Earnings Call: Q1 2021

Sep 25, 2020

Good morning, our call participants in Asia, and good evening to our callers in the U. S. This conference call covers the 1st quarter results of Delmonte Pacific Group, TMPL, ending July 2020. Representing Delmonte in this call are Cito Alejandro, Group Chief Operating Officer, DMPL Faraj Dacheva, Group CFO of DMPL Greg Longstreet, CEO of the Amante Foods in the U. S. And this is Igi Si Son, Chief Corporate Officer of DSP. We hope everyone in this call has been keeping healthy and well. Thank you for joining us. Before we start, may we request all participants to please mute their phones until the end of the presentation. Thank you. So, Parag Sakhdeva will now present our Q1 results. Thank you, Wadhimachiki, and good morning to everyone in Asia, and good evening to all in the U. S. On Slide 4, I would just like to highlight that on 30th April 2020, the group recognized the sale of a 12% stake in Del Monte Holdings and started recognizing this as non controlling interest on 1st May 2020. In addition, PMPL's effective stake in Del Monte Foods Inc increased to 93.6% starting 15 May 2020 and henceforth recognized the 6.4% NCI. These 2 comprise the NCI line in the P and L. Net profitloss is net of NCI. On Slide 5, starting with the 2021 highlights. For the Q1, group sales grew by 9.9 percent due to higher consumption of healthy self stable food at home, and that was both across U. S. And in Philippines. U. S. Sales are up 13.5 percent and Philippines sales expanded by 21.6%, offsetting lower Fed sales in Q1. Our EBITDA increased to $42,400,000,000 and net loss was significantly reduced to $3,200,000 from $38,300,000 prior year. Can we request everyone to please mute their phone? We hear some background noise. Can you please check if your phone is muted now? Okay, thank you. Okay. Thank you very much. Just to repeat, subsidiary Del Monte Philippines Inc. Generated net profit of $18,700,000 CMPI was rated AAA, the highest credit rating assigned by the Philippine Rating Services Corporation. We also reduced from a group perspective net debt and gearing on the back of improved operating cash flow, and we'll talk more about it in the upcoming slides. Slide 6, outlook. It continues to meet the sustained demand for our trusted healthy shelf stable products, and we will continue to optimize our production facilities while implementing strict safety measures. Our strategy is to strengthen the core business, expand the product portfolio in line with the market trends for health and wellness and grow our branded business while reducing nonstrategic business segments. Aside from the DMPL based business, DMFI is also well positioned to improve performance in 2021 with better sales mix and management of costs. We do not anticipate material one off items in the coming fiscal year, and the expected to return to profitability in fiscal 2021 barring unforeseen circumstances. On Slide 7, we'll present the 1st quarter group results summary. As stated previously, sales of $413,100,000 is up 9.9% over the prior year quarter. U. S. Sales up 13.5 percent. Philippines higher by 18% in local currency and 21.6% in U. S. Dollar terms. Our S and W brand in Asia declined by 19.4%, mainly due to lower sales of fresh pineapple in North Asia. Our JV in India declined by 40% in sales as our B2B business did get impacted by COVID-nineteen. EBITDA of $42,400,000 up 10% from $38,700,000 due to higher volume and better sales mix in Philippines, getting a lift from pandemic driven higher consumption of trusted healthy shelf stable products. Our operating profit of US20.6 million dollars down 8% from US22.54 million dollars due to higher costs of last year's PAG and logistics costs in the U. S. Net loss of US3.2 million dollars from a net profit of US4.1 million dollars due to the above, higher net financial expense and includes the impact from minority interest changes explained on Slide 4. There are no one off costs or items this quarter. Slide 8, on non recurring expenses, as stated, there are no one off items in the Q1. Last year, one off costs in the Q1 were $2,100,000 on a pre tax basis, out of which $1,700,000 was incurred in partial disposal of assets of Crystal City plant in Texas. Our one off fixed stock for the group included $41,000,000 of tax on intercompany dividends and deferred tax on undistributed share and profits of a subsidiary. VMPL's Philippines subsidiary, VMPI, declared dividends to its parent, and the dividends were taxed at 15%. Just as information, this quarter, the deferred tax on undistributed share in profits has been considered as recurring costs and not a loss. On Slide 9, we'll present you more detailed results. Again, on sales at $413,100,000 was 9.9% higher than last year, again from higher sales in the U. S, Philippines and S and W package sales in Asia getting a lift from the pandemic. This will be explained more in the