Good morning to our participants in Asia, and good afternoon or good evening to those joining us in the US. Thank you for joining Del Monte Pacific's results briefing for the third quarter and nine months ending January 2023. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer of Del Monte Pacific and President of Del Monte Philippines, Parag Sachdeva, Group CFO of DMPL, Greg Longstreet, President and CEO of Del Monte Foods in the US, and I am Iggy Sison, Chief Corporate Officer of DMPL. Parag Sachdeva will now present our results.
Thank you so much, Iggy. Thank you so much, Iggy. I would like to start sharing the results on slide five. Good morning, everybody in Asia, good evening for those who are joining from the US. On slide five with third quarter highlights. For the first three months, or third quarter, Del Monte Pacific group sales grew by 3.3% to $681.2 million on higher US and international sales, which are up 5.8% and 19.3% respectively.
EBITDA on a reported basis down by 11.8% to $80.2 million on higher input and commodity costs, while net profit of $9.8 million declined on lower operating results and higher interest expense from increased debt with the redemption of pref shares.
We continue to lead market share positions across the US, Philippines, and fresh in North Asia. When it comes to nine months, DMPL group sales rose 3.6% to $1.8 billion on higher US and international sales. EBITDA and net profit before one-off cost of $280.2 million and $82.7 million respectively at 3% ahead of last year. DMFI EBITDA and net profit before one-off costs were higher by 12% and 57% respectively.
We also achieved savings of $8.8 million from lower rate of bank loans versus the pref share coupon option of 10% on a step-up basis if they were not redeemed. On slide six, outlook continues to be a little bit volatile.
The global environment remains somewhat unstable, with consumers becoming more cautious with their spending and persisting cost pressures. We remain vigilant and focused as far as managing our operating costs are concerned. This includes packaging material optimization, power and fuel initiatives, including programs being put in place to attain energy from alternative sources such as solar, investment in plants to improve efficiency, productivity and minimizing waste.
Also selective price increase as one executed in February in the US, which will assist us in offsetting the inflationary impact while offering consumer nutritious product at an affordable price. We plan to invest and accelerate sales from recent acquisition of Kitchen Basics. That is going well.
We are also pleased to share that innovation in adjacent categories, such as beverages in the US and dairy in Philippines are off to a pretty good trajectory. We are also planning to increase sustainably our MD2 fresh pineapple production while we support our premium exports. Barring unforeseen circumstances, the group expects to generate a net profit in fiscal 2023 after one-off redemption expenses incurred in first quarter considered.
On slide seven, we'll share with you a more detailed results of DMPL group. In fact, on slide seven and eight, again, summarizing our revenues, our revenue story. Sales up 3.3% at $681.2 million. US sales up what? 5.8%. Philippines also grew by 5.5% in local currency but declined by 6.4% in dollar terms. International business did quite well and grew by 19.3%, driven both by packaged exports and which was also a result of improved supply. When it comes to JV in India, that also grew by 2.1% in local currency.
More importantly, the packaged business after you take into account the discontinued fresh business grew at close to 8% in INR terms. Our EBITDA of $83.5 million was down 8.3% from $91 million due to higher costs and unfavorable sales mix, with more impact on the base business, excluding the US operations.
Operating profits of $60.4 is down 13.7% from $70.1 million. Net profit of $11.9 is down from $25.9 due to lower operating results and increased interest expense from higher bank loans to refinance the redemption of $300 million of pref shares, as well as rising interest rates. All figures that I shared with you on this slide are versus prior year quarter and exclude one-off items amounting to $2.1 million net.
On slide eight, as you see a more detailed view of the, of the third quarter results, the third quarter sales at $681, as I mentioned, is 3.3% higher than last year from branded sales in the US and also international sales for packaged goods.
They both continue to do well. Growth from pricing and trade optimization net of unfavorable Forex was approximately 8% on a group-wide basis. That was the impact from pricing and trade optimization net of unfavorable Forex. This will be further explained in the turnover analysis. When it comes to our gross profit at $152.2 million, it was lower by 6.7%, driven by higher costs and unfavorable sales mix. This is the first quarter in fiscal 2023 that has full impact of inflation, particularly for our US business.
Gross margin for the group at 22.3% was lower versus last year by 240- basis points. This quarter saw the full impact of commodity headwinds, as most of the inventory that we sold was from the current pack, which has significantly higher costs.
Additionally, we had unfavorable mix, with lower sales of fresh exports to North Asia and lower sales of core products in the US. Gross margin for DMFI was at 19.9% and was lower by 100- basis points versus a year ago. Our multiple pricing actions in fourth quarter of fiscal 2022, and then again in September 2022, partially offset the impact from cost headwinds.
Gross margin for the base business decreased by 640- basis points during the same period, driven by commodity headwinds, such as cost of fertilizers, increased packaging cost, which was partly offset by pricing. As explained earlier, favorable impact on revenue and margins from pricing group wide is approximately 8%.
EBITDA of $80.2 million on a reported basis was lower by 11.8% from $91 million due to lower gross profit, as explained. Net profit of $9.8 million is lower by 62%, driven by lower operating income and higher interest costs. Net debt at $2.2 billion is higher by $737 million due to additional loans that we have taken to refinance the redemption of DMPL Series A-1 and A-2 pref shares amounting to $300 million. Working capital loans of DMFI due to increased inventory for seasonal bills and also increased costs. Working capital loans of DMFI, which have been taken to acquire the Kitchen Basics brand.
Lastly, some refinancing that we did last May for the redemption of $500 million high yield bonds in the US, which required us to also fund the one-time redemption redemption premium. This increase in debt has led to a gearing ratio of 5.8%, which is 3.7x more. Just for everybody's appreciation, this D ratio would have been 5.4x or 0.4x less if we exclude the one-off impact from redemption cost on retained earnings.
Considering the seasonal build of inventory, the high leverage was expected, we expect to bring it down by the end of April, which is because in fourth quarter, we do sell through the inventory that has been built during second quarter and third quarter. Our net debt to adjusted EBITDA at 6.1x is 1.9x higher, again, due to increased debt, as explained above. On slide nine, we'll share more about the revenue build during third quarter. Americas constitutes 73% of total group sales. Is higher by 5.8% in the third quarter to $498.5 million, mainly driven by higher branded retail sales, which grew by 12.1%.
That revenue growth was mainly driven by pricing taken across categories in line with inflation, offsetting the volume impact from shift in normalized stocking levels to pre-COVID days and some supply constraints that we have seen mainly in the fruit segment and the produce segments. Kitchen Basics that contributed revenue of $14.3 million representing 2.9% of net sales. If we exclude KB, DMFI's net sales would have increased by $13.1 million or 2.8%.
DMFI does continue to hold leading market share positions across its core business on the back of strong commercial execution, expanded distribution of core products and new product expansion as well. New products launched in the past three years continue to play a significant role and contributed 7% to DMFI's total sales in the third quarter.
Asia PAC sales in the third quarter declined 7.5% to $167.9 million due to lower sales of fresh business, which was impacted by extended lockdown in China and lower sales in the Philippines, which was mainly driven by peso devaluation, as explained previously. This was partly offset by sales performance in inter-international markets due to higher exports of packaged pineapples and other products, and better pricing across all markets.
Philippines delivered a sales of close to $110 million, which is 5.5% higher in local currency, but 6.4% lower in dollar terms. Unfavorable impact of peso devaluation on revenue of Philippine business was approximately $14 million.
In terms of our performance, we saw higher sales of beverage, culinary and innovation categories, which was offset, which offset the decline in packaged tropical fruit. Del Monte improved its market share and maintained its number one ranking across core categories, and it was great to see food service sales increase behind the accelerated, accelerating business of QSRs and also convenience store sales rebounding and growing significantly during the quarter. Innovation, especially dairy and snacking, are also gaining traction, accounting for 6.9% of Philippine market sales.
Europe sales increased significantly to $14.7 million on a small base of $6.6 million, driven by higher packaged fruit sales and pine juice as well. From third quarter, let me now move to DMPL's nine months group results summary on slide 10.
Sales of $1.8 billion for the first nine months was an increase of 3.6%. US sales grew by 4.5%. Philippines was lower by 5.3% in dollar terms, higher by 6.5% in local currency following strong recovery in the second quarter. International business grew by 16%, driven both by fresh and exports of packaged products. JV in India increased by 7.3% in local currency, driven by recovery of B2B sales and continued growth of B2C sales as well. EBITDA of $280.2 million, up 2.5% versus $273.3 million on better operating results of DMFI, which offset declines in the base business.
Operating profits of $216.4 million, up 3% from $210 million. Net profit of $82.7 million was also up 3.3% versus $80.1 million due to higher net profit of a US operation, which included savings from refinancing high-yield bonds. All figures for profitability exclude one-off items.
On slide 11, we'll provide you a little bit more perspective on one-off costs. In May 2022, as a reminder, DMFI raised $600 million through a seven-year Term Loan B facility, which was at an adjusted SOFR with a floor of 0.5% plus a credit spread of 4.25% per annum to primarily redeem the $500 million of senior secured notes, which had a very high interest rate.
The Term Loan B has a much lower interest rate. We are expecting to see a drop by 1.5% at the end of April as the interest swap comes into effect. The redemption of high yield bonds did incur one-off cost of close to $72 million. Pre-tax are $51 million post-tax at NCI, which was all booked in the first quarter.
The $26.3 of that was of the redemption cost was of a non-cash nature. In addition to that, following the acquisition of Kitchen Basics, we also are recognizing excess of net realizable value over cost of inventory as a one-off cost since we have taken the inventory on acquisition at market value on the books.
This impact is $4.5 million on a year-to-date basis. Would like to remind and notify everybody that it includes $2.2 million of the cost from second quarter, which was not previously disclosed as one-off. On slide 12, we'll share a more detailed view of the group results.
Again, 3.6% growth versus last year at $1.84 billion was from higher sales in the US and also international market sales, including S&W business in Asia. G rowth from pricing and trade optimization, net of unfavorable Forex was approximately 6.3% on a group-wide basis. We'll give you a little bit more color on the turnover and revenue in the following slide.
Gross profit at $489.2 million on a year-to-date basis was higher by 3%, driven by increased sales and revenue. Gross margin at 26.6%, marginally lower by 20- basis points, generally demonstrating our ability to protect margins via revenue and cost drivers both in the US and Asian operations. Gross margin for DMFI for nine months was at 24.5% and improved by 90- basis points versus a year ago.
As explained in third quarter results, multiple pricing actions in fourth quarter of fiscal 2022, and then again in September 2022, more than offset the impact from cost headwinds. Impact of inflation, just for everybody's appreciation, is approximately $81 million for year-to-date month nine from a P&L perspective that we have been able to offset.
We also benefited from sale of fiscal year 2022 pack, primarily in the first nine months that has lower costs than fiscal year 2023 pack. Gross margin, when it comes to the base business, decreased by 310- basis points during the same period, driven by commodity headwinds such as cost of fertilizers, increased packaging costs, partly offset by pricing. Impact of commodity headwinds and inflation is approximately $35 million for the base business.
A s explained earlier, favorable impact of revenue from pricing, net of FX, group-wide offsetting a large component of the inflationary trends that I just talked about is approximately 6.3%. EBITDA of $274, marginally higher than a year ago.
Net profit of $28.8, lower, because it does include the impact of one-off redemption costs, which amounted to $51 million to refinance DMFI as a high bond, as explained in the one-off cost. Our debt-related KPIs have already been covered in third quarter results. On slide 13, we'll provide you more perspective on our year-to-date month nine turnover and operating profit overview. America's business constituted 71.3% of total group sales.
This was higher by 4.5% in the first nine months to $1.31 billion, mainly driven by branded retail sales, which grew by 9.2%. The revenue growth was mainly driven by pricing taken across categories as explained in third quarter results.
It was offsetting the volume impact of inventory de-loading by key customers and some supply constraints that we saw in our food segment and also the produce business that we get from Mexico, which was impacted by the drought conditions. Kitchen Basics, which we acquired in August, contributed to $26.4 million or approximately 2% of net sales. If we exclude KB, DMFI's net sales increased by $34.1 million or 2.7%. In Americas, our branded retail accounts for 76%, while private label is now down to 5% of sales.
New products launched in the past three years have contributed 7% to DMFI's total sales in the first nine months. Americas is constituting, as you can see from the pie chart, to almost 63.6% to group's operating profit.
Asia Pacific sales in the first nine months declined by 1.1%, that was largely what we experienced in the third quarter. It was at $491 million from $496 million, mainly due to lower Philippine sales in US dollar terms, offsetting higher international sales both for fresh and packaged products. Export sales of S&W fresh pineapple and other packaged products grew by 16%.
The company recently has launched the naturally ripened extra sweet S&W Deluxe premium fresh pineapple in China, Japan, and South Korea with favorable market feedback. That continues to gain traction in China's retail segment. Asia Pac contributed 26.7% to group's revenue and 33.2% to the operating profit of the group. Fill market sales were up 6.5% in peso terms, but declined 5.3% in dollar terms due to peso depreciation. In our local currency, we are seeing improvement in sales across almost all channels, driven by culinary, beverages, and innovation segment.
Innovation grew strongly due to higher sales of Mr. Milk and potato crisps in the snacking segment, with new products that were launched in the past three years contributing 7.4% to total fill market sales. When it comes to Europe, sales have increased by 57% to $36.5 million from $23.2 million, driven by higher packaged fruit and bev sales. With that, I would like to hand over to Greg for providing a comprehensive overview on the US business.
Thank you, Parag. I'll begin by giving you a review of the third quarter for our Del Monte Foods US business. As Parag mentioned, our third quarter sales were $495 million, and 73% of the total group turnover, really encouraged by the continued growth on our branded business. That's where we generate our greatest gross margin and profitability. We continue to focus our efforts against our brands, our existing brands, as well as new brands that we've created and launched, and I'll tell you more about that.
Encouraged by our core business, our canned vegetable, fruit, and tomato performance in the third quarter year-over-year showing positive growth. Also encouraged, it was our first full quarter of selling the Kitchen Basics brand.
We have a lot of excitement around this brand and a lot of growth potential for this brand. Really, for the first time, got to sell and market this business and have ambitious plans over the next 12 to 24 months. Excluding KB, our sales were up 3% for the quarter. New products are also a big part of our playbook in the US We're consistently growing new products as a percent of sales. We've now achieved 7% of sales.
Four years ago, we were at less than 1% of sales. We've been actively developing strategic new products that are resonating with US consumers, and our goal is to get to 10% of sales, and we see a path to that in the next 12 months.
Gross margins dipped slightly in the quarter, as Parag mentioned. This is the quarter when we experienced our biggest hit of inflation. All of those inflationary costs came into our cost of goods in our pack, and we're now almost exclusively selling that pack and facing the headwinds that that cost has generated.
W e've gone through three rounds of pricing in the US to help offset these costs and inflation, as well as a very aggressive cost savings, cost reduction, value engineering set of initiatives to take product costs out, as we incur more and more inflation. We've seen parts of the inflationary impact basically reduce. We've seen a little bit of deflation in some areas.
Overall, as we look forward, we expect more inflationary impact, especially in areas like raw product and labor, as we look forward to the upcoming pack season. We're working hard through strategic pricing and additional cost reduction to make sure we can continue to grow our gross margins and drive more profit. EBITDA was stable in the face of these headwinds, while net profit was down to production, logistics cost, and the interest rates that Parag referenced in his earlier comments. The next slide takes a look at our market shares.
Encouraged, in this economic environment that we continue to hold leadership share and see pockets of really impressive share growth in our fruit snack business and our canned tomato business. We have a strong playbook around adding distribution, growing channels, and really building our brands.
That is working. It's been a wonderful three years of share growth for us in the US markets. The dynamics are shifting. The purchase patterns are beginning to change year-over-year. It's a different type of consumer environment. COVID is not a factor. You know, many of our retailers have lowered their carrying inventories.
There's more economic uncertainty, higher average prices, and despite all of this, you know, the power of our brands have kept consumers coming back, and they've been loyal to us and allowed us to hold share. Even as many of our competitive brands and our categories have lost share to private label, we've been holding our shares very successfully.
We're gonna continue to invest in this strategy of differentiation and innovation and expanding channels, and I'll talk a little bit more about that in the coming slides. The next slide. For us in the US, right now, value and convenience are big priorities for the, for the US consumer and for Del Monte. Our value-priced offerings continue to be expanded. Many of these products, in fact, all these products on this slide are new.
They are new areas of growth and expansion for us, as we really try to find that balance with quality and value and lower price points for US consumers. We're having a lot of success with our value pack, multi-pack strategy. Consumers, when they can see a savings, will buy four cans or six cans or eight cans of our product.
That's been a very successful strategy. We built out a bigger billboard on grocery shelves across the United States and much more distribution through this expansion strategy. It's also allowed us to do more within the club channel, which has been a very successful channel, and even e-commerce for us, which has now grown to over $100 million in sales for us in the US marketplace. On the next slide.
One of our key thrusts and our key strategies that, as I mentioned earlier, has been taking our brands and growing our presence that's been traditionally very strong in the grocery mass channel, taking it to what we call emerging channels. Emerging channels is anything outside of grocery and mass. This chart on the top row reflects our CAGR between our fiscal 2019 and 2022.
What you'll see is tremendous growth in club e-commerce, food service, dollar, convenience, and natural. Those are new channels for us with our brands, and we continue to have success, and this is gonna be our runway for growth in the next three to five years. If you look at percent of sales down below that row, you'll see that we're increasingly growing our presence as example in the club stores at 13.5%.
E-commerce at 8.1%, we should really be in double digits. We should be north of 10% in e-commerce, and we're on our way to accomplishing that, but it's a new business for us. Foodservice, we have a goal to be 15% of sales. We're at 5.8%. Dollars should be 3% to 5% of sales.
Convenience and natural should be larger. The exciting thing for us is that we have lots of room for growth as we penetrate these channels with our branded products and a lot of our innovation. The next slide are some examples of recent wins that are gonna help fuel growth in the year ahead. These are important expansions of many of the products you saw in our value and convenience portfolio.
We've just received authorizations for nine important new items at Target in the refrigerated sets. We continue to see a lot of growth in our refrigerated produce and citrus items. Below that, very encouraged by our ability to take our Del Monte vegetable proposition to new products.
This year, we entered into the mushroom category and the artichoke category for the first time in our history with our brand, and we've had tremendous success that they've been accepted by Walmart and Sam's and others. We've also, as I mentioned, launched more multi-pack products, as you'll see in the center, and then some interesting new, more premium products like our Sweet Baby Mini Pea product that's also getting wide acceptance across the retail channels.
Below that, you'll see value at customers like Kroger is increasingly important. We're addressing their needs and their strategies around the value proposition. Below that, you'll see our value portfolio of products that has been increasingly accepted in the dollar and the value channel.
That is a big growing channel of foot traffic and consumer interest in the US markets. We've just entered Dollar Tree for the first time with many new items that we're excited about. Lastly, our first major national contract in the convenience channel.
Our new JOYBA beverage has generated a lot of interest as a single-serve beverage. The next slide takes a look at that. This category, the premium tea category, is something we entered about 12 months ago for the first time with some innovative concepts that we have to bring the boba tea shop experience to the retail grocery, but also to the Midwest and parts of the country that don't have boba tea shops. Consumers and younger consumers are very interested in this product, and we're really the first chance for them to try these items.
As an example, in Target stores nationally, the top four items in terms of dollar velocity in the entire ready-to-drink tea category with some very big brands like Snapple and Lipton, the top four items are JOYBA items. This is a brand that we're rapidly adding capacity to. In our Mexico operations, we make this internally ourselves to ensure we have low cost and can accelerate distribution. It's a complicated product to make, but our end result is really winning over consumers and new customers. Now I'll jump into some marketing information.
Next slide. Marketing highlights had a very strong holiday and post-holiday period, promoting our love of sides concept, really promoting a multitude of our portfolio as really healthy, better for you and affordable side dishes. Really excited about our growth in pineapple.
We have made a concerted effort to grow our pineapple, canned pineapple and pineapple juice business in the US market and are really gaining significant market share with our two-tier brand approach. More support of fruit cups. As well, our new positioning with Contadina is accessible everyday Italian, it's really resonating with consumers, it's been a big part of our share gain story in the tomato category. The next chart looks at some more marketing highlights. As I mentioned, it's exciting to have Kitchen Basics. We're already out advertising Kitchen Basics.
This brand has not had a lot of advertising support over the last decade, we're excited to bring new news and remind consumers about the greatness of this portfolio and these products. More support on College Inn, supporting our holiday highest seasonality period of broth consumption.
Very excited about a new brand. We launched a new brand as a company this year called Take Root, Take Root Organics. We're one of the largest growers country, and we've never sold a portfolio under any of our brands.
We've done a lot of private label activity and co-manufacturing. We're now making product for our own brand and launching our own brand nationally. We tested this concept last year nationally with Kroger, with great success, and now we're rolling this out broadly across the customer base in the US, and we'll be doing much more work in fiscal 2024, adding some really exciting line extensions. This will be a portfolio of nine SKUs that we think can become the largest organic tomato brand in the US The next slide. Some additional highlights.
We had our annual Choose Good, Do Good cause-driven partnership event with retailers this year. It's a multi-brand event across our portfolio. This year, we aligned with the Alliance for a Healthier Generation to really promote nutrition education, especially in our school systems. We really think it's important to educate young consumers on proper diets, the benefits of fruit and vegetables and plant-based diets, and really are having a lot of success with that movement.
This is one additional way to really work with our retail partners and have a lot of success merchandising and educating and giving back to a very good cause. The next slide. Gives a look just briefly at food service. We continue to generate double-digit growth in our food service business.
As I mentioned, it's only 5.8% of sales, but it was much lower than that three years ago. We have a very good team, a national sales force, building distribution every day with customers. A big recent focus for us has been pineapple and pineapple juice. Our pineapple juice products were recently accepted by some impressive banners of fast casual and premium dining establishments like Fleming's and Outback.
You know, we have ambitious plans to become a big player in the pineapple juice segment in food service as well. We have selectively taken JOYBA to college campuses through some partnerships and are encouraged by the increased interest in that new JOYBA product line. With this, I will hand it over to Mr. Alejandro.
Thank you, Greg. Good morning and good evening to all of you. Unlike the second quarter, the third quarter was a bit of a challenging period for DMPL behind very untimely events. Let me just summarize for you what happened to our sales in the third quarter.
First, in the Philippine market, we suffered a major out of stocks on tomato paste material. This is because our tomato paste got stuck in the China lockdown. They arrived late. We fell short of serving customer orders over the holiday season. We have corrected this now. We're back on track. Second one is on tropical fruit cocktail. This has been such a banner product for us every holiday season. This time around, consumption was below expectation.
First time it happened to us in many, many years. We believe that this could have been impacted by the pricing that we had to take in order to address inflation. Also because of the growing options of cheaper holiday season desserts.
This all impacted our sales of fruit cocktail. Having said that, we are reviewing our pricing, and with now the commodity prices coming down, we will consider, seriously consider rolling back prices to make it more affordable. Finally, in fresh fruit, as was mentioned by Parag earlier, this got impacted by slower China sales because of the lockdown. The usual volume bump over the Chinese New Year did not happen.
Right now, we're getting back on track, we believe that we will get back to our normal growth pattern in China. In summary, the Philippine market sales of about $110 million grew 6% in peso, but was impacted in US dollar terms by 6%. Our core beverage and culinary registered sales growth along with innovation, this was offset by the decline in the tropical food cocktail business.
On the bright side, our food service business has picked up significantly, up 16%, while convenience store business grew by 68%. Innovations has continued its momentum, growing by 89% versus year ago, now accounts for 7% of Philippine sales, we expect to take it to all the way to 15% over the long range plan.
In international, sales was at $80 million, up 19%. This was driven primarily by packaged exports, whose combined volume and better pricing delivered a robust growth of 53%. As mentioned earlier, fresh sales was down 8% due to China. Both EBITDA and net income were down versus year ago, and they were both impacted by several factors.
Number one: Unfavorable forex. Second, high inflation across all materials, primarily tin plate and tomato paste, even as supply fell short and the prices were way beyond what we had forecasted in our annual operating plan. We've also suffered higher logistics costs. As mentioned earlier by Parag, increased interest expense also from the higher bank loans to redeem the $300 million preferred shares. Next chart, please.
Despite our position in the third quarter, I'm also pleased to report to you that based on this market share reading, our position in the market remains strong, remains very solid. We have maintained leadership share across core categories in the recent December share period. Packaged pineapple and tropical fruit cocktail, even in a category declining by 3%, gained market share. Beverage share grew behind juice drinks while 100% pineapple juice share was steady.
Fit 'n Right also grew market share. Spaghetti sauce, market share grew by a good 1.5 points. In dairy, we encountered a momentary blip due to increased competitive multi-pack activities in store. But we expect to recover this in the coming period. Later on, I'll talk more about our progress in the innovation front. Next chart.
On beverage, our recovery plan continues and consists of several components. In our most challenged 100% pineapple juice, we aired new compelling advertising featuring new benefits very unique to pineapple, bromelain being one of them, that helps promote health and well-being. This also helped stabilize our once declining market share in this segment. Juice, juice drinks has become a winner for us.
Sales growing 19% in third quarter and 23% year to date third quarter, as we intensified our social media efforts behind a perfect for meals positioning. Fit 'n Right original classic is back in the market, and sales growth on this brand has been restored in third quarter.
