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Edited Transcript of D03.SI earnings conference call or presentation 21-Jun-19 2:00am GMT

Apr 1, 2020 (Thomson StreetEvents) — Edited Transcript of Del Monte Pacific Ltd earnings conference call or presentation Friday, June 21, 2019 at 2:00:00am GMT

Del Monte Foods, Inc. – CFO

* Gregory N. Longstreet

Del Monte Foods, Inc. – CEO & President

* Ignacio Carmelo O. Sison

* Jennifer Y. Luy

Ignacio Carmelo O. Sison, Del Monte Pacific Limited – Chief Corporate Officer [1]

Welcome to the investor briefing of Del Monte Pacific, DMPL, for our fourth quarter and full year FY ’19 results ending April 2019.

Representing Del Monte to my left are Parag Sachdeva, Group CFO of DMPL; Cito Alejandro, Group COO of Del Monte Pacific; Greg Longstreet, CEO of Del Monte Foods in the U.S.; and Gene Allen, CFO of DMFI; and I’m Iggy Sison, Chief Corporate Officer of DMPL.

Parag Sachdeva, our CFO, will now present our results beginning on Slide 5.

Thank you very much, Iggy. Good morning, everyone.

Starting with Slide 5, that provides highlights for the fourth quarter and full year 2019. We generated a higher net income of USD 6.3 million for the fourth quarter and USD 20.3 million for the full year, which is a significant turnaround from prior year loss. We have reported net income for fourth quarter in a row. Pleased to also announce a dividend of $0.005 per share which equates to 50% of net income for fiscal year 2019.

Our innovation program is gaining momentum, and we introduced 4 innovative products in refrigerated produce and frozen categories, catering to health and wellness, snacking and convenience.

Next slide, please, on the outlook. The group is expected to be profitable for fiscal year 2020 barring unforeseen circumstances on a recurring basis without one-offs. There would be a major emphasis on responding to consumer trends: strengthening the core business and innovating particularly outside the can; we will continue focusing on growing the branded business. Priority would also include improving financial performance through review of manufacturing and distribution footprint in the U.S. to improve operational efficiency, further reduce costs and increase margins amidst cost headwinds including rising metal packaging prices and impact of tariffs imposed by the U.S. government. Improving cash flow, strengthening the balance sheet and reducing leverage and interest expense continues to be the third big priority for the group.

Next slide, please, would provide you a little bit more background on the fourth quarter results for the group. Our sales of USD 432.6 million were lower by 13.3%. U.S. sales, lower by 19%; but if we take out Sager Creek, DMFI sales would have been lower by 14.4%. Philippines, lower by 8% in local currency but 8.5% in U.S. dollar terms. S&W brand surged in the fourth quarter by 19.8% mainly due to higher sales of fresh as well as packaged fruits. The JV in India grew at double digit in local currency.

An EBITDA of $43.3 million, up 24% due to higher EBITDA in the U.S. driven by higher list price, lower trade spend plus the favorable impact from the divestiture of low-margin Sager Creek vegetable business. We also benefited from lower fixed costs. Our operating margin — or profit of USD 28.3 million was up 55% from USD 18.3 million, just in line with what we just discussed on the EBITDA. Net profit of USD 9.2 million, a turnaround from the net loss of USD 2.9 million. All of the above profitability numbers are without one-off costs and are versus last year. We have also successfully lowered our inventory in the U.S. and reduced the same by $102 million versus the same period last year.

Next slide, Slide 8, provides a snapshot of nonrecurring expenses for Q4. One-off costs in the fourth quarter are USD 4 million on a pretax basis. The USD 2.9 million was incurred in severance mainly for rightsizing 2 of the plants in California. Others of USD 1.8 million includes losses on self-initiated product recall of Fiesta Corn due to packaging issues. Last year, just to remind you all, also includes nonrecurring costs from divestiture of Sager Creek business and closure of 2 plants in Indiana and Arkansas offset by the gain from purchase of second lien loan.

Slide 9 provides a more detailed overview of our fourth quarter results for the group. Fourth quarter sales are down 13.3% at $432.6 million due to divested Sager business and also lower sales in U.S. and Philippines. Excluding Sager, sales are down 9.9% and will be explained more in the turnover analysis. Gross margin at 18.8%, marginally lower by 20 basis points on an organic basis pretty much led by price increase in Philippines and U.S. markets, lower trade spend in the U.S., exit from low-margin Sager Creek business. And this was — these positives were offset by unfavorable impact from lower pine juice concentrate pricing, higher costs of tinplate across Asia and the U.S., sugar tax which was imposed in the Philippines last year, lower yields and recoveries in the U.S. and also under absorption of overheads due to reduced pack in the U.S.

Our EBITDA of USD 43.3 million and operating profit of USD 28.3 million is higher versus last year on a recurring basis. On a reported basis, EBITDA and operating income are up significantly as last year included a USD 29 million charge from the closure of Sager Creek Arkansas plant.

Our net finance expense last year included a one-off gain of USD 33.6 million from purchase of USD 126 million of loans in the U.S. at a discount. Our DMPL share in FieldFresh joint venture in India was a loss of USD 300,000 and lower than last year due to increase in cost of commodities and higher overheads.

Tax benefit of USD 7.5 million due to higher future tax benefits from loss carryforward in DMFI also trued up at the year-end. Net debt at USD 1.46 billion, marginally higher by USD 16 million due to lower payables and increase in biological assets in Philippines. Gearing ratio at 2.4x, marginally higher but lower than Q3, which was at 2.5x.

Now on the turnover analysis for the fourth quarter on Slide 10. The Americas constitute 71% of total group sales, lower by 18.7% in the fourth quarter at USD 306 million, mainly driven by the divestiture of Sager business and lower private label sales in the retail channel. If you strip out Sager, sales would have been lower by 13.7%. Lower volume across categories in branded retail was offset by our deliberate strategy to lower promotion spend and also increase in the list price. DMFI has fast tracked its innovation pipeline with the introduction of 4 innovative products in the growing refrigerated produce and frozen categories. Greg will talk about more on the same in the market update.

Asia Pacific sales in the fourth quarter grew by 3.5% to USD 116.5 million, up from USD 112.5 million driven by 20% increase in sales of S&W business, both fresh pineapple and packaged food. The Philippine market sales were lower by 8% in peso terms and 8.5% in U.S. dollar terms mainly as we address the operational issues and in general trade and strengthen the distribution network. Our key foodservice channel continued to grow.

When it comes to Europe, sales were almost flat at USD 10.1 million with lower beverage sales offset by higher packaged fruit sales.

With that, I’ll take you now through the full year results in the coming 4 or 5 slides. Starting with the summary, sales of USD 1.95 billion, lower by 11%. U.S. sales lower by 14.1%; and if you take out Sager Creek, DMFI sales would have been lower by 9.3%. When it comes to Philippine market, sales were down 4.2% in local currency and 8% in U.S. dollar terms. S&W in Asia has grown by 8.8% double-digit growth in fresh, offset by decline in processed. Our JV in India grew at 10% in local currency. EBITDA of USD 156 million, down 5% from USD 165 million due to lower sales in the U.S., lower exports of processed pineapple from Philippine significantly, reduced PJC prices and higher product costs that were partly offset by price increase in the U.S. and Philippines as well as our deliberate strategy to lower the trade spend in the U.S. Operating profit of USD 92.5 million, marginally down by 2% from USD 94.2 million. Net profit of USD 15.8 million, up 32% from net profit of USD 12 million. All of the above profitability numbers are without one-off costs and are versus last year.

Next slide provides an overview of nonrecurring expenses for fiscal year ’19, significantly less than fiscal year ’18. Again, DMPL continued with the initiative of buying out second lien loan from third-party lenders. Pretax gain from the purchase of DMFI’s second lien loan at a discount to par net of transaction cost was USD 16.7 million and most of this was in Q1. Would like to remind that following the divestiture of Sager in fiscal year ’18, we had incurred USD 13.1 million for write-down of Sager inventory based on estimated net realizable value in Q4. However, the actual cost or loss incurred on bulk sale of approximately 2 million cases of Sager products was higher by $6.2 million and most of that and all of that was in Q1. We are left with minimal Sager stocks, and we should not be seeing any costs which are material in the coming fiscal year.

USD 6.1 million was incurred in severance across several locations as we optimize our resources, both in plants and corporate roles. Last year, the group wrote down USD 39.8 million of deferred tax assets due to change in the federal income tax rate from 35% to 21%. This was something which impacted all the corporates universally in the U.S.

Moving on to Slide 13, which provides a little bit more detailed overview of our results. Again, full year sales $1.95 billion, 11% lower than last year, mainly due to lower sales in the U.S. and also increased due to divestiture of Sager veg business. Excluding Sager, sales are down by 7%. This will be explained more in the turnover analysis. Our gross margin at 20.5%, higher by 30 basis points on an organic basis. Reasons for improvement such as price increase, lower trade spend have already been outlined in the Q4 update. EBITDA at USD 143.7 million is significantly up versus year ago on a reported basis driven by lower one-off costs in DMFI and also profitable growth of fresh pine business, improved gross margin as well as lower overheads, offset by lower volume in the U.S. and Philippines.

In terms of financing costs, would like to clarify that last year included a one-off gain of USD 33.6 million from purchase of USD 126.9 million — or USD 125.9 million loan at a discount. DMPL share in FieldFresh joint venture in India was a loss of USD 0.1 million from a USD 0.3 million loss in the prior year period, which the improvement was primarily driven by increase in sales and margin. Year ago, just to remind everyone, was also impacted by implementation of GST in Q1.

Tax credit of USD 13.5 million lowered due to lower DMFI’s net operating loss. But FY ’18 includes write-off of noncash deferred tax asset as explained under the one-off costs. Net profit at $20.3 million, a turnaround versus a year ago, it does include $13 million gain on buyback of DMFI loan at a discount.

On the turnover analysis for the full year, you will see Americas does constitute 72% of total group sales, as explained, lower by 14%, mainly driven by divestiture of Sager business and also lower volume across categories most significantly branded tomatoes, fruits and private label sales as well as unfavorable impact of lower pricing in foodservice or pine juice concentrate and other pine products. From an overall group perspective, on an estimated basis, the unfavorable impact of pine product pricing and PJC was $15 million versus year ago.

When it comes to Asia Pacific sales, it declined by 2% to USD 507.9 million from USD 518.4 million due to decrease in exports of processed pineapple products and unfavorable sales mix in the Philippines. The sales of Del Monte packaged food declined in the Philippines. And S&W sales in North Asia and Middle East were also impacted due to increased competition from lower priced canned fruit from Thailand and Indonesia, which was partly offset by double-digit growth of fresh pineapple business. The Philippine market, sales were lower by 4.2% in peso terms and 8% in U.S. dollar terms. We continued to grow in key accounts both in foodservice as well as retail, but this growth was offset by general trade as we continue to address operational issues and strengthen the distribution network in that channel.

Europe’s sales decreased marginally by 5% at — and were USD 31.9 million versus USD 33.5 million last year, mainly due to significantly lower pine juice concentrate pricing, which were partly offset by higher volume of pine juice concentrate.

On Slide 15, just a bit of color on the balance sheet and cash flow. We are committed to improving cash flow, reducing debt and interest expense. Just to remind everyone, we raised $300 million from 2 tranches of pref shares in April and December 2017 that was used to repay our loans. We did purchase an additional USD 6.5 million secured loans in the fourth quarter, bringing the total amount purchased since fourth quarter of fiscal year 2018 to USD 231 million out of the total USD 260 million. And this was bought at a discount in the secondary market. We have continued to reduce our gearing and it was at 2.4x equity as of end of April from 2.5x.

Now I would like to hand it over to Greg for market update on the U.S. business.

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Gregory N. Longstreet, Del Monte Foods, Inc. – CEO & President [3]

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Thank you, Parag.

On Slide 17, you’ll find a summary of our shares and key actions. In FY 2019, we were able to maintain our market share leadership across our core businesses, our #1 share position in canned vegetables and canned fruit as well as our #2 market share positions in the fruit cup snacks category and canned tomato category. We did this while successfully executing price advances. We raised list pricing this year and took significant reductions in trade investments, as Parag highlighted earlier. We were pleased with how our brands performed in light of this increased pricing and higher list pricing. Innovation continues to expand the business into new spaces and new categories, and I’ll talk about that quite a bit here in further slides. Our business fundamentals remained on solid ground with strong shelvings, our support of innovation and sustained marketing investments in our brands. And we continue to be encouraged by the development of new channels primarily our foodservice channel this year as well as e-commerce. And I would also add that our growing produce department in deli business as well as our convenience store business saw a positive growth this year. In summary, to drive growth in market, Del Monte will continue to invest in building brands, bringing differentiated and innovative products to market and expanding distribution channels.

The next slide, 18, highlights our Q4 results. As Parag highlighted earlier, our sales were down in Q4 19%. After separating and removing Sager Creek business, sales were down 15%. This decline was anticipated and planned as a result of our decreased trade promotion, decreased private label business and higher list pricing. Removal of those products did enable us to improve our EBITDA margin by 4 points versus prior year quarter. And new products played a key role in our efforts in Q4.

We have successfully launched several exciting new product lines that will help shift our focus from some of our center store heritage into some exciting new spaces. And I’ll talk about those new products now. First, within the produce department, in perimeter of store, we launched new Del Monte Citrus Bowls. Very pleased with the acceptance and the support from the retail trade in that new hit product line that’s highly innovative and differentiated in its space. We launched new Del Monte Fruit Crunch Parfaits, which feature layers of nondairy coconut cr�me, crunchy granola with probiotics as well as a full serving of fruit. Very on trend, very contemporary products for the Del Monte brand, and those products are enabling us to expand our C-store business and our foodservice business as well as college and university business. And then we successfully entered the frozen category for the first time this year with new Del Monte Veggieful Bites as well as Contadina Pizzettas, frozen snacks made with cauliflower crust and a full serving of vegetables.

Slide 19 talks about what we refer to as our transformation. Del Monte Foods in the U.S. in many ways is building on its 130-year heritage, though we’re acting a lot like a start-up company right now, really changing who we are and what we are doing to meet the needs of the changing consumer base and customer base in the U.S. market. As an example, in recent years, Del Monte had focused on declining center store categories. The new Del Monte, Del Monte of the future, is extending our portfolio into high-growth, high-margin categories sold across diverse channels and we’re making great progress. In the past, we have limited investment and focus on innovation and efforts to contemporize our brands. We have revitalized and strengthened our brands over this year and in future years by supporting category-leading innovation and marketing investments in our business. We’ve historically suffered from pricing and margin erosions driven by excessive pricing promotion and nonstrategic business. We have changed that. We’ve decreased our trade investments, decreased and eliminated our nonstrategic business and are focused on best-in-class revenue management in strategically relevant categories. We’ve also historically experienced declines in profitabilities driven by increased cost of goods and haven’t had a concerted effort to pass through net inflation. And again, this year, in F ’19, we faced some significant headwinds with inflationary cost pressures. We took a proactive step this year to take an additional price increase to help pass through that net inflation. We’ve also suffered in recent years and recent past by a bloated supply chain that had excess inventory and underutilized manufacturing assets. We took significant strides again this year to reduce our inventory position by over $100 million and as well taken steps to decrease the size of our footprint, and more work is coming as we head into FY ’20 as we work on plans to announce an asset-light organization. And we’ve also lacked some of the internal alignment, communication and culture that’s necessary to really be a best-in-class food company in today’s environment, and we’ve worked hard on that this past year and are encouraged by the progress. So the future of Del Monte Foods really is a consumer-driven packaged foods innovator and some of those products are highlighted below, and I’ll talk about those in the next few slides.

It’s important to highlight the progress that’s been made over the past 12 to 18 months. It begins with our new turnaround plan that we unveiled last March at our ABL meeting where we extended successfully our ABL term loans. Encouraged by the efforts that Parag highlighted to buy back our second lien and improve our leverage this year. Our parent company, DMPL, has been very supportive of our U.S. efforts and initiatives, encouraged by the progress made in our trade reduction and cost-reduction efforts, which I mentioned earlier, significant reductions in trade our biggest area of expense, list pricing action for the first time in over a decade was taken this year as well as an aggressive cost sell program that will continue in FY ’20. We’ve accelerated innovation, and you’ll continue to hear that theme because we have so much potential to innovate this very strong family of brands that we have and enter new categories and new channels. We’ve also reallocated resources and improved our selling capabilities. We have a new perimeter and convenience stores selling organization. We have a new foodservice selling organization that’s equipped with very solid and experienced sales managers. And we’ve migrated to a completely direct sales model with our U.S. grocery trade. We’ve also reduced nonstrategic sales in terms of USDA business that’s been unprofitable for us historically as well as private label business and took initial steps to help reduce in idle assets in our supply chain to help us getting balance between supply and demand.

The next slide, 21, talks about our — the elements of our long-term strategy. It’s a very clear and focused path forward for us. It begins by building relevance by differentiating our brands and products to drive customer and consumer preference. We are investing to communicate our points of difference; improving our taste, health and wellness across our portfolio; and pursuing new more contemporary packaging solutions that’s essential for us.

Driving innovation by addressing consumer needs, shifts in eating behaviors and evolving demographics is another key thrust for us and pillar that we’re pursuing. We’re reaching new younger consumers with our new products. We’re extending plant based into new usage occasions. We are in many ways one of the original plant-based food companies. We’re providing more healthy snacking, morning and dinner day-part meal occasions and really entering attractive adjacencies for Del Monte and Contadina.

Expanding distribution is also a critical focus for the company. We are extending our reach into growing sales channels and new grocery store aisles. Of course, our center store leadership is important to us. We’ll continue to strengthen that position. But as we look at the long-term opportunities and the initial success in growing our Latin America business, our foodservice business, our convenience, deli and produce business, we’re encouraged by the future and the opportunities that are in front of us. And then we successfully ramped up our Del Monte fresh joint venture activity again this year. That’s really helped accelerate this growth and expansion of our brand into new areas of the store.

And then lastly, optimizing our organization. We’re building an organization model and a cost structure that will enable us to be more agile and to help fuel our growth, again, rationalizing nonstrategic business, focusing on our brands. We’re a branded food company and that’s where we’re going to place all of our effort and focus going forward. Realigning our manufacturing footprint and our supply chain footprint is critical to our future success and driving more efficiencies in our global sourcing and procurement.

The next slide, 22, talks about some of the tactics that we’re focusing on. Some of the key themes across our selling organization and marketing organizations have been strengthening our core, expanding into new areas and building our brands. And we do have an exceptional family of brands to build.

The next slide talks about briefly some of these highlights and accomplishments. In terms of strengthening our core, one of the critical areas of focus for us in the U.S. market is rationalizing competition. In most of our categories, with our customers, we’re helping to simplify the distribution and the grocery stores’ depth within the retail environment. If you’re not a #1 or #2 brand, in many cases, you are being eliminated. And most of our largest customers in these categories are now presuming — pursuing a one brand and a private label strategy. So a lot of our competition is being eliminated with our strength. It’s expanding our distribution, our presence on shelf, and it’s helping the retailer grow private label sales and it’s helping us grow Del Monte branded sales. A part of that strengthening of the core is also improving our products. This year, we went to a 100% juice formula in our baked — and fruit cup business. We’ve improved our College Inn offerings, introduced some new canned items in terms of innovation this year and our very successful launch for Fruit & Oats. The new Fruit & Oats product was named new product of the year in the breakfast category in the U.S. and it’s the first of its kind in terms of a shelf-stable, ready-to-eat oatmeal product with real fruit.

Expanding in the new areas is really a focus for us. Here highlighted are the 2 new frozen food products. In the bottom right is our new pouched Pizza Cut Pineapple Tidbits product that we’re expanding nationally in foodservice. We have gained authorization from several national pizza chains to begin carrying this product, that which is provided with 100% Philippine pineapple and really provides a packaging medium that’s preferred by our customers.

And then building our brands. We’re really investing to connect our brands with consumers and doing more efforts to advertise and reach our consumers on that path to purchase and encouraged by the Growers of Good campaign that we launched this year, which is really tracing back our roots to sustainability and our role in providing good, safe, high-quality products for our consumers.

Slide 24 helps kind of bring to light our vision of transformation of our portfolio. We’re really migrating from a leader in canned vegetables to a leader in vegetable goodness. Featured are brand-new items like our veggie-based dips, which are competing with hummus and provide a really good opportunity for us to expand within the deli department across the U.S.; our new Veggieful frozen products, our healthy appetizer as well as our new Veggie Bowl product, which is a veggie grain product made with ancient grains and vegetables and a unique flavor combination that’s ready to serve, ready to eat and very convenient for consumers. So a really healthy migration outside of the canned so where the Del Monte vegetable brand can provide solutions for today’s consumers.

Same rules apply to fruits. We’ve been a leader in canned fruit. The growth for us will come by making fruit exciting and accessible. Our new Bubble Fruit product, which is made with bursting bubbles of boba is a really fun and unique product that is one of its kind in the U.S. and is being accepted nationally by all retailers. I mentioned Fruit & Oats. Our Fruit & Chia line continues to expand and grow for us as well as the new Fruit Crunch Parfaits and our citrus products.

If we look at Contadina, we’re expanding our footprint on Contadina. We’re becoming a leader in contemporary Italian meal ingredients and solutions with added new products to the portfolio. We’re expanding that brand nationally, and we’re taking the brand outside of the canned to the frozen food aisle and building on the Italian heritage and the consumer equity with Contadina.

When you look at College Inn, similar story. We have been a leader in canned broth historically. All of our growth is coming outside of the canned as we launch and expand our footprint in tetra packaging and combi packaging with our Stock and Bone Broth and even our Organic Broth products. And our brand-new one pot Simple Starter line of products is very differentiated and being well received by retailers. And our goal here is to expand College Inn nationally to have a bigger footprint across the U.S.

Slide 26 talks a little bit more about the specific 4 products that were launched just recently in the U.S. marketplace. The specifics around our new citrus bowl products, again, very differentiated, healthy, closer to fresh but yet plenty of shelf life for our customers and consumers. As well as the new Fruit Crunch Parfaits, very excited about this product, really the first of its kind with this kind of shelf life and its delicious taste and nutrition.

Slide 27 talks about our new frozen products, which are in store, and we’re seeing some great early success from these products in the frozen food aisle for the first time with the Del Monte brand and Contadina brand. These products are made with cauliflower crusts, delicious, nutritional products to help really see the entire family so encouraged. This is a very big space in the U.S. marketplace and a growing category, and we’re providing something that’s healthier for consumers but yet delivers on great taste.

A couple of slides now on unlocking foodservice growth potential. This is an important area of investment for us. We have staffed the teams with very seasoned professionals that know the restaurant trade across the United States. We’re now gaining distribution nationally on a very innovative new line of riced veggies that are really healthy, better for you, gluten-free, low-carb products that replace traditional usage for rice with finely diced broccoli, cauliflower and sweet potatoes, very, very good success there with that product. I mentioned our success with frozen and refrigerated pineapple via our nice fruit partnership and technology as well as our pouch pineapple business. The single-serve fruit opportunity for us as we venture into college and university campuses and grab-and-go airport locations is also a growing phase for us, and then, of course, our traditional line of our quality kitchen ingredients.

Highlights from Q4. We’re really seeing success with our grab-and-go products in vending on a national basis through vending machines. And I also highlight convenient stores that are looking to carry healthy, better-for-you products. The products that we’re providing with the Del Monte brand are being very well received. And we’re excited about the early success there as we gain more traction and distribution across the country in vending environment.

I will now transition the presentation to Mr. Cito Alejandro.

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [4]

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Thank you. Thank you, Greg.

I will now talk about our business outside of the U.S. First, in the Philippines, we continue to have very dominant market share positions in the categories we compete in. Nothing much has changed in packaged pineapple, canned mixed fruit, canned and carton juices, tomato sauce and spaghetti and pasta sauces. Foodservice and modern trade are growing, but specific mention should be given to the convenience store segment, which is now close to $1 billion in revenue total for that industry and which we will capitalize on to further grow the Del Monte brand.

The second one is, as Parag mentioned earlier, our fourth quarter sales were lower by 8%. And this is primarily due to the operational issues we have encountered with 5 distributors. All of them have been replaced. They account for 30% of our business, and I’m pleased to report that the past 3 months results have been very favorable, and we’re now at a solid growth path. The general trade is very important to us because this composes about 15 distributors, which accounts for 65% of our business in the Philippines.

The culinary segment of the Philippine market is our most-profitable segment. And as you can see on the chart, we continue to support that and grow it via traditional advertising support. We also have what I would call culinary recipe initiative as well as system bundle packs to encourage further use of the product. In the middle, you will see a very exciting product that we have launched about 5 years ago and this is the Del Monte Quick ‘N Easy meal mixes that has become very popular among the millennials and is now #2, second to McCormick.

Not only do we have engagements with consumers, we also have engagements with the trade and with our retail customers. Here is an example of one of our engagements on the Contadina brand with Rustan’s, one of the leading supermarket chains in the Philippines. And this has been proven to be successful and will be launched in other key accounts very soon.

The outlook for the Philippine market continues to be very bright. And essentially, these are the key buckets of growth that we will be pursuing in the coming year. First is expanding our user base amongst our key beverage products, the juices Fit ‘n Right and all of our tetra juice products. The second one is really increasing our share of plate amongst our culinary products with special focus on the young households.

And finally, on the right, these are the other initiatives that we will be pursuing, but most important of all is we have reignited our innovation mindset. We have assigned a dedicated commercial leader to work with our R&D, to give us a clearer path to our innovation. And I’m pleased to report that in our Board meeting, we have cleared our 5-year innovation path, and we will be pursuing this starting this fiscal year.

For S&W, as you know, this is by far the fastest-growing brand in our portfolio, especially in Asia. The growth is really led by fresh pineapple and packaged products with significant growth in North Asia, China, Korea and Japan.

As Parag mentioned earlier, the sales of S&W rose 20% in the fourth quarter due to higher sales of both fresh pineapple and packaged products. In fresh, we are very — strong #2 in China and soon to be #1, hopefully, this fiscal year. Our focus has been in Tier 1 to Tier 3 cities. And we right now have 3 distributors in fresh in China, mainly Goodfarmer. The second one is Xian Feng, which I will talk to you later. And another one is Eachtake.

This is just an example of our efforts in WeChat, yes, okay. And one of our distributors right now, Xian Feng, and I’ll talk more about them, has about 14 million in their membership and all of them have bought at one point in time our S&W fresh pineapple. Not only are we in retail, we are also in e-commerce. As you can see in the picture, this is our latest — our meeting last month with Alibaba on how we can further expand our fresh pineapple and packaged S&W products in China.

Not only are we in North Asia, we are also expanding our footprint in the Middle East. And of course, here in Singapore, we have a very, very good business with NTUC.

Next picture is our latest visit to China. This is our — one of our distributor partners, Xian Feng. They have about 1,700 direct food stores in China, and they have a vision of expanding this to 4,000 stores in the coming 3 to 5 years. So we believe that this is going to provide us a strong footprint to solidify our leadership position in China.

The S&W fresh outlook also remains very bright. As you can see in these pictures, Goodfarmer is our lead distributor in China and they will be expanding more to Southwest China. Xian Feng also will be doubling their food chain stores together with China’s fastest-growing e-commerce company, Yunji. In the Middle East, we are expanding our footprint in Saudi Arabia, also in Dubai, Oman and Lebanon. And in Korea, Japan and Singapore, not only do we sell fresh pineapple, but the fastest-growing segment right now is fresh-cut pineapple. We have partners who buy our fresh pineapple, they cut it in their facility, they put it in a package and they deliver it on a daily basis to the retail stores. As you can see, the S&W brand is on the pack itself.

Our outlook for S&W packaged also is bright. We are expanding across categories, be it juice, pasta. And we have also introduced College Inn in Hong Kong. College Inn is from our U.S. portfolio, and it is one of the leading broth products in the U.S. And I’m proud to say if you take a look at that picture, where — in Singapore Airlines where our S&W tomato juice product is served.

Moving now to India. India sales were up 11% in the fourth quarter due to higher Del Monte packaged products. We now have $180 million revenue business in India. We are breakeven and cash positive, and we look to really generating a positive net income in the coming years. We expect to double this business in the next 5 years.

One of the biggest categories in India is mayonnaise. We actually have a production facility in southern India that makes all of these products. We also have toll packers in the North that make them. And this shows to you the extent of our mayonnaise products. Not only are they in bottles, but we have recently introduced them in standup pouches in order to increase distribution across the trade and also to offer a more affordable pack for consumers.

Not only are we in mayonnaise, we are also in fitness in India. And this is just an example of how we have strengthened our association with the health and fitness in communities thereby leveraging our experience with key consumers. This is a key part of the growth strategy we have for our dried fruits portfolio in India. And there will be more coming similar to this in supporting health and wellness in the coming years, okay.

With that, I will now turn you over to Iggy who will talk about sustainability and close the meeting.

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Ignacio Carmelo O. Sison, Del Monte Pacific Limited – Chief Corporate Officer [5]

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Thank you, Cito.

Improving sustainability is 1 of our 5 strategic pillars for Del Monte Pacific, supporting our vision, nourishing families, enriching lives every day. So this is an important part of our business which includes the Growers of Good master brand campaign that Greg talked about in the U.S. and all the sustainability initiatives we have in the Philippines. We published our first sustainability report in October last year, and this was recognized as the finalist in the Asia Sustainability Reporting Awards here in Singapore last March as one of Asia’s Best First Time Sustainability Report amongst companies listed in 14 countries in Asia. The Philippines SEC or Securities and Exchange Commission has begun requiring listed companies on the Philippine Stock Exchange to publish sustainability reporting this year following the lead of Singapore last year and other ASEAN countries before that.

In the U.S., we have some initiatives that we have outlined here towards achieving our packaging goals, which includes our joining the Sustainable Packaging Coalition in the U.S. to collaborate with other leading packaging suppliers and make materials more sