in raw produced costs as compared to what we have seen in fiscal 2023. The impact of that, from a P&L perspective, as you would appreciate, would generally follow six months later, just because of the nature of our business and our seasonal packing process, particularly in the U.S., which we do in three to four months. Barring unforeseen circumstances, the group is expected to generate higher net profit in fiscal 2024, and we also do not expect to incur any one-off costs in fiscal 2024, just as we had demonstrated in fiscal 2021 and fiscal 2022. On next slide.
Sharing with you more color on our Q1 results. Sales, as I mentioned, driven by U.S., were up 13.2, with U.S. sales growing at 18.3%. Philippines also grew across all the core categories by 5.4% in local currency and 0.7% in dollar terms. International business out of DMPI declined by 6.9%, and that was due to lower shipments to the US, driven by supply of pine in Q1 and high inventory that we have seen because of unprecedented supply chain disruptions in the last year or two. JV in India grew by 1.5% in local currency, driven by B2C sales, which grew at 7% in local currency.
When it comes to profitability, details that I will share with you, all of them are on a recurring basis. First of all, there was no one-off item this quarter, but last year we had $71.9 million on a gross basis, $50.2 million on a net basis due to early loan redemption. EBITDA of $51.1 million was down 27%, mainly due to higher costs. Our operating profit, consequently, was also down 47.6% at $26.4 million, and net loss of $13.1 million from a net profit of $19.6 million, due to lower operating results and increased interest expense. More details on a reported basis on slide eight on our Q1 results.
Sales, as I mentioned, growth was 13.2, coming from U.S. and fresh pine sales to North Asia. When it comes to the construct, pricing contributed net of unfavorable Forex to around 5% on a group-wide basis. So of the 13%, 5% on a group-wide basis was from pricing and netting off the unfavorable Forex. Gross profit at $108.3 million was lower by 17.8%, driven by inflationary headwinds and also lower productivity in Mindanao operations. Gross margin at 21%, lower by 790 bps due to inflationary headwinds and increased costs as we continue to sell high-cost inventory from fiscal year 2023 back.
That's why you would appreciate that in the first half last year, our margins were high as we were really going with the F-2023 pack production at that time, which was then starting to sell from second half of fiscal 2023 onwards. Inflationary headwinds, to give you more details, as I've shared in the previous updates, included significant increase in metal packaging costs. It also was contributed by increase in raw produced costs, driven by fertilizers and weather-related issues, both in the U.S. and Philippines. On the transportation side, we saw a significant impact on ocean freight, even though the total imports to the U.S. is more like 10%-15%, but the overall impact was significant. We also saw increased warehousing costs both in the U.S. and in Asia.
Gross margin for DMFI was at 18.2% and lower by 780 basis points versus a year ago. We did take multiple pricing actions in 2023 to partly offset the cost headwinds. Impact of inflation and other cost headwinds is approximately $44 million for the quarter from a P&L perspective. Just to build on it, metal packaging itself would have contributed around $15 million-$18 million of the $44 million that I just mentioned. When it comes to the base business, our margin decreased by 410 basis points, again, driven by commodity headwinds and lower productivity in Mindanao operations, partly offset by pricing. Impact of commodity headwinds, inflation, and other cost increases is approximately $9 million for the base business.
As I mentioned earlier, favorable impact on revenue from pricing, net of FX, is approximately 5%, which is offsetting the cost headwinds and other related issues that I just explained. EBITDA, due to lower gross margin, was at $52 million. Net loss of $13.1 million due to lower operating results was at $13.1 million, plus increased interest expense on an ongoing basis, as the rates and the benchmarks have significantly increased versus where we were last year. When we look at net debt, we were at $2.3 billion, higher by $570 million due to the additional loans we have taken to refinance the redemption of $100 million, DMPLs A-2 preference shares, where we are still saving on interest cost.
Approximately the arbitrage is around 3.5% if we have to compare it with not redeeming the pref shares. So that's a net saving even in a very high interest rate environment. Working capital loans also contributed to the overall increase, particularly in the U.S., where we are carrying higher inventory for seasonal builds due to increased costs, as well as lower sales than planned that we saw last year. Lastly, we also increased our loan for the acquisition of Kitchen Basics that was achieved in August last year. Gearing ratio accordingly at 6x due to increased loans and net debt to adjusted EBITDA at 7.2x, and is 2.2x higher than last year.