In our one liter tetra format continues to gain strength due to its perceived higher value, and we believe we can further accelerate growth by building more consumption in meal occasions and also increasing consumer purchase by way of our bundle pack promotions. Next chart. As you know, the October to December holiday season is a big event in our calendar. Nearly 40% of our annual volume happens over this period. Here is an example of merchandising and promotions we ran last holiday season.
As you will see, it is during this season that we are able to build leadership merchandising displays across all major channels, across categories, especially in the culinary and pineapple food categories. Next chart. This shows our value offerings to consumers in the face of an inflationary environment.
The low cash outlay units, as you will see at the left side of the chart, along with the discounted bundle packs, have been proven successful in mitigating the impact of shrinking consumer budget due to inflation. This portfolio of low cash outlay units and value bundles now account for 28% of total Philippine market sales. Next chart. Excuse me. Going now to innovation. We continue to progress on our new products in dairy and snacks. They now account for 7% of sales and still growing.
In third quarter, Vinamilk sales grew by 91%, our Mr. Milk by 73%, and Total Biscuits by 277%. The addressable market of these categories is huge at about $3.5 billion, lots of opportunities and upsides for these products in the coming years. Next slide.
The return to face-to-face school in the Philippines has favored our dairy products, Del Monte-Vinamilk, Mr. Milk and our biscuits line. Here is an example of our back-to-school program on Del Monte-Vinamilk, Mr. Milk and Fruity Munchsters, which involve providing healthy tips for children along with product sampling activities in select schools.
Next chart. Pleased to report that our food service business, which accounts for about 10% to 15% of our sales, has sustained strong momentum with the number of open outlets nearly back to normal pre-pandemic level. Sales was up a strong 16%, still growing, and we continue to sell more product lines across key accounts. Convenience stores also benefited from the opening of schools and the transport sector. Sales grew by 68%, albeit still behind pre-pandemic level. Next chart. Here is our innovation in our international market.
Our sales potential for these products is as much as $100 million, today we are already at $47 million. We believe that we will eclipse this $100 million in the coming years. You will see that our Nice Fruit frozen pineapple sticks are now sold in more than eight geographies worldwide. Pleased to report that we are launching the frozen pineapple stick at McDonald's in the Baltic region this coming summer. Again, to remind everyone of our continued success with the super sweet S&W Deluxe Fresh Pineapple, especially in the China market.
Next chart. On fresh, we remain the largest pineapple exporter to China, still with a commanding 52% leadership share. We have also remained among the top three biggest exporters to Japan, Korea, and the Middle East.
Below are examples of very impactful merchandising and promotion activities that we ran across different channels and cities in China to welcome the Year of the Rabbit. These activities built business, but they were at a slower pace than last year. As I told you earlier, the expected bump in the Chinese New Year did not happen.
Finally, in India, pleased to report that our India business continues to hum and it continues to gain traction now for three consecutive quarters now. Third quarter sales were up 2% in INR terms. I believe they are up 7% year-to-date, and this covers both B2C and B2B channels. Gross margin improved by 230- basis points, so 18.2%, and EBITDA has turned positive. That's all I have to say for Del Monte Pacific, you know? I shall now turn you over to Iggy Sison. Thank you.
Thank you, Cito. Sustainability is one of Del Monte Pacific's five strategic pillars. Del Monte Philippines developed an EPR program that will be implemented beginning this year to recycle a proportion of its plastic footprint. We are expanding our carbon footprint measure beyond pineapple operations to include a broader scope, three, including key suppliers, cold packers, and logistics providers in the supply chain. We're pleased to report as well that the company obtained the Rainforest Alliance certificate for our fresh pineapple and juicing plant.
Recognizing that our plantation complies with standards that require long-term environmental, social, and economic sustainability. Aside from having planted over 600,000 trees around the plantation, we are also planting on watersheds to promote soil conservation and erosion control. On the next slide, we have initiatives in the US to nourish families together with the Alliance for a Healthier Generation.
As referred to by Greg earlier, this is an organization that promotes nutrition, education, and the health of children. This alliance is consistent with our vision, nourishing families, enriching lives every day. On the next slide, to recap our outlook.
Amidst the global environment where consumers are becoming more cautious with their spending and cost pressures are persisting, we remain vigilant in managing our operating expenses across the DMPL group, including packaging materials, optimization, power and fuel initiatives, investment in plants to improve efficiency, productivity, and minimize wastage, product bundling initiatives. The most recent price increase in the US will assist in offsetting the inflationary impact while offering consumers nutritious products at an affordable price.
We have a new growth stream from our Kitchen Basics in the US, as outlined by Greg earlier, as well as a new e-commerce infrastructure. We are increasing our MD2 fresh pineapple production, which will support our exports of premium products, as described by Cito. DMPL expects to generate a net profit in fiscal year 2023 after one-off redemption expenses incurred in the first quarter, as explained by Parag earlier. 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. Good morning, everyone. We have a number of questions now in the Q&A box. I'll start off with George's questions on leverage. The biggest risk of Del Monte Pacific is its high leverage. This had been flagged by many analysts and is probably the reason why the stock price is trading sparingly and value remains depressed. What is management doing about this? How soon can this be lowered?
Thank you for the question, George. We agree with the comment around high leverage. As I mentioned during the update, our leverage, because of the seasonality, is high, and obviously, with the increased cost of inventory, that has also contributed to the same and is at 5.8x . By the end of the year, I'm expecting the leverage to come down to close to 5x as we lower our inventories by around $100 to 150 million. If you have to look at our operating performance, with inventories at an all-time high from a cost perspective, we are expecting next year to have a significant focus on that particular area.
If we are able to keep our inventories flat or reduce them next year, we are expecting to generate close to $100 to 150 million from an operating perspective, just on working capital, which should lower our leverage profile from close to 5x by end of fiscal year 2023 to around 3.5x to 4 x by the end of fiscal year 2024.
We would have operating improvements which will lead to a leverage profile which would be much more manageable. We continue working on the capital structure side to see what the opportunities are, as we have mentioned in the past through listings both on Philippines side and on the US as well.
Thank you, Parag. In relation to the IPO, George also asked, about DMPI's IPO. Since DMPI deferred its IPO two years ago, there have been many other IPOs in the Philippine Stock Exchange. What are the reasons for deferring this for so long?
That's a great question. There have not been many IPOs of the scale that we have been looking at for DMPI since we last attempted in the first half of 2021. Monde Nissin and Converge were the last two big ones. Rest assured we are watching the market very closely and would look at some sort of activity around Philippines in the coming 18 to 24 months as the market conditions improve.
Okay. For DMFI's IPO, the US interest rates are headed higher. The stock markets may head south. Will management accelerate the listing of DMFI to maximize its value?
We continue working on various options, and we are giving some priority to it. Obviously, there are no clear timelines. As you said, it depends on the market conditions and that volatility does not really assure you on what exactly would be the timing.
Okay, thanks. How will the unfavorable third quarter results impact cash dividends for this fiscal year?
That's another great question. Thank you, George. As you would imagine, on a year-to-date basis, if you look at our operating results, still our performance is pretty strong. From a net income basis, as I mentioned, we are close to $82 to 83 million as compared to $80 million that we did last year.
Yes, third quarter was a tough quarter for us, especially considering the full impact of cost headwinds that we saw and some unfavorability that we saw from our high margin, or high margin, businesses such as Fresh or some core categories in the US. From a full year perspective, we still think that we would be pretty much in the ballpark in comparison to last year.
We do have plans also in place to address the cost, the margin challenges that we are seeing in third quarter, which will, to some extent, continue in fourth quarter. We have plans in place. We are making significant improvements on our supply chain to take out inefficiencies around variable distribution and warehousing costs.
Mm-hmm.
A big focus for us. In addition to that, value engineering, which will allow us to optimize our recipes, packaging, and also running RFPs for major items and major input some items is going to help us. We also continue to look at opportunities to hedge our commodities such as natural gas, and fuel. Those hedges are in place and are going to give us a favorable impact next year.
Productivity would be of us, a lot of focus both in Philippines and in the US across all our plants and sites. Rest assured, margin improvement plans are being put in place to continue optimizing our costs and take out the inefficiencies that we did see in addition to inflation in fiscal year 2023.
Thanks, Parag. There is a related question here, so you might have addressed some of them. In case you wanna add or Cito or Greg would like to add to this. There seems to be many opportunities and potentials in growing revenues, but it also appears our grip on costs is slipping. Margins had shrunk. How will management address this moving forward?
I think I covered it, but would love to get.
Yeah.
Greg and Cito to contribute to that.
Sito, would you like me to go first? Okay.
Go ahead.
Okay. Yeah. In the US, as we mentioned earlier, we've been through three rounds of pricing. Our latest price increase in advance happened in February. We'll continue to look for strategic pricing opportunities in the marketplace across our portfolio in the next three to six months. We're already studying opportunities there. We have to keep passing on, unfortunately, the inflation we're facing to hold margins. As Parag suggested, we have a very ambitious cost takeout agenda this year across the supply chain, across our G&A base.
It's gotta be a two-pronged attack: take cost out and carefully pass through pricing. We have to monitor elasticity. In this environment, we don't wanna price ourselves out of these categories and lose share. It's a delicate balance. Gross margins are our most important KPI as we look at the year ahead, and our biggest objective is to hold and grow gross margin, coming off our base that we've established here in fiscal 2023.
Thank you, Greg. I guess what Greg said is similar to how we're approaching it also in the rest of the markets outside the Americas. Just wanted to add more to that. Our key priority should always be our consumers and our volume, you know, and our market share.
Any loss in these areas, okay, will impact the long term. I mean, all of the inflation that we're suffering right now, we just have to ride it and to make sure that we create that balance between pricing and affordability of our products. In the affordability front, as I showed you earlier, our value pack propositions, our low cash outlay options, is one big help to ensure affordability among our consumers.
The same thing also happens in Greg's area in the US More importantly, in our operations, we have to take out the profit leaks now. We gotta make sure that line losses are controlled, defectives are addressed properly, because these are the ones that are killing our costs also every now and then. Productivity has got to improve. We have to do our share as far as operations, tightening our operations, and making sure there are no profit leaks, none of these that can impact our costs beyond the normal inflation that we're seeing.
That's the way we have been addressing these inflationary pressures. They're not gonna go away. They'll probably ease up a little bit this year. We're seeing some easing up right now, no. We never know. I mean, things can turn for the better, things can turn for the worse, but at the end of the day, we must be prepared to manage our own operations and keep it tight. Thank you.
Thank you, Cito Alejandro. Thank you, Greg Longstreet. Okay, last question from George is: how did the redemption of preference shares impact EPS for common shareholders?
Again, a great question. I think we mentioned in our update that we are saving close to $9 million on redemption of pref shares through bank loans. That translates to our current EPS is around $0.0128 per share. Had we not got that in place and actually redeemed the pref shares, we would have been down to $0.82. The savings is around $0.45 per share.
Okay, thanks, Parag. A question from Wei Ben. When will the interest swap for the $600 million loan in the States be effective, and what's the tenor for the swap?
It will be effective from May 2023 onwards.
Okay, thanks. A question from Seo Byung: Can you give more color on the mentioned unfavorable sales mix last quarter? What caused it... [crosstalk]
[inaudible]... [crosstalk]
And... [crosstalk]
Certainly... [crosstalk]
Pricing power is not holding well also.
Certainly, we can provide more color, and I'll request Greg and Cito to chime in as well. When it comes to unfavorable sales mix, the way to look at it is on the base business side, as an example, our fresh business contributed less as compared to last year, and it was impacted by the continued lockdown that we saw in the third quarter in China.
Our exports ended up being less, which meant our margin performance on fresh business was not as strong as in the prior year. Similarly, on the US business, as I mentioned, some of our core categories, which are more profitable, they were lower than our plans, and that led to some dilution in margin performance.
The other trend that we are seeing is, in order to continue generating value for our customers, we have to provide them with an option of multipacks. As we expand our business and in the core categories through multipacks, they are obviously somewhat less profitable as compared to our singles business. These are some of the drivers on the revenue side which have led to unfavorability on sales mix. When it comes to pricing, we have taken pricing in line with inflation.
We are not trying to stay ahead. It is just enough. As you saw, the cost headwinds that I mentioned, just as an example, are close to $80 million impact on a year-to-date basis, for the US or $35 million on a year-to-date basis for our base business.
These are clear indications that the pricing we are taking is pretty much in line or, and to cover some of these significant headwinds that we have seen in our business. Let me ask Greg to talk more about the pricing impact on our business and Cito as well.
Yeah. I think, Parag, you covered that really well. You know, we constantly monitor the pricing impact in terms of elasticity on our brands and our categories. We've been encouraged that we've seen minimal impact of price elasticity through three rounds of pricing and over 15% of net pricing action. Our products cost more on shelf. We certainly are encouraged that we have not lost market share. We've gained case volume, and we've gained revenue in a much greater way than our peer group.