turnover analysis. Our gross profit at US94.1 million higher by US3.2 million dollars driven by higher volume. Gross margin at 22.8%, lowered by 150 basis points, which was led by higher product costs, mainly in the U. S. From sales of inventory packed in fiscal 'twenty that had a higher cost. Higher cost was driven by metal packaging and poor yields from weather related issues. Margin for the base business excluding the U. S. Improved by almost 240 basis points during the same period, offsetting partly the lower gross margin in the U. S. EBITDA of US42.4 dollars up 15.8 percent mainly due to the increase in volume. Would also like to note that increased depreciation from change in accounting of leased assets is US7.4 million dollars in fiscal 'twenty. OI of US20.6 dollars up 1.9 percent on a reported basis. Net finance expense. Our financing cost of $24,600,000 reflects higher interest costs. BNPL's share in the Field Fresh joint venture in India was a loss of $700,000 and lower than last year, driven by lower sales for food service and key accounts that were impacted by COVID-nineteen. And in India, almost 50% of the business of our process business is B2B or food service and key account driven. Higher tax expense last year as Del Monte Philippines declared a dividend to its parent, which was taxed at 15% amounting to US39.6 million dollars Net debt, very pleased to the fact that we were able to bring it down to $1,240,000,000 lowered by almost 318,000,000 dollars due to significant improvement in cash flow from operations, both in fiscal 'twenty and fiscal 'twenty one. Cash flow from operations improved by 59,300,000 dollars from a negative $38,800,000 primarily from better capital in Q1. Our gearing ratio at 2.2x, mainly driven by significantly lower loans due to higher cash flow from operations as explained. On Slide 10, a brief update on our bond issue. In August, Del Monte Philippines applied for a regulatory approval of its maiden bond issuance of up to Ps. 5,000,000,000 with an option to upsize to Ps. 7,500,000,000. The proposed offering consists of 3 and or 5 year maturity tranches. And as mentioned in the highlights, the credit rating for this bond is tripling, the highest rating assigned by the Philippine Rating Services Corporation. The proceeds of the offering will be used to refinance existing loans. On Slide 11, a good perspective on reducing our gearing. BNPL's group's net debt decreased to $1,200,000,000 from 1,600,000,000 dollars The gearing improved to 2.2x from 2.8x equity in the prior year quarter. Cash flow from operations, as of operation previously, improved to $59,300,000 from negative $38,500,000 primarily from better working capital in Q1. Additionally, in the last 12 months, net cash flow from operating activity, net of capital spend, was an inflow of US236.2 million dollars In addition to the significant improvement in cash flow from operations, we also raised $305,000,000 net of expenses from sale of 12% stake in BMPI. Reduction in inventory that has been achieved in the last 12 months and reflected in the cash flow from operations is $201,000,000 BMPI, as we previously mentioned in the last quarter, infused $379,500,000 equity and successfully refinanced the loans of DMFI. So from a DMFI perspective, this does provide a solid foundation to improve its financial performance and capture market opportunities. DMFI's credit rating was also upgraded by the rating agency and outlook improved to stable and positive by both S&P and Moody's. Slide 12, a bit more perspective on the turnover in Q1. Starting with Americas, which constitute around 66% of total group sales, we achieved higher sales by 13.5 percent to US272.5 million dollars mainly driven by higher volume due to increase in demand from COVID-nineteen across categories, higher sales for Contadina from distribution games as well. DMFI benefited in the categories and segments with strong leadership positions as consumers initially turned to trusted names. When you look at our share performance, whether it's 52 weeks, 13 weeks or 4 weeks, in terms of volume share, the growth outpaced category growth across all categories where we operate. New products contributed 6% to the MFI's retail and food service sales in the Q1. On Asia Pacific sales, we increased by 4.8% to $35,900,000 from $129,600,000 mainly due to increase in all major segments, including Philippines, S and W Packaged and exports of packaged pineapple products, partly offset by lower sales of fresh pineapple in China, mainly due to lower demand attributed to the aftermath of COVID-nineteen. Sales in the Philippines, the domestic markets were up in both peso and U. S. Dollars by 18% and 21.6%, respectively, indeed due to higher volume both in general modern trade, favorable sales mix and also sales price variance. Group continued to progress with distribution transition in general trade. Our sales in Europe declined