Singapore Mainboard and Philippine Stock Exchange dual-listed Del Monte Pacific Limited (DMPL; Bloomberg: DELM SP, DELM PM) (PSE: DELM) reported its first quarter fiscal year 2019 results ending July.
The group generated first quarter sales of $437.2 million, 8% lower than prior year quarter mainly due to lower sales in the USA and lower exports of processed pineapple products.
DMFI contributed $308.3 million or 71% of Group sales. DMFI sales declined by 8% due to lower volume across categories, most significantly branded tomato products and private label, as well as lower pricing in foodservice for pineapple juice concentrate (PJC). The decline in sales was in line with DMFI’s strategy to deprioritise non-profitable businesses including private label.
The group is on track with its innovation strategy. Following the success of Del Monte Fruit Refreshers Del Monte Fruit & Chia, Del Monte Fruit & Oats was launched in the USA in June. Del Monte Fruit & Oats combines healthy fruit and wholesome oats in a cup, is delicious and filling, as well as convenient for breakfast and snack. Feedback from the trade has been encouraging.
The Group also entered new product categories for foodservice with Riced Cauliflower and other vegetables with broadly positive industry reception. Del Monte Nice Fruit Fresh Frozen Pineapple had also been placed at some regional chains in the USA.
With the Nice Fruit revolutionary technology, frozen pineapple, when thawed, has the same physical properties as fresh cut pineapple.
DMFI’s market shares in canned vegetable and fruit, and fruit cup snack categories increased during the quarter, driven by compelling innovations, strong execution against fundamentals at retail, and sustained marketing investment to support its brands.
As part of its strategy to improve operational efficiency and profitability, DMFI divested its underperforming Sager Creek vegetable business in FY2018. DMFI booked additional one-off expenses of $8.4 million in the first quarter of FY2019, mostly for Sager Creek.
Sales in the Philippines domestic market were flat in peso terms and down 5.3% in US dollar terms due to peso depreciation. Key accounts in foodservice and retail beverage and culinary continued to grow, offset by lower sales of packaged mixed fruits in retail due to excess trade inventory. DMPI launched Del Monte Juice & Chews nationally, a snack-in-a-drink combining nata and pineapple with fruit juice blends, a drink popular amongst teens. Foodservice sales in the Philippines remained strong, riding on the rapid expansion of quick service restaurants and convenience stores with partnerships and menu creation with major accounts.
Sales of the S&W business declined in the first quarter mainly due to lower sales in North Asia and Turkey. Increased competition from cheaper canned pineapple products from Thailand and Indonesia continued to impact S&W’s business. Turkey, on the other hand, was impacted by currency devaluation and political instability. To diversify its business, the Group had introduced tomato and pasta sauces from the Philippines into S&W’s Asian markets in FY2018. Despite lower sales, the S&W business was able to deliver higher operating profit and a 5.5 ppt increase in operating margin due to lower costs.
The Group’s Nice Fruit joint venture in frozen pineapple successfully launched frozen pineapple spears in Japan last June. These are produced in Bukidnon, Philippines. Individually packaged and known as Pineapple Stick, it is available in about 70% of 7-Eleven outlets or about 14,000 stores in Japan. It is positioned as an on-the-go healthy snack placed in the store’s chiller section, and has received good feedback.
DMPL’s share in the FieldFresh joint venture in India for the first quarter was favourable at $0.1 million profit, a significant improvement from the $0.5 million loss in the prior year period, due to higher Del Monte product sales and better margins.
The Group reported an EBITDA of $18.8 million, versus prior year quarter’s EBITDA of $32.2 million. Without the one-off expenses of $8.4 million cited earlier, the Group’s EBITDA would have been $27.2 million.
The Group reported a net income of $3.0 million, higher than $0.7 million in the prior year quarter as a result of the one-off gain from the purchase of DMFI loans at a discount in the secondary market. Excluding one-off items of $6.8 million post-tax, the Group would have incurred a net loss of $3.7 million versus a profit of $1.2 million in the prior year period due to lower sales in USA, lower exports of processed pineapple, significantly reduced PJC prices and higher product costs that were partly offset by price increase in the Philippines and lower trade spend in the US.
Strengthening Balance Sheet
The group continued to strengthen its balance sheet, and reduce leverage and interest expense in the first quarter. In FY2018, DMPL purchased $125.9 million out of the total $260 million second lien loans of DMFI at a discount in the secondary market. In the first quarter of FY2019, DMPL purchased an additional $99.1 million bringing the outstanding second lien loan balance to only $35 million on a DMPL consolidated basis. This loan purchase resulted in a one-off gain in the first quarter of $15.9 million pre-tax or $12.5 million post-tax. This is the highest interest-bearing loan of the Group, and will save DMPL more than $10 million of interest payments in FY2019.
At the end of the financial year, the Group reduced its gearing to 2.5x equity as of 31 July 2018, from 3x in prior year period, primarily due to the $100 million Preference Shares issued by DMPL in December 2017 to raise equity and the purchase of DMFI loans at a discount in the past two quarters.
As part of the Group’s deleveraging plan, subject to market conditions, DMPL plans to sell approximately 20% of its stake in wholly-owned subsidiary Del Monte Philippines through a public offering on the Philippine Stock Exchange. The IPO was deferred in June due to volatile market conditions. The Company will announce when it relaunches this as the equity markets improve.
The Group will continue to strengthen its core business and execute its innovation strategy. It will focus on growing its branded business and reduce non-strategic, non-branded business segments. The Group continues to review its manufacturing and distribution footprint in the US to improve operational efficiency, further reduce costs and improve margins. It is committed to increase cash flow, strengthen the balance sheet, and reduce leverage and interest expense.
Barring unforeseen circumstances, the DMPL Group is expected to be profitable in FY2019 on a recurring basis.