We are seeing that many of our peers have lost share in these environments, particularly to private label. We think the power of our brands and our brand portfolio are certainly demonstrating themselves right now.
you know, we're cautiously monitoring all of these pricing actions, looking for ways to offer value to consumers. As Cito suggested, we must take care of our customers and our consumers, and we must strategically identify ways to enhance margin. The pricing actions net of what Parag suggested, have quite honestly been encouraging and the fact that we've proven the power of our brands, that consumers will pay a little bit more for our brands.
I think the general behavior of consumers in the US eating home more often, continuing to work from home in many cases and eat throughout the day, they're looking for healthy snacks, flavor and meal enhancers, health and wellness products, and affordable brands that they can trust. We think we're poised for a very good year ahead. We have a very, a strong outlook for growth.
Mm-hmm.
In both fiscal 2024, but as we've recently modeled our long-range plan, also is very encouraging by the pockets of growth that we're identifying. We're getting through this time of inflation, we think, quite well. We're encouraged. We'll continue to be good stewards of the business. Cito, I'll let you take it from here.
Well, the only thing that I can add, thank you, Greg, is in categories where we have major competitors, we're very careful about pricing. We're watching, even in the US, with the private labels, we're watching the price differences because those are key. In categories where we're strong, big leaders, like in the Philippines, in the juices and all, okay? What we do is ensure we have affordable packs, no, in order to maintain consumption.
One of the efforts that we've done is to control the price increases and still protect our margin, is we downsize the content a little bit, no. So for example, in pineapple juice, instead of $240, we're now down to $220. But you know, the satisfaction is actually the same.
I mean, we've checked that, no, from a $240 to 220. In doing so, it allows us not to increase prices further, no. We can hold on to it and make sure that the downgrading, in a way, covers from unexpected costs that we will see. Those are the things that we've been doing. It's a tough balance. It really is a tough balance. There is no sure way of doing it. The elasticity models are helpful, at the end of the day, we have to watch it day in and day out, no? Get close to the customers on what is really happening in the stores, no? That is the secret to that. Thank you.
Thank you, Cito. Thank you, Greg and Parag. We have a question on dividends from Wesley. Will the dividends be calculated based on organic or core earnings or earnings after one-off costs?
Thank you, Jenny. Generally, it is post one-off cost. That's how we look at, you know, any dividend payout. As you would, as you would imagine, they are all subject to board approvals at the end of the year.
Thanks. We have a question from Paul Chew. He raised his hand, so I'm gonna allow him to talk. Paul, please go ahead.
Thanks. Thanks, Jennifer, for giving me the opportunity to ask. Just a few questions for me. In particular, the gross margins for DMFI, you know, there's kind of a lot of volatility in the margins if you look at it quarter and quarter. My question for DMFI is, what cost items impacted the margins with the and also, if possible, like how large is the 23 February 2023 price increase? Because it's pretty hard to model what is the trend like for gross margins in the DMFI.
Yeah, great question. Thank you. You are absolutely right. The volatility is clearly there. We have a very seasonal business. To give you some context, we manufacture the inventory, or we pack the inventory, literally in four to five months from July to November. The way you should look at our business, in the first half of the year, almost 70% to 80% of the in-inventory that is being sold is from the prior year.
When you look at fiscal year 2023, in the first half, we were selling most of our sales was coming from inventory that was packed and manufactured in fiscal year 2022. That was obviously, that did not contain many elements of the inflation and commodity headwinds that came into play from calendar year 2023 onwards.
In this year's pack, we are seeing full impact of inflation, which would include a significant increase in, say, our biggest packaging cost, which is a can. The can cost in the US increased by 50%. Raw produce prices, whether it's tomatoes, whether it's fruits, whether it's all your vegetables, they have increased by almost 15% to 20%. These are some examples. Obviously in addition to that, you would be very familiar that natural gas prices in California, they went up considerably. The fuel prices went up during 2023 considerably.
Those are the inputs that led to a significant increase in cost, which came into play in fiscal year 2023 current pack, which we have now started selling in third quarter. Though part of it was also sold in second quarter. Hence the margin compression. It was very much as per our plan. And we were clearly contemplating that. Obviously, we were expecting it to be around 150- basis points more, which was influenced by unfavorability in sales mix.
Some of the additional cost headwinds that we have seen, some of it is weather-related, some of it is obviously other inefficiencies in variable distribution and warehousing costs, which I said we would definitely look at improving the next year. This trend will continue in fourth quarter.
We would see the same cost headwinds which have impacted us in third quarter, but we are mitigating it through additional pricing. That additional pricing in the US is not significant. It's very selective across certain categories. It has been executed, and those categories include, you know, plastic cups, tomatoes and a few others. That is expected to give us, on an annualized basis, somewhere around $20 million.
We continue to look at improving the margin performance, and can assure you that versus where we are, our plan is to improve it through both revenue initiatives and also cost initiatives going into next year as we firm up our plans so that we are able to show year-on-year growth on our gross margin, which we have demonstrated despite significant headwinds that have impacted us in the third and fourth quarter. Let me see if that answers your question or, Greg, if you would like to add anything.
Yeah. I guess I would add that you know, I actually think it's a pretty easy model to assume when you study our gross margin performance. Our overall strategy to drive branded growth and improve our product mix and to eliminate low margin, no margin businesses has been working for five years.
Every year, we've added about 100- basis points, starting from 17% or 18% gross margins to where we're currently gonna finish the year, north of 23% gross margins, and we'll continue to grow gross margins every year. Our overall strategy is through growing profitable brands, we will continue to improve gross margins. We will offset inflation through cost reduction and pricing actions. You're gonna see, quarter-to-quarter fluctuations, but if you look at the macro environment of the fiscal year-over-year, we continue to deliver our promise to grow gross margins.
Yeah.
Anything... [crosstalk]
I'm sorry. Please go ahead.
Go ahead.
Oh, no. I just wondered because, having said that, the last three price increases that you made in the US, I guess, was just to cover the old cost structure. Moving forward, I mean, without stating the obvious, I mean, it might kind of imply that you need more just to kind of raise it. Again, like you mentioned, there's other initiatives to kind of improve the margins.
Yeah. I think it was done to cover the old call but also prepare for the new cost. You'll see that. You'll see. As Prax suggested, you'll see improvement next quarter, you'll see further improvements in fiscal 2024.
Yeah. sorry to be asking so many. Can I just trouble you one more question, Greg? On the channels that you had, you know, you had... [crosstalk]
Yeah.