at $4,700,000 by 23%, mainly from lower sales of beverages. With that, I would like to pass it on to Greg Longstreet, who would give you an update on the U. S. Market. Thank you, Farag. If we move on to the market updates portion of the presentation, on Slide 14, you'll see a review of our USA Del Monte Foods business. Within the quarter, we maintained our strong leadership share positions across our 4 key business segments. Number 1 in canned vegetable, number 2 in canned fruits, number 2 in Fruit Cub Snacks and number 2 in canned tomato. I would add that in addition to this, our 5th major business, our broth and stock business was quite healthy in this most recent quarter. Importantly, in all 4 of these segments and as well our broth segment, we gained share in the quarter and it was a unique quarter for us. We continue to see very strong category growth and momentum in these business segments, very strong double digit growth. We are outpacing category growth in the brand, but we are really seeing an incredible uptick in consumers at shopping center store, preparing more meals at home, looking to snack and looking for more healthy meal solutions for themselves and their family, while most of these consumers in the U. S. Market have been under a shelter in place or had limited access to restaurants and out of the home meal consumption. So those meals have moved home and we've benefited. Our grocery store business has grown tremendously again in this quarter as it did in the Q4. And what consumers are looking for, in addition to, as I mentioned, healthy and safe products that they trust, they're looking for leading brands. And certainly with Del Monte, Contadina, Collagen and S and W, we have the brands that consumers are very aware of, they recognize and they trust. On the next slide, Slide 15, this improved category growth and gain in brand share led to an 11% improvement in our sales to 268,200,000 in the Q1. As I mentioned, the trends that are in place right now are certainly benefiting us and we are winning with our base products, our canned food portfolio, but we're also winning with innovation outside of the can. We continue to bring new ideas to market and I've been encouraged by retailer interest and consumer interest in our new product lines that we've introduced this past quarter, which are included on this slide. On the right hand corner, you can see our new line of plant based foods that are frozen, handheld sandwiches, handheld comfort ties that we've launched really fit today's consumer trends that are looking for healthier grab and go products and looking for plant based foods. So very encouraged by the success there. The item below that is our collagen savory infusions. And what this product enables consumers to do is simply add flavor to any meal preparation, very simple, convenient, one stop addition of really tasty powerful flavors to their meals. This product tested very well with consumers in our research studies and has done very well and has been on the market on shelf. So encouraged by those two launches, the versatility in the on trend nature of those products. I'm also pleased to report that we took a major step forward in the pineapple business this quarter. We launched a premium product with our parent company with the help of DMPI and DMPL launched new Del Monte deluxe gold pineapple. And this product has been very well received. We've exceeded our distribution goals. Several large retailers including Kroger are already carrying this product. It's already on shelf and performing well across the U. S. The 4th product that we launched, which really ties to the morning breakfast occasion, Consumers really told us they were looking for healthier, more convenient ways to consume oatmeal. So our new Oats To Go product is a great solution and really encouraged by the receptance of that product line and the future growth potential. Also within the quarter, our EBITDA was up 10.3 percent to US10.4 million dollars On the next slide, Slide 16, we'll look a little bit more at some of these new products with some of the creative that's a proven launch of our new Pine Deluxe Gold product. The black packaging has been very powerful, stands out on shelf and is viewed as very premium by consumers, really a delicious product that's unique in terms of what consumers can find in a packaged environment in the U. S. And then on the right is some of the support behind Oats To Go, as I mentioned, really a convenient product, ready to eat, really the only ready to eat oatmeal with real fruit in the marketplace. This is being merchandised right in the middle of the oatmeal sections next to brands such as Quaker Oats, 10 grams of protein, half serving of fruit, no artificial flavors, very, very good product. The next slide talks about some of our PR efforts. We continue to invest in this investment is paying off, especially during the grocery store business in the U. S. So our brands are being supported by significant media placements, garnering many, many incremental impressions. We're driving a lot of online content right now. We're reaching consumers at home and on their cell phones and through social media. We're doing a lot of content development. One example is through our website, we've provided and our partnership with Growing Great, we provided some online lessons for healthy eating for parents to provide their children. We've also done some incredible work on this new product front in terms of awards and recognition. We were named with our Blueberry Crunch Parfait Best New Product Award from Convenience Store News and that's a growing segment for us reaching that convenience store consumer, just somewhat new for Del Monte Foods and this new product has really helped us. And our canned mango product was also selected by Parents Magazine as a pantry item that they could not live without. So really encouraged right now. Consumers in the U. S. Are certainly stocking up their pantries, but they're also consuming food from their pantries in record fashion. So we're encouraged by the recognition. There's some additional showcases of areas where we've been focused and recognized. Another one is R and D. We have a really incredible R and D organization at Del Monte Foods here and we were recognized by Food Processing Magazine as Large Company R and D Team of the Year and this is across all large consumer products companies. So very proud to be recognized for the work we've done in innovation. The next slide, Slide 18 is interesting. In the U. S, the food service business has really suffered in the face of what's happened here with the pandemic. But we found ways within the quarter to grow our business. We've actually seen almost 10% growth in our foodservice sales this quarter through some really creative work we've done and some new distribution. We've really pivoted to help different relief agencies and governmental organizations and few banks with products. And we've also established some new distribution with customers like the Bojangles chain and with the largest contract buyer, food buy. So encouraged by the continued focus. We feel in food service as the buffet occasions are going away, our foodservice providers need to provide healthy packaged product solutions that are safe for consumers when they're traveling, whether it's on an airline or in a hotel or at an event. And we are uniquely positioned to capitalize on that strength. But continue to be optimistic about the opportunities in that channel in addition to what I described as a very, very healthy grocery store business in the U. S. Right now. I will next hand over the presentation to Mr. Cito Alejandro. Thank you, Greg. Now going to Chart 19. First quarter was a period of very strong growth for the PILOTIC market. And as you can see on the chart, we're going to have the expansion of our market leadership across nearly all categories. Under the pandemic, Adel Monte products were sought after by consumers because of its trusted, healthy and high quality reputation. One of the exciting developments we've witnessed is the growth of e commerce. Still in its early stage for our products, but already we're investing resources. We're gearing up to keep pace with industry trends. Chart 20, our retail sales surged 32% across all categories, more than offsetting the decline of food service which took a beating under COVID lockdown. Retail sales was led by flagship Del Monte brand, 100 percent pineapple juice, actually all juices for that matter, our pasta sauces, our premium condiments line and our quick and easy meal mixes just to name a few. We are pleased to announce that last July, we formally entered the dairy category with the introduction of Del Monte Mr. Milk, a healthy fruit yogurt milk drink. We're also pleased to report that the product is so far doing very well in the market. Chart 21. The next couple of charts, including this one, will show our marketing activities across our core categories, all towards accelerating growth, specifically increasing the consumption of our products. In this chart, you will see our advertising initiatives aimed at enhancing the relevance and versatility of pineapple in home cooked meals. Pineapple can indeed make food and desserts more fun and exciting for the family. Chart 22, this talks about our anti COVID message of health and fitness, how our fruit juice products provide immunity, protection as we call it, an extremely sought after benefit during these times. Pleased to report that our entire juice beverage business has exceeded historical growth trends, and this has been very favorable for us. After beverage comes our 2nd fastest growing category, obviously, our cooking portfolio. Here are a few of our initiatives capitalizing on the growing trend towards more home cooking. Our goal is to make