On the next slide, please. We'll share with you more about our increased revenue performance across the group. Pleased to share that the U.S. business grew by 18.3% and roughly contributes or continues to contribute 70% of the group sales. We achieved total sales of $359 million, mainly driven by higher branded retail sales, which grew by 18.8%. Branded retail sales contributed 78% to total DMFI sales. Revenue growth again was mainly driven by pricing taken across categories in line with inflation, and also volume growth across key categories of canned vegetables, fruits, tomatoes, broth and stock, as well as our newly launched JOYBA Bubble Tea. Kitchen Basics contributed around $5.1 million to the revenue, representing around 1.4% of net sales.
We do continue to hold leading market share positions across the core business on the back of strong commercial execution and also new product expansion. New products, as we always indicate to you, in the past three years, have contributed to around 8.7% to total DMFI's sales in the first quarter. Asia Pac sales also grew by 2.5%, to $149.3 million. Exports of S&W branded fresh pineapple increased by 22.9% due to higher than planned supply, plus increased market share in China, where we continue to have dominant share, and also higher sales of Deluxe fresh pineapple, which is showing very encouraging trends. Exports of processed pineapple products was lower than last year due to higher inventory in the U.S.
Philippine market, as I mentioned, also did show a robust growth of 5.4%, and we ended the quarter at $75.9 million. In terms of, overall core business, it continues to be very healthy, and sale of packaged food, beverage, and culinary was higher, behind compelling communication campaigns and also value for money offers amidst a very high inflationary environment. Food service and convenience stores, continue to grow, and, the growth that we saw in the first quarter was 25% and 16%, respectively. Innovation continues to be a big part of the story and contributed 5.4% to Philippine market sales.
When it comes to Europe, again, on a small base, just like fiscal 2023, it grew by 11.4% to $8.5 million, driven by higher sales of packaged products. On next slide, just as we did at the AGM, we would like to provide more context on our increased or higher loans, which went up by $569 million versus last year. And as I had explained, on slide eight, the main cause of increase was preference share redemption, acquisition of Kitchen Basics, and mainly increase in inventory in the US. That all is very clearly laid out and led to the increase. Now, what are we actually doing about it?
We have a very clear goal in the U.S. and in Philippines to manage our inventory much better going forward, and we are taking the right actions to achieve the same, including reducing the pack in the U.S. as well as processed pineapple in the Philippines by almost 10%.... We expect to also improve our operating performance in 2024 behind strong volume growth and improve our margins from the second half of fiscal 2023, from the second half of fiscal 2024. Secondly, also on the capital structure side, we are considering the issuance of appropriate equity instruments. To just give an update, we continue to progress on our DMFI IPO, as we had recently announced, and we had completed the filing of F-1 with SEC.
So that program continues to be actively pursued. We expect our debt levels in 2024 to go down to $2.1 billion and bring down our net debt equity ratio to below three times in the short to mid-term. With that, let me hand over to Greg to provide a more deeper insight into the U.S. business.
Thank you, Parag. In the first quarter in the U.S., the Del Monte Foods business, as Parag suggested, benefited from very strong demand and execution of our growth strategies, achieving $356 million in revenue, 69% of group sales. But importantly, it's not just about pricing, there's solid volume growth over 5% for the entire U.S. business. Importantly, the retail branded business, which has really been our focus for channel development and channel expansion, was up 7.8% in volume, driven by our core businesses. The revenue also had some very strong performance, up 18%, and up 19%, respectively, for branded retail. So good, good quarter for growth. In the U.S. right now, growth stories like this aren't very common.
Most of our peers are demonstrating mid to high single-digit volume declines. So, you know, our strategy to expand our brand into more stores and more aisles, drive innovation, drive channel development, continues to work, and we are optimistic about the outlook for growth this year. Channel development in food service was also a success story again this quarter, up 8.5%, driven by new customers and some new outlets that I'll describe later. Kitchen Basics continues to be a solid contributor, both in sales and margin to the company.
$5.4 million sales were demonstrated in the quarter, and really like what we're doing in terms of developing new distribution and new outlets for that business, and it's giving us a very strong national presence and a high growth, high margin category of broth and stock. Innovation continues to be a very prominent fuel of, for growth for the company. Innovation is now approaching 9% of sales for the company. Our innovation is margin accretive. One of our success stories that we have talked about in past quarters is the rollout and development of new JOYBA Bubble Tea. We currently have capacity to produce approximately million cases of this product. That million cases has been sold out over the past year.