Which had the lowest gross margins? If you don't mind kind of refreshing us, reminding us. You're going to change the mix, we just wanna understand which mix had the lowest... [crosstalk]
Yeah. I mean, the good news is in all those channels, we're selling branded goods, right? You know, as we develop new products, our commitment is always to be margin accretive with our new products to the portfolio. Every channel has, and every customer has nuances to margin.
We continue to move up our use of raw material and finished goods into branded solutions that are margin accretive, that are helping us penetrate these channels. You know, we like each of those channels. We like the business within each of those channels, and we like when we can especially sell our high profit core that Parag alluded to, our core business, our core fruit and vegetable and tomato business. As we roll out and introduce products into those channels, we're very encouraged by our ability to continue to grow margins and grow margin mix.
Thanks so much. Can I just move to a question on DMPI, if I may? There were a few nuances that was mentioned, you know, like, tomatoes, you know, the fresh in China not recovering and of course, the tropical fruits. Could I possibly get an update? Like, how is the fresh? Is it recovering, or do you think it's just a one-off blip because of, I guess, there was a massive, kind of surge in COVID in China and you're beginning to see the channels start to reopen for your fresh. Could I trouble anyone just for an update for that? Thanks again.
On the fresh side, as we speak right now, things are recovering in China. In fact, I'm going to be there next week to assess the situation and plan out our fiscal year 2024 program our next fiscal year. We're pretty much bullish that things are going to shape up there. It's coming around.
Just unfortunate that the third quarter was not that strong for the market. I speak not only for pineapple, but I also check with the other fruit growers exporting to China, the banana people, you know. A lot of them suffered the same downturn in the business, temporary downturn. Right now, it's coming up. You know, our sales are beginning to climb, you know, this is a critical period for us.
It's usually the sales start going up, April, May. We're seeing that right now. In the tomato paste, that's a one-time thing. We're past that, and we have all the stocks right now, and we're ready to go and build our business particularly in the summer months, because these are the times that you've got a lot of these local celebrations and where eating is such a big thing again among big groups, you know. Tropical fruit cocktail, I have to study the pricing.
I must admit to you that we may have to take it down, you know, in order for us to be more affordable. I'm also looking at an option whereby I don't need to put it in a can, right? The tropical fruit cocktail is now in a can.
I'm looking at options to put it in an SUP, a stand-up pouch, like what we have for our pasta sauces. We also have, as you know, we also sell tidbits in SUP format, you know, in portion packs, and that has helped us grow the business. I'm trying to find ways and means by which to lower the cost and make it more affordable. For now, I think short of transferring it to an SUP, which will require more qualification, technical qualification, the next best thing right now is to review our cost and likely take it down. Take it on the pouch.
Thanks very much for that. Just one last category for me. Just on the financial questions. You know, for CapEx, your run rate is still quite high. I mean, it's close to almost $200 million. Just wondering what's the outlook for CapEx? At least what are you planning to spend? Should we expect lower CapEx?
Again, on inventory, I know you touched on it a little bit, but, you know, you are entering the post-festive season require, you know, like you mentioned, record $1 billion inventory. I'm just wondering, anything you could share further. A housekeeping item, just to clarify, there's no longer any preference shares in the balance sheet. I should know this, but I just want to double-check. Thanks.
Okay. That's a couple of questions. Let me tackle it. Pref shares, yes, we already redeemed those through debt, and I think we covered that. We saved significantly through that, and it was accretive from an earning per share perspective. That should answer your question. On inventories, yes, absolutely. I think there is a similar question to what you have raised. We are having higher inventory levels and definitely significantly more than where we were last year.
Two reasons for that. One, as we said, the costs have significantly gone up. Secondly, in certain areas, either because of the over pack or our sales being lower than planned, we are seeing inventory being on the higher side. We have clear plans. It's a big focus for us.
We can only adjust the inventory in our next pack, as you can imagine, since we produce in most cases, we are producing our inventory over five months. We have clear plans in place to adjust the inventories, and in certain instances, take down our pack for next year to make sure that inventory stays in control. By end of next year, we are expecting some reduction than the current levels, as per our projections.
Parag, on the CapEx, what is the outlook like?
Yeah. On the CapEx, the way to look at it, you have to separate out the investments, or the operating costs that we incur in our plantations, which for accounting purposes are capitalized as capital spend. If you take that out, on an average, we are spending $25 to 30 million on our base business and close to $40 to 50 million on our US operations. Those are pretty compelling projects, either to drive growth or to really further drive automation and bring in efficiencies, or really drive the sustainability agenda in our company.
Sorry, the balance is for plantations... [crosstalk]
Yeah, that's right. You will see a huge amount also on accumulated depreciation, which is pretty much the write-down of the pineapple costs.
Okay. Okay. I was referring more the CapEx on the, on your balance sheet. Yeah, the purchase of plant equipment. Okay.
Right. That includes... [crosstalk]
Okay.
T he spend that we incur on our plantation to grow pineapple.
Okay. All right. Thanks so much for taking my questions.
No problem.
Thank you. We have some more questions in the Q&A box. long term, like five to 10 years, what's the main metric or KPI that our company's trying to hit or would want to beat, especially on the capital allocation side and shareholder benefits?
Yeah. I think ultimately it boils down to earning per share. That's what we would like to continue focusing on, and that would be improved and generated through improvement in our operating performance, increase in margins, sales of higher margin products as we improve our mix. That would touch upon the capital allocation and reducing our debt and obviously make sure that we can continue increasing our equity to deleverage the business.
Thanks, Saurabh. Back to inventory, he's asking on the year-end fiscal year 2023 levels, will it remain high before the next packing season? I think you said yes... [crosstalk] right?
Yes. It would remain high. We will see some reduction in fourth quarter. As I said, that should bring down our leverage to around 5.2x, 5.3x . Next year, we should see our inventory stabilize as We will see some benefit of deflation both in Philippines and in the US, though not massive. We will also be adjusting our inventory and production back where we are seeing excess inventory.
Thank you. For the gross margin, are we expecting full year 2023 for the group to be lower than fiscal year 2022?
Yes, marginally lower.
Okay. Thank you. How many years is the interest rate swap?
Three years.
Three years. Okay, that's the last question. Thank you to all our panelists for answering our difficult questions very well. Thank you to all our participants for joining in. If you have more questions, just feel free to email me and we'll ask our panelists for the answers.
Thank you very much for all the questions.
Thanks.
Thank you very much.
Thank you for inviting us.
Thank you, everybody.
Bye-bye.
Thank you. Bye-bye.
Bye.