the families longer time staying at home, never a dull moment when it comes to delicious, healthy food cooked with Del Monte products. Slide 24, moving now to S and W. As you know, COVID started in China and thus this major market accounting for 50% of our fresh pineapple volume was the one that affected the S and W business the most. However, pleased to report that as of today, our China fresh has begun to recover. Although not yet to the level prior to COVID, it's steadily getting there. We also we are also present across digital formats in China, but that's not enough to offset the huge decline we witnessed in fresh retail. For on S and W, in Chart 25, total sales of S&W Branded in Asia and the Middle East declined in the Q1 compared to last year. While we benefited from higher sales of healthy shelf stable packaged products, the decline in fresh overshadowed whatever gains we realize in our packaged business. Not all is lost in fresh. You can note that on top of the resurgence in China orders, all other markets have shown steady improvement in demand over the recent months. So that's all positive for us. Next chart shows there has been no net up in our efforts to resuscitate our fresh business in Singapore, in China, in Korea, foodservice, in store retail or e commerce. Now going to Chart 27 on India, which was not spared from the impact of COVID. TMPL's share loss in India was higher than a year ago due to lower sales of branded packaged products primarily driven by food service or B2B, which comprises 50% of our business portfolio. It was severely impacted by the lockdown. We have now adjusted our strategy towards accelerating the expansion of our retail business. Both in store and e commerce, we have modified our product portfolio given the demands of the times. We have also embarked on major productivity and cost savings programs to ensure we optimize our costs, protect our margins and prepare for a rebound in the future. That's all I have. I now turn you over to AD Sito. Thank you, Sito. Excluding sustainability is one of the 5 strategic pillars of the amount of statistics. To support our vision, nourishing families and reaching lives every day. In the Q1, the Del Monte Foundation continued donating food and beverage to private and local government organizations. Since March, when the COVID lockdown started, we have assisted over 220 organizations, which includes over 50 medical facilities and to support medical professionals and other frontliners and marginalized communities in the Philippines during the pandemic. Following the publication of the multi specific annual report, we just published last week our sustainability report for FY 2020, which features new sections on our pandemic response to sustainable development goals, human rights, plastic solutions and deforestation. Del Monte Foods in the U. S. Established a diversity leadership council to provide leadership in building a more inclusive company. And in the Q1, Del Monte Foods continued to partner with organizations like the American Red Cross and Feeding America to provide aid to victims of the recent Hurricane Laura and the ongoing California wildfire. So to recap, our outlook for the rest of the year continues to meet sustained demand for our trusted front healthy shelf stable products as Cito Alejandro and Greg Longstreet have described in our markets. We will continue to optimize our production while implementing stringent safety measure against 2019. The Monte Pacific strategy is to strengthen the business and Sorry, we got cut off. Okay. Can I ask my question? Go ahead, please. This is Mr. George Sands. Good morning. Yes. Good morning. 1st, before I raise my question, can you please confirm how much is the net loss of Del Monte Foods? The net loss of Del Monte Foods prior to the non controlling interest was $15,000,000 in the Q1. So that's our bottom line, dollars 15,000,000? Yes. Okay. My question really is, I know this is the weakest quarter, but our sales are up, our products are doing well. So we're encouraging news from product development, positive consumer response. We have 0 asset write offs, right, and yet still we're unable to manage the breakeven or perform positively. The main reason for that, Josh, is that we are really going through the sales of products that were packed last year and which was a pretty high cost pack for us. And the reason for the high cost back was, our metal packaging costs were significantly higher last year due to tariffs and changes that took place in the U. S, which increased our cost by around 15% to 25%. In addition to that, we also had we were also impacted by poor weather last year in terms of several crops. So that led to a very high cost backlog at which we are seeing in the Q1. We expect to see that thing getting reversed in the Q2. So our margin should start improving in the Q2 as we have sold most of the pack from prior year. I