We've been on allocation with not enough supply to meet demand, so we are in the process of adding an additional 4 million cases of production. That production will be available in the second half of this year and will help us elevate sales this year to, to more than double its current run rate, with an outlook of 5 million cases in sales in the fiscal year ahead. Very encouraged by the success of this item. It's done well in, in multiple channels with multiple customers, including Costco and Sam's Club and Target, and, and a lot of new excitement around the the brand itself, with some line extensions and, and really some new categories that we're looking to enter with the JOYBA brand, in the coming year.
New products such as our Gut Love and Boost Me Fruit Cup Snacks were also recognized this past quarter in the 2023 Mindful Awards for our ability to upcycle many of the ingredients in those products. EBITDA was at $25.4. As Parag mentioned, you know, inflation, the final wave of inflation, has hit our cost of goods. We'll be cycling through that high cost of goods here in the first half. We have taken pricing again, that will help us restore margins in the second quarter of this year and put us on proper trajectory to maintain those mid kind of 20 margins that we've been achieving back in line with our objectives. Encouraged, as Parag suggested, that inflation appears to be behind us.
The rapid rise in our costs that we've had to incur in the last two years, including warehousing in a lot of areas that we think are gonna bode well for us. The next slide. This is our market share. This is the key indicator for us. Our fundamentals are very sound. We're growing the right products. We're growing branded business across existing channels and new channels. We continue to gain share. In the U.S., we compete in four multibillion-dollar categories. We are the dominant market share leader in vegetables, growing share again this quarter. We're the dominant brand across packaged fruits with a record quarter of growth, up 3.8 points in our canned business, 5.3 in our fruit cup snack business, demonstrating more growth in the very large tomato category.
In a category of broth and stock that's growing at nearly 15%, we're doing a good job of holding share and still delivering solid growth in that business. The category dynamics are changing in the U.S., purchase patterns are changing. There is a need for value. We're really focused on delivering value and affordable nutrition. We're having success with the new products that cater to the value segment, but we're also having success, you know, providing easier meal solutions as more and more consumers look to prepare meals at home. Our brands and our products and our categories are ideally suited to meet that demand. You know, for long-term growth, our strategy will be to continue to invest in bringing differentiated and innovative products to market and expanding our distribution channels and building our brands.
The next slide highlights some of our marketing investments. We continue to support our JOYBA expansion with some really thoughtful, on-target campaigns through various social and digital media outlets. We've done a nice job of relaunching our adult fruit cups, our Fruit Refreshers line. We've seen increased demand over-plan in that business and are working to keep up with that demand. So really encouraged by our ability to grow our healthy snacking portfolio. The next slide, just a few examples of some of the things we've done for back to school. You know, we're just kind of in the middle of that back-to-school season right now, and have done a lot of creative merchandising display activity and partnerships with brands like Chobani.
So, encouraged by the increased demand and the market share growth in that fruit cup space, and we continue to ramp up both our domestic production and our external sourcing and global sourcing of those items. Back to school was also supported through Amazon, with some unique promotions and events to drive both trial and awareness of our fruit cup snacks and adult products. So we're really encouraged by our ability to reach consumers and drive more growth and household penetration for these products. The next slide is just another summary of PR. You know, we continue to promote the advantages of our high-quality products, the nutritional benefits of our products.
We, we are investing in our ESG efforts, you know, continue to be recognized for our ability to promote sustainable acts, like avoiding food waste and upcycling. Consistently are being recognized for new product innovation, and really doing a nice job of using influencers in the U.S. marketplace to help spread the news about our interesting and innovative new product portfolio. The next slide. My last slide is just to comment on our success in food service. We think this business has potential to be a quite a large business for us. Today, food service, although it's growing at a rapid rate, is only 6% of sales. We believe it can be twice that over the next couple of years.
We really like the position we've taken, marketing our wonderful pineapple products that are produced in the Philippines. We think we have the best products, the best pineapple juice products, the best pouched and canned pineapple in the U.S. marketplace, and our customers and distributors are taking notice. We've had a lot of success growing this business the past few years, and in catching up with our inventory situations this year, we fully expect to return to some pretty sizable growth rates again in both FY 2025 and 2026 as we look forward and develop new contracts and new business. So with this, I will transition to Mr. Cito Alejandro.
Thank you very much, Greg, and good morning to all of you. I will now talk about Del Monte Pacific, which comprises of the Philippine market and our international operations. Despite our strong exports of fresh pineapple and the very steady performance of the Philippine market, you know, our sales for the period was down 4%, largely due to the lower exports of processed products to the U.S. Philippine sales was up 5% in peso terms, although flat in dollar terms due to peso depreciation. But our sales of packaged food, beverage, and culinary were all up, and these were very much supported by compelling communication campaigns, as well as value for money offers in the face of an inflationary environment.
