Fresh Del Monte Produce, Inc.

and good evening to our callers in the US. This is the conference call for the first quarter results of Del Monte Pacific Group, DMPL, ending July 2020. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer, DMPL, Parag Tachdeva, Group CFO of DMPL, Greg Longstreet, CEO of the Amante Foods in the US. And this is Iggy Sison, Chief Corporate Officer of the . 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 please mute their phones until the end of the presentation. Thank you. So Parag Sachdeva will now present our first quarter results.

Thank you very much, Iggy, and good morning to everyone in Asia and good evening to all in the US. On slide four, I would just like to highlight that on 30th April 2020, the group recognized the sale of a 12% stake in Del Monte Philippines and started recognizing this as non-controlling interest on 1st May 2020. In addition, DMPL's effective stake in Del Monte Foods Inc. increased to 93.6% starting 15th May 2020, and henceforth recognize the 6.4% NCI. These two comprise the NCI line in the P&L. Net profit loss is net of NCI. On slide five, starting with the 2020 highlights for the first quarter. Group sales grew by 9.9% due to higher consumption of healthy, health-stable food at home, and that was both across U.S. and in Philippines. U.S. sales are up 13.5%, and Philippines sales expanded by 21.6%, offsetting lower-fret sales to 1%. Our EBITDA increased to US$42.4 million and net loss was significantly reduced to US$3.2 million from US$38.3 million prior year. We generated net profit of US$18.7 million.

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 US dollar 18.7 million. DMPI 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 six, 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 brand business while reducing non-strategic business segments. Aside from the BMPL-based business, BMFR 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 DMPL group is expected to return to profitability in fiscal 21, barring unforeseen circumstances. On slide seven, we'll present the first quarter group results summary. As stated previously, sales of US dollar 413.1 million is up 9.9% over the prior year quarter. US sales up 13.5%. Philippines higher by 18% in local currency and 21.6% in US dollar terms. Our SMW 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-19. EBITDA of US dollar 42.4 million up 10% from US dollar 38.7 million due to higher volume and better sales mix in Philippines, getting a lift from pandemic driven higher consumption of trusted, healthy, self-stable products. Our operating profit of US dollar 20.6 million down 8% from US dollar 22.4 million due to higher costs of last year's pack and logistics costs in the US. Net loss of US dollar 3.2 million from a net profit of US dollar 4.1 million due to the above. higher net financial expense and includes the impact from minority interest changes explained on slide four. There are no one-off costs or items this quarter. Slide eight, non-recurring expenses, as stated, there are no one-off items in the first quarter. Last year, one-off costs in the first quarter were US dollar 2.1 million on a pre-tax basis out of which US dollar 1.7 million was incurred in partial disposal of assets of Crystal City Plant in Texas. Our one-off extract for the group included US dollar 41 million of tax on intercompany dividends and deferred tax on undistributed share and profits of a subsidiary. BMPL's Philippine subsidiary, BMPI, declared dividends to its parent and the dividends were taxed at 15%. Just as an information, this quarter, the deferred tax on undistributed share and profits has been considered a recurring cost. On slide nine, we'll present you more detailed results. Again, on sales at $413.1 million. was 9.9% higher than last year, again from higher sales in the US, Philippines, and S&W package sales in Asia, getting a lift from the pandemic. This will be explained more in the turnover analysis. Our gross profit at US dollar 94.1 million, higher by US dollar 3.2 million driven by higher volume. Gross margin at 22.8% lower by 150 basis points, which was led by higher product cost mainly in the US from sales of inventory packed in fiscal 20 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 US improved by almost 240 basis points during the same period offsetting partly the lower gross margin in the US. EBITDA of US dollar 42.4 up 15.8% mainly due to the increase in volume. Would also like to note that increased depreciation from change in accounting of leased assets is US dollar 7.4 million in fiscal 21. OI of US dollar 20.6 up 1.9% on a reported basis. Net finance expense. Our financing cost of $24.6 million reflects higher interest costs. DMPL share in the FieldFresh joint venture in India was a loss of US dollar 0.7 million and lower than last year. driven by lower sales for food service and key accounts impacted by COVID-19. 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 50% amounting to US dollar 39.6 million. Net debt, very that we were able to bring it down to $1.24 billion, lower by almost 318 million due to significant improvement in cash flow from operations, both in fiscal 20 and fiscal 21. Cash flow from operations improved by 59.3 million from a negative US dollar 38.8 million, primarily from capital in Q1. Our gearing ratio at 2.2 times 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 five billion, with an option, five billion pesos, with an option to upsize to 7.5 billion pesos. The proposed offering consists of three and or five year maturity tranches. And as mentioned in the highlights, the credit rating for this bond is triple A. 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. DMPL's net debt decreased to US dollar 1.2 billion from 1.6 billion. the gearing improved to 2.2 times from 2.8 times equity in the prior year quarter. Cash flow from operations, as operated previously, improved to US dollar 59.3 million from negative US dollar 38.3 million, primarily from better working capital. Additionally, in the last 12 months, net cash flow from operating activities, net of capital spent, was an inflow of US dollar $236.2 million. In addition to the significant improvement in cash flow from operations, we also raised $105 million net of expenses from sale of 12% stake in BMPI. The reduction in inventory that has been achieved in the last 12 months and reflected in the cash flow from operations is 201 million. BMPL, as we previously mentioned in the last quarter, infused 379.5 million 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. EMFI's credit rating was also upgraded by the rating agencies 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 constituted around 66% of total group sales, We achieved higher sales by 13.5% to US$272.5 million, mainly driven by higher volume due to increase in demand from COVID-19 across categories, higher sales for Contadina from distribution gains as well. BMFI 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 four weeks, in terms of volume share, the growth outplaced category growth across all categories where we operate. New products contributed 6% to the MFI's retail and food service sales in the first quarter. On Asia Pacific sales, we increased by 4.8%. to US dollar 35.9 million from 129.6 million due to increase in all major segments, including Philippines, SNW 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-19. Sales in the Philippines domestic market were up in both peso and US dollar by 18% and 21%, 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 4.7 million 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 four key business segments. Number one in canned vegetable, number two in canned fruit, number two in fruit cup snacks, and number two in canned tomato. I would add that in addition to this, our fifth major business, our broth and stock business was quite healthy in this most recent quarter. Importantly, in all four of these segments, and as well our broad 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. But we are really seeing an incredible growth 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 fourth quarter. 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&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 $268.2 million in the first quarter. As I mentioned, the friends that are in place right now are certainly benefiting us and we are winning. We're 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. These are 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, simple, 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 and 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 US. The fourth 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% to US 10.4 million. On the next slide, slide 16, we'll look a little bit more at some of these new products with some of the creative and supporting launches 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 Oats2Go, 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 protein. a 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 to the grocery store business in the US. 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 is 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 US 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&D. You know, we have a really incredible R&D organization at Del Monte Foods here. And we were recognized by Food Processing Magazine as large company R&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. You know, in the U.S., food service business has 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 an almost 10% growth in our food service 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 food 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 food service 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 trend. 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 US 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 Philippine market. And as you can see on the chart, expansion of our market leadership across nearly all categories. Under the pandemic, Telmonte 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. Part 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% 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 daily category with the introduction of Del Monte Mr. Milk, a healthy fruit yogurt milk drink. 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. Excuse me. 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, and extremely sought after benefits during this time. We used 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 second 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. Part 24, moving now to SNW. 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 SNW business the most. However, we used 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 are also present across digital formats in China, but that's not enough to accept the huge decline we witnessed in fresh retail. More on SNW in chart 25. Total sales of S&W branded in Asia and the Middle East declined in the first quarter compared to last year. While we benefited from higher sales of healthy, shelf-stable packaged products, the decline in fresh overshadowed whatever gains we realized 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 let-up in our efforts to resuscitate our fresh business in Singapore, in China, in Korea, food service, in-store retail, or e-commerce. Now going to chart 27 on India, which was not spared from the impact of COVID. DMPL 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 Yogi Sito.

Thank you, Sito. Thank you. Improving sustainability is one of the five strategic pillars of Del Monte Pacific to support our vision, nourishing families and enriching lives every day. In the first quarter, 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, to support medical professionals and other frontliners, and marginalized communities in the Philippines during the pandemic. Following the publication of the Amante Pacific Annual Report, we just published last week our Sustainability Report for FY 2020, which features new sections on our pandemic response, sustainable development goals, human rights, plastic solutions, and deforestation. Amante Foods in the U.S. established a Diversity Leadership Council to provide leadership in building a more diverse and inclusive company. And in the first quarter, 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 wildfires. So to recap, our outlook for the rest of the year continues to meet sustained demand for our trusted, healthy, shelf-stable products, as Tito Alejandro and Greg Longstreet have described in our markets. We will continue to optimize our production while implementing stringent safety measures against COVID-19. The Montepacific strategy is to strengthen the core business, expand the

I'm sorry, we got cut off here.

Okay, can I ask my question?

Go ahead, please. This is Mr. George Tan. Good morning.

Yes, good morning. First, 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 is $15 million.

in the first quarter so that's our bottom line 15 million yes okay my question really is uh i know this is the weakest point there but our sales are up our products are doing well so we're encouraging news from product development positive consumer response yeah we have zero asset write-offs and yet still were unable to manage to break even or perform positively.

The main reason for that, George, is that we are really going through the sales of products that were packed last year, and which was pretty high-compact for us. And the reason for the high cost pack was our metal packaging costs were significantly higher last year due to tariffs and changes that took place in the US, which increased our costs by around 15 to 20%. In addition to that, we were also impacted by poor weather last year in terms of several crops. So that led to a very high cost. We expect to see that thing getting reversed in the second quarter. So our margin should start improving in the second quarter as we have scored most of the pack from prior years.

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 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 $379.5 million 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% because what was common equity was the second lien loan that was converted to equity. The 150 million was invested as prep shares.

So how did we arrive at the 4.2%?

We can share the competition separately with you guys. But as I explained, what was converted to comp was only the second lien loan that was purchased over the last couple of years. Not the $150 million that was invested as prep shares.

Prep shares, yes. Actually about $229 million, I think, is in equity.

That's right. And we can share the competition separately with you guys.

Yes, because I'm looking at what valuation or implied valuation was given to Del Monte Foods 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.

Because I understand your plants are already at full capacity, so I don't know how production would increase or what if you 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 yeah so i'm just trying to understand what is the upside and how it will happen even that all your plants are basically patiently operating but there's no room for growth at all well we have one more one major factor which which greg can talk about is that we are also changing the mix of our sales in the us yeah george we are focusing more and more on branded and let's 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, Prague brings up a great point. First 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 brand. And hopefully, we will be able to provide a better price.

That's correct.

That's right. I see. Okay. And then with some 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 first quarter.

That's right. Correct.

Okay. Yeah. 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, yeah. Okay, that would be all. Everybody, please stay healthy.

Thank you, George. Thank you. Thank you also.

Thank you.

Thank you, George. Are there any other questions?

Chee Keong from Singapore. Can I ask some questions? Can I ask some questions? Actually, my question is regarding about the Philippine bond. Okay, according to your slide, it says that actually you'll be raised to a maximum of $155 million. Okay, I will let you know when are we expecting the bond to be sealed and where is it? The follow-up subsequently, the question I have is regarding about the refinancing. What bond are we going to refinance and what is the interest rate like?

So, if I follow you, we expect to complete the bond issuance by October. And number two, in terms of tenure, it's three to five years. Interest costs that we are expecting is devalued 75 to 150 basis points, depending on three to five years.

Okay, can you just give me a rough guide on how much interest we're going to pay for this bond? for this point, yeah, definitely. Yeah, 4%.

Roughly 4%, and it would be mainly used to refinance our existing loans. So it's not going to increase our debt.

Okay, existing load is which load? Is this a 12% DMFI loan?

DMFI loan? No, these are DMPI loans that are for a short-term nature.

Okay, I see, I see.

Thanks, I see, I see.

Okay, thank you. Are there any other questions? If there are no other questions, we'd like to conclude our conference call. Thank you for joining us and keep well. Thank you very much. Thank you.