see. So it's really a higher inventory cost. It's a higher inventory cost that we had from last year, which was a little bit extraordinary. Okay, that's good. So finally those items are already sold. So, I'm looking forward to that. Last week, Just to clarify, John, we still have some cases that we will process in the balance of the year. Okay. My second question is really about the infusion of capital in Del Monte Foods. I think we reported R379,500,000 put in, in Del Monte Foods. And yet our ownership was only increased by 4.2%. Can you comment on that? The ownership was in by 4.2 percent because what was common equity was the 2nd lien loan that was converted to equity. The $150,000,000 was invested as prep shares. So how did we arrive at 5.2 percent? We can share the computation separately with you guys. But as I explained, what was converted to comp was only the 2nd lien loan that was purchased over the last couple of years, Not the $150,000,000 that was invested as prep shares. As prep shares, yes. Actually about $229,000,000 I think is in equity. That's right. And we can share the competition separately with your competition. Yes, because I'm looking at what valuation or implied valuation was given to Del Monte Soods, given that it's not really performing so well. We'll share the details with you. I know this is forward looking, but when can we see Del Monte Foods looking like Del Monte Philippines? We are on the right path. That's what we can say, George. Yes. Because I understand your plants are already at full capacity. So I don't know how production would increase or what if we are already utilizing it at almost 90%. Yes, we are also getting product from other sources, including co packers as well, George. So we need to have the right opportunities to grow the business. Okay. Yes. So I'm just trying to understand what is the upside and how it will happen, given that all your plants are basically basically operating, but there's no room for growth at all. We have one more one major factor which Greg can talk about is that we are also changing the mix of our sales in the U. S. Yes. George, we are focusing more and more on branded and less on private label. I would let Greg talk more about that so that you can get a good perspective on how that will lead to margin improvement. Yes, there's 2. Yes, Parag brings up a great point. 1st and foremost, we think we can still make more in these plants. We've got a comprehensive plan to increase efficiency, to extend the pack season and to get more utility out of these plants on a more year round basis. So there's room to grow. But mix is a big part of this. We're cycling out of high cost of goods and we're cycling out of an unfavorable product mix that had a lot of unprofitable, quite honestly, unprofitable private label business in it. This is the last kind of leg of private label for us. We've exited those agreements and we're focused on our high profit, high margin branded business. And you'll continue to see without providing too much forward looking information here, you'll continue to see improvements in our margins and profitability on a go forward basis because of the changes we've made. So basically, get rid of the private labels and use our own brands. And hopefully we would be able to combine a better price? That's right. That's right. I see. Okay. And then with some well, I guess, efficiency impact of lower cost in production on account of the new products that are big or the old products that are already sold out, most of them are basically charged to the Q1? That's right. Okay. Yes. At least I have a little some idea of how these things would happen and looking forward to management delivering this turnaround in the soonest possible time. Yes. Okay, that will be all. Everybody, please keep safe. Stay healthy. Thank you, George. Thank you. Thank you, Arthur. Thank you, George. Any other questions? Actually, my question is regarding about Philippines bond. Okay, according to your slides, you said that actually you'll be raised management of US155 million dollars Okay, I would like to know when are we expecting the bond to be sealed and where is it? The follow subsequently, the particular question I have is regarding about the refinancing, what bond are we going to refinance and what is the interest rate like? So, we expect to complete the bond issuance by October. And number 2, it's in terms of tenure, it's 3 to 5 years. Interest cost that we are expecting is deval plus 75 basis points to 150 basis points depending on 3 to 5 years. Okay. Can you just give me a rough kind of how much interest we're going to pay for this bond? Yes, Roughly 4% and it would be mainly used to refinance our existing loans. So it's not going to increase that day. Okay. Existing load is which load? Is it a 12% DMI loan? No, these are DMPI loans that are for of a short term nature. Okay, I see. Thanks. Okay, thank you.