Food service and convenience store continued their strong performance, and I'll talk more about that in the coming slides. International sales, as I mentioned, is down 7% due to the decline in exports of packaged pineapple and fresh pineapple up 23%, driven by North Asia and increasing sales of our high-margin S&W Deluxe, primarily in the China market. EBITDA and net profit, however, was lower than a year ago, and mainly driven by higher costs and higher interest expense. Our market shares remain solid. Not only do we have very strong market leadership positions in our core categories, but we've even managed to grow market share over the period. Packaged pineapple, canned mixed fruit, and ready, ready-to-drink juices market shares are all up.
In the culinary segment, in tomato sauce and our pasta sauce, we were either steady to slightly growing. We had a hit in the drinkable yogurt, three-year-old drinkable yogurt, category, and this was primarily due to multiple price increases in Mr. Milk and some competitive activities, but volume and share recovery plans are underway. Next chart. Just wanted to take you through some of our marketing initiatives, noh? In culinary and food, our strategy here is to increase usage of our products in various meals and different occasions. In the pasta sauce segment, we aim to gain more market share from competition, and our strategy is to own the birthday occasion, which is the number one occasion for pasta sauces in the Philippines. Next chart.
As you know, beverage is about occasions and frequency of use, and we are capitalizing on these two, two key pillars of growth in this category. On the left side, you will see how we have positioned our fiber-enriched 100% pineapple juice as a nightly fiber habit drink, noh? And this is gaining traction, and the segment is actually growing. Fit 'n Right continues to roll, noh? And, we've done a lot of digital advertising among the Millennials, noh, and the Gen Z, noh, to increase volume of this product, and it has actually been growing of late.
Next chart. More on innovation. I told you about the price price issues that we encountered in Mr. Milk, and we just rolled back the price to PHP 52 per six-pack, and this is a demonstrated price that allowed us to grow this, this, this segment. We also introduced a new flavor, and we're tying this up with products that are used for morning occasion and snacking. In the potato crisp category, we've introduced lower size products in order to increase distribution in a low-end segment of the market and likewise, to increase trial of the products. Next chart. Just to summarize our innovation portfolio, we will be adding more to this towards the second half of this fiscal year, and also through FY 2025. But, excuse me, right now, they account for 5% of total Philippine sales.
Our goal is for innovation to account for at least 15% of our total portfolio or revenue over the next three to five years. Next chart. Talking about food service and convenience, on the left side of the screen is our food service, excuse me, update. Sales up 25% versus prior year, and this is already 108% of our pre-pandemic level. We've continued to open new accounts, and in our core accounts, more outlets are now opening, and we are really very close to the pre-pandemic levels today. Right hand of the chart is our convenience store update. Revenue up 16% versus prior year, although this is still 77% of pre-pandemic, so lots more growth ahead of us.
Encouraging to note that, the convenience store category, or channel, has actually increased outlets today, actually more than 20% of the pre-pandemic level, which I think is a real vote of confidence on their optimism on consumer consumption. Next chart. Pleased to report to you, our significant developments in China with our distributor, Goodfarmer, noh? We held our first ever S&W Pineapple Festival in China, and this is to communicate S&W's strong commitment to the Chinese market and the Chinese consumers, no? We showcased our innovative products, such as S&W Deluxe Pineapple, and these are one of the things that we've been doing in order to also increase our strategic partnership with Goodfarmer, noh?
So this festival ran for one month, and it covered more than 300 retail stores and nine wholesale markets across China. Next chart. So now, we have now introduced, due to popular request and popular demand, so we have now introduced our S&W Deluxe Fresh Pineapple in the Philippine market. Very favorable response as what we have seen in our international market, and we will continue to leverage and expand distribution in the course of the year. Just to summarize where we are with our S&W fresh market shares. Very strong market shares in North Asia, and in fact, we are neck and neck as far as leadership is concerned versus our major competitor. In China, we have maintained our market leadership position. Very steady in Japan. We took a dip in Korea.
Last year we gained market leadership there, but we took a dip because of supply issues, noh? So we're correcting that today, and we hope to get back on track to our leadership position there very soon. Pleased to report, too, that our S&W Pineapple Stick, you know, this is the frozen, our frozen stick, noh, that we produce with the joint venture with Nice Fruit of Spain. We are now in 7-Eleven in Taiwan, and the product is now available in 3,400 stores. So this is just the start, and if we're successful in Taiwan, then we expect to roll out to more 7-Eleven stores, not only in Taiwan, but in different parts of Southeast Asia.
So this just summarizes our international innovation. So we've got the Nice! snack frozen snacks or sticks, which I just told you about, we introduced in Taiwan. We also have our natural concentrate juice, which is growing and is now being packed into consumer package formats, noh? Our IQF pineapple chunks and of course, our deluxe pineapple line, noh. And all told, this now accounts for 90% of total international sales. Good to note our progress in India. Our retail business grew by 7% ahead of industry trends, primarily driven by e-commerce. Very strong growth at 16%. Our food service business also grew by 6%.
Despite high inflation, there was strong improvement in our contribution margin by 214 basis points, driven primarily by supply chain efficiencies. We also built a new factory in the north. As you know, our only factory there is in the south, in Bangalore. We now have one in the north, and we believe that this is going to be very critical in developing our very underdeveloped North India market. We will continue to invest in brand building and continuing to improve our general trade distribution, these two being critical pillars of growth this year and onto the future. That's all I have. And with that, I'll now turn you over to Iggy.
Thank you, Cito. I'm pleased to share some key highlights on sustainability, in addition to what Greg had alluded to in the U.S. with upcycling and other initiatives. We use drones in our pineapple plantation to reduce water usage by as much as 90%. We continue to generate renewable energy to our waste-to-energy facility, and we are now installing solar power in two locations: in the Bugo manufacturing facility, as well as the plantation. We are diverting post-consumer plastic packaging waste as part of our extended producer responsibility, or EPR program, of plastic recycling. We published our FY 2023 sustainability report, which includes early adoption of GRI 13 sector standards on agriculture. Our contribution to the UN SDGs are highlighted, as well as the 27 ESG metrics of the SGX. Our sustainability report is downloadable in the delmontepacific.com.
So recapping our outlook, we'll continue to manage our operating expenses, including packaging materials, optimization, power and fuel initiatives, improving efficiency, productivity, and minimizing wastage, as well as product bundling initiatives. We will continue to focus on innovation while increasing penetration in a number of high-growth channels in the U.S. and pursue new market development initiatives. We are increasing production of our superior MD2 fresh pineapple, as Cito described earlier, in our key North Asia markets, including China. And as Parag highlighted earlier, we'll continue to work on working capital improvements, especially inventory reduction, to generate more free cash flow and strengthen the balance sheet to lower debt. Del Monte Pacific Group expects to generate higher net profit this fiscal year, 2024, especially in the second half of the year. So with that, we would now like to open the floor to questions.
Our colleague, Jennifer Luy, who's responsible for IR, will moderate the Q&A.
Thank you, Iggy. Our first question is on costs. What costs were affected by inflation? Are these fertilizers, tin cans, cardboard boxes, power, transport costs? Do we see this tapering in the second quarter? And related to this, another shareholder asks: What is the expected timeframe for the high cost FY 2023 pack to be cleared out from the inventory?
You want me to... Let me take that, Jen. I think I did-
Sure.
Explain that in my commentary. The costs that obviously have gone up are in several areas. Some of the major items which have impacted us, both in the U.S. and Philippines, are metal packaging costs. We saw the metal packaging costs increase in fiscal 2023 by as high as 45%-50% in the U.S., and significant increase in Philippines, too. And as you can imagine, metal packaging is a major component of our cost of production. We saw increase in raw produce costs, driven by fertilizers and weather-related issues, both in the U.S. and Philippines. And again, to explain, as you would appreciate, being an agri business, generally, we cycle our costs over three years when it comes to pineapple.
When it comes to the U.S., we generally carry six to seven months of inventory across the board. So, when it comes to cycling these costs to the P&L, that's why we are seeing more impact starting from H2 of fiscal 2023. That will continue for a year or so, when it comes to our business from a P&L perspective as we cycle the costs, or even beyond. So those are some of the examples, plus, as I said, transportation, both ocean freight and also domestic transportation impacted us in the last six to nine months. And it's again about releasing these costs to the P&L, as some of them are capitalized to the balance sheet based on the inventory levels.
Okay. Thank you, Parag. Related to inventory, please comment on the high inventory levels at the end of Q1 compared to the end of Q4, despite the reported efforts to sell down inventory?
I think that's more a function of our seasonal nature of the business. In fact, happy to share with you that versus our plan, which we are tracking on a monthly basis, inventories were lower in the U.S., as compared to our plan. We do continue to very diligently make improvements. Our goal is to lower our inventory by $80 million-$100 million by the end of the year, group-wide. So we are on course to do that. Of course, it is subject to us delivering our planned volume.
Okay. Thank you, Parag. Any price increases expected in the Philippines and in the international markets?
