Del Monte Pacific Limited - MANAGEMENT REPLY: Can Del Monte return to profitability?

3/11/2014 – Del Monte Pacific Ltd is confident that sales in its key markets of the USA, Philippines and Asia might improve earnings in FY15.

It says most of its revalued inventory will be sold by end April 2015, and will generate strong cash flow to the company.

On 24 February 2014, DMPL acquired the consumer food business of Del Monte Corporation in the US and various consumer product trademarks like Del Monte, S&W, Contadina, College Inn, Fruit Naturals, Orchard Select and SunFresh.

The acquisition was financed by US$970 mln in debt, of which US$705 mln came from bridging loans and US$75 mln in equity.

Subsequently, it changed its financial year end from 31 December to 30 April.

The company, which is dual listed on the Singapore Exchange and the Philippine Stock Exchange, recently offered 5.5 mln shares in the capital of Del Monte Pacific Limited to the public in the Philippines at PHP17/share or S$0.48/share.

It agreed to offer 20% of the shares to the Philippines Stock Exchange traders and 10% will be offered to local small investors (LSI) under the PSE's LSI program.

If the demand from LSI exceeds 5 times or more from the initial allocation, it will increase the offer by 5%.

DMPL received its approval from the PSE and the new shares started trading on 16 October.

The company just announced earnings for Q1 FY15:

Revenue: US$445.6 mln vs US$119.4 mln
Profit: (US$21.9 mln) vs US$4.2 mln
Cash flow from operations: US$18.3 mln vs (US$8.6 mln)

Sales to the US makes up the biggest part of revenue, with total sales of US$342.3 mln, followed by US$95.5 mln to Asia and US$7.8 mln to Europe.

But that doesn’t mean it’s profitable there.

Operating profit in America would have been US$11.3 mln if there had been no non-recurring expenses upon purchasing DMFI.

Sales to Europe dropped by 22.8% to US$7.8 mln due to reduced sales after it exited the unbranded pineapple juice concentrate (PJC) market.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How confident is it that it can regain market share?

On page 4 of its earnings, DMFI has taken corrective measures by adjusting the price of its products to competitive levels, reintroducing its popular classic label and undertaking aggressive promotional campaigns in an effort to regain market share.

How much is it expecting to raise its market share?

Question

2. Can it boost its operating profit after purchasing DMFI?

The company says that its operating profit is unfavourable due to non-recurring expenses upon acquiring DMFI.

Now that these issues are behind it, can it boost its operating profit in US?

Management Reply: Re DMFI (your question 3 below also pertains to DMFI), prior to our acquisition on 18 February 2014, DMFI under the previous owner had implemented a price increase, a change to a new packaging label and increased A&P spend and lowered trade support. After our acquisition, DMFI has reduced prices to where they were before, and reverted back to the classic labels and the trade support that they had before (your question 3).

Total number of questions in the full story: 7)

We thank Jennifer Luy for her responses.

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