Yes, price increases are expected in Philippines. We are executing the same, and they are expected to be in place from October onwards. But we are very cautious at the same time to make sure that we stay in line with the competition, and also make sure that we continue to be relevant and affordable for our consumers. On the international business also, in fresh, wherever we see the right opportunity, we are expecting to take some pricing action on that front as well.
On international processed exports, it's more difficult because we are obviously competing with other countries such as Thailand and Indonesia, so we have to step with caution when it comes to pricing on exports of international processed business.
Okay, thank you, Parag. Kindly comment on the reasons for the lower export sales of processed products. Are they supply side or demand side issues?
Not on the demand side, per se. Demand continues to be steady. As I said, it was more a function of the supply chain disruption that we have seen in the last couple of years, which did lead to a lot of product being shipped to the U.S. in the second half of fiscal 2023, and that has led us to making some corrections there and accordingly reducing our overall shipments to the U.S.
Okay, thank you. On CapEx, why is it still at $47 million level as last year? Is there a continuing replacement of PPE?
No, we also continue to invest in driving growth. And as I said, we also are looking at every opportunity to lower our conversion cost through automation. Plus, as consumers are looking for value proposition, we have made investments in increasing our capability on multipacks. That's where we have invested.
Thank you, Parag. Okay, on the outlook, we said that barring unforeseen circumstances, the group expects to generate high net profit, higher net profit in FY 2024, especially in the second half of the fiscal year. How about second quarter?
On the second quarter, would like to highlight that we expect margin improvement. We have taken pricing action in the U.S., and we are taking more pricing action in Philippines as well. Plus, our sales in the second quarter is expected to be also strong, particularly on the branded side in the U.S. We would see some impact in our base business due to weather-related issues, and that will limit our supply on fresh pineapple, which obviously is profitable for us, so that will be an unfavorable impact. Plus, we would see some productivity impact again on our gross margin of the base business.
So overall, do expect our margin to improve from 21% that we had in Q1, which we know is not the place where we want to be in. So our margin improvement is expected in second quarter, and we would have definitely better per profit performance despite some of the challenges we are facing on the cost side and productivity side in the base business.
... Thank you, Parag. For Greg, on weather, what's the effect of the recent typhoons and weather disturbances in the States?
You know, fortunately, they have not had any impact on our core growing regions. As we look at the Midwest, the Northwest California and Central Mexico, we have not been encountered by any major weather events this year, and our yield and productivity has by and large been on track, and in some cases, we're seeing better than expected yield in certain crops this year.
Thank you, Greg. Moving on to loans. Since our loans are composed of fixed and variable rates, may I know for every 100 basis points of increase or decrease, what's the estimated corresponding value in terms of dollars? It's for Parag.
My apologies. Can you repeat that question, Jen?
Since our loans are composed of fixed and variable rates, may I know what's for every 100 bps of increase or decrease, what's the estimated corresponding value in dollars?
For every 100 bps , the increase in interest cost to us is roughly around $10 million-$11 million. To give you a more clear answer, if our borrowings are $2.3 billion, what we have fixed or hedged by way of various initiatives is around $1.1 billion. That's what we are having a fixed rate at, and the balance is more on a floating basis, so increase in cost is roughly around $10 million-$11 million for every increase by 100 bps .
Okay. Thank you, Parag. DMPL's current debt levels are at $2.2 billion, and noted the target for FY 2024 is to bring it down to $2.1 billion, which is a 5% reduction. Would be glad if management could shed some light of this fairly modest target, despite all the attention and effort made towards its debt reduction program.
This is more on an operating improvement basis. If we are able to successfully complete certain capital structure programs, we would obviously see further improvement in debt.
The planned equity raises is at which level? In the U.S., Philippines, or at group DMPL level?
As we have mentioned in the last couple of calls, including the AGM, our current initiative is being actively pursued in the U.S.
Thank you. How long is it expected to take before the Del Monte Pacific debt reaches its target 2x leverage?
In the short to mid-term, our goal is less than three times. Again, it's a little bit speculative to comment when it would be, but we would like to achieve and bring it down below two times in three years' time.
Thank you, Parag. With interest rates not likely to go down the next few months or maybe years, improving DMPL's leverage should be of utmost priority. Can we know of the upcoming plans like IPO, additional share offering, or any type of funding?
I think we have covered that.
Yeah, we covered this. Yeah.
Thank you.
Okay. For Greg, Kitchen Basics contributed $5.4 million of sales. What's the profit or loss contribution of Kitchen Basics? Considering the company spent $100 million to acquire, can management give some kind of assurance to investors to stop acquiring companies that are not immediately profitable? DMPL should focus more on reducing debts to improve overall profitability. Since the purchase of the DMFI in 2014, DMPL's leverage has been greatly compromised, so I do hope acquisitions like Kitchen Basics would be the last of its kind.
Do you want me to take that?
I agree. And I, Parag, go ahead. I'll follow up. Go ahead.
Okay. Great question. Thank you. Thank you very much for this one. I would like to report that last year we did indicate that in fiscal 2023, we did $35 million, because you just can't look at the at one quarter, especially Q1, which is very low seasonal from a business perspective for broth and stock category. So we did 35, and happy to report that our gross margin was around 31% on the business, which is much more than our weighted average for the U.S. operations. And we made an operating income, which was in line with our goals of approximately $6+ million .
So we are on track, but we do appreciate the caution on reducing debt before we make further acquisitions.
Okay. Greg, are you adding anything or you're good?
No, I think that was a great summary by Parag.
Okay.
We very much believe in this business. The Kitchen Basics business is a highly profitable business, as Parag suggested, 30+ gross margin, double-digit growth category. We see a clear path to adding revenue in this business. You know, our projections are to create a $70 million business here with Kitchen Basics.
Okay
Really establishing a dominant national presence in broth and stock, which is a category that, again, is very vibrant and profitable.
Okay, thank you so much, Greg. Last year's 1Q net profit would have been $19.6 million if there was no one-off. This quarter, we had a loss of $13 million or a difference of $32.7 million. And if we take into consideration that this current quarter already included a savings from the refinancing of the U.S. loans last year, so if you add the savings plus the one-off, that difference could have been $34 million-$37 million range. Can the management focus on maintaining profitability instead of focusing on the revenue or market share? As investors, profitability would be more important than market share or revenue.
We agree. We agree, but we also would like to highlight that some of the cost headwinds are unprecedented, and as deflation sets in and we sell the high cost pack that we obviously are being, you know, bound on, we would see improvement in margin through that as well.
Mm-hmm.
So we absolutely agree, and we are focused on growing our profits, but growth of branded sales is at the heart of it, and we are happy to report the continued growth.
Okay. Thank you, Parag. In terms of our outlook, in the last quarter, we mentioned that there's gonna be a better outlook for Q1, but here comes the result. It didn't materialize. Unless there will be sufficient price adjustment, the 4% price increase on July 31 might be a little too late. Are there any more increases? As for 2023 versus 2024, gross margin dropped by 7.9%. So clearly, the 4% price increase is not enough.
Parag, I'm happy to begin that response. You know, I think as you look at this business, as Parag and Cito and I have each described, restoring gross margin and improving profitability isn't all just about list price increases. There's a lot of work going on across the company to drive down conversion cost, driving more supply chain efficiency, productivity, more automation. That, combined with outside of list pricing, we each have businesses that have annual contracts outside of list pricing that we constantly monitor and raise to pass. This will by no means be the only pricing action we take to drive margin restoration this year, and are confident the combination of that list price, which was mentioned with our various other activities, will restore profit in Q2, Q3, and Q4 this year. So go ahead, Parag or Cito.
Yeah. No, I think, Greg, you covered it. We are taking so many measures, plus improving on our waste and lowering waste, et cetera, packaging optimization, moving to, lower conversion costs through measures such as use of solar energy or more sustainable form of energy. All, all these are being pursued, but, yeah, I mean, it, it does, take time in, in executing some of these, some of these plans. Plus, due to higher inventory, adjusting and reducing waste also gets a little bit more complicated.
Okay, our next question is: What is the expected inventory levels in dollar terms that we should see at the end of FY 2024 and going forward?
As I said, we expect a reduction of $80 million-$100 million group wide, as long as we deliver on our sales volume.
Okay.
That's the reduction we are expecting.
Thank you, Parag.
So that's-
Yes.
Thank you.
This one for Greg. Looking deeper into segment reporting, press release, and SGX, it was shown that the U.S. 1Q sales and packaged food was the number one, but the biggest operating loss. Well, please explain this. Please square the circle. Yeah, please explain this, why was it growing and number one?
Yeah. Thanks again, Parag, and I'll add some color because I know you play a big part of the SGX filings.
Yeah. So I mean, a couple of reasons when you look at our segment performance. When it comes to fruits, it does comprise and include a number of categories which have been impacted by significantly higher costs. Just as an example, pineapple or mandarins that we get from China, or our plastic fruit cup business overall. So while these are categories where we would like to invest due to exceptional cost increases driven by ocean freight driven by a number of other factors plus overall competitive nature of plastic fruit cups, our profitability has been challenged recently. We are investing in automation. We are-...
Continuing to bring more of our production in our manufacturing sites to address the issue, and also improve the efficiency in our plants to lower the cost and improve profitability. So these are some of the factors and some of the categories that stand out within fruits that have led to a challenging margin position when it comes to the U.S. in fruits.
I would only add, you know, to summarize that, it's really a mixed issue within the quarter. We have a variety of profit levels of performance across the portfolio. The domestic fruit that we grow and produce and process and sell across our branded business is quite profitable. So it really is a point in time that we are addressing as we look at overall mix and the development of our total fruit business. So, looking forward to seeing that improve in future quarters.
Okay, thank you, Parag and Greg. For Parag, is the cost recognition FIFO, LIFO, or blended weighted average?
It's FIFO.
Okay, thank you. For Iggy, sustainability question: In FY 2023, 19% of Bugo manufacturing facilities' electricity was generated by its renewable waste-to-energy facility. Installation of solar power in two locations are underway, expected to generate energy in 2024. Solar energy installation costs have dropped significantly. It's now at PHP 30,000-PHP 35,000 per kWh. Hope the management will be able to take advantage of the price drop globally of solar panels.
Yes, certainly we're taking advantage of the lower cost of solar panels the past few years, mainly due to China's production. These two facilities will actually be leased from two vendors, but we have an option to buy the solar energy after about five years. Certainly it will generate a significant savings. In fact, we're also looking at a third location as well, a third facility.
Thanks, Iggy. Follow-up to that, how much is the per kilowatt-hour for the PPA?
Solar power?
Yeah. Well, for the grid, it's over PHP 10, but solar is less than-
Less than five.
PHP 4-PHP 5.
Less than PHP 5.
Less than PHP 5.
Less than PHP 5, yeah.
You can see the difference is 50%.
About 50%.
What we pay the grid.
Yeah. Thanks, thanks, Iggy. For Parag-
Just to add to that-
Sure.
Just to add to that.
Go, go ahead.
On the solar power, right? Not only are we installing solar power in our Bugo facility, we are also installing solar power, ground solar power in our plantation. And this is going to be significant because it will be on the ground, and we have the land for it, and it will support our facilities there, primarily the packing houses, the juicing plant, and also the Nice, Nice Fruit, Nice Fruit plant. The requirement that we have there is about close to 4 MW, noh? So, we think that, we will be able to build a facility that can support at least 50% of that total requirement for the plantation.
Our savings in the plantation and Bugo facility combined will be close to $1 million a year.
Yeah.
It's close to 50%-
At least-
Of the year combined.
At least. At least.
Yeah. Plus, there's a third location where we will install solar as well, closer to Manila.
Okay.
Okay. Thanks, Cito and Iggy. For Greg, for Mexico. Mexico is benefiting substantially from the shift from China. How is DMFI positioned?
Yeah, we've been working on this for some time, Parag and I, on ramping up production in Mexico and sourcing in Mexico to help us avoid tariffs and lower logistics costs, given the relationship that the U.S. and Mexico have. So we're seeing more and more production. We are investing to expand more capacity within our Mexico operations, and we are taking advantage of that shift.
Thank you, Greg. Next, is any update on the DMFI IPO?
Really, really nothing more than what Parag has provided. You know, we mentioned several quarters ago about our filing and continue to do preparation work in the background to explore a potential listing.
Okay, thanks. And our last question is on the international markets. Can we have a rough idea of the revenue per country to gauge the scope of brand acceptance and potential? For instance, how much revenue do Japan, China, India, and MENA bring in, rough numbers?
Yes, we can share, but I would rather provide you on what is the contribution from North Asia, so that we are not... You know, we can maintain confidentiality. Overall, when you look at North Asia, we are talking about our business being roughly around $150 million. That's what we do. When it comes to our exports to the U.S., you are looking at roughly around $60 million-$70 million. That's what our sales of pineapple products would be to the U.S. So $150 million for North Asia, around $60 million-$70 million to the U.S. When you are looking at Europe, we are talking about that business being around $50 million in total sales.
So those are the rough numbers. When you look at Middle East, overall, you're talking more like $20 million-$25 million.
Okay. Thank you, Parag. We don't have any more questions.
All right. Thank you so much.
Thank you.
Thank you to everyone for joining us. So we conclude our call then.
Thank you.
We'll be in contact with you. Thank you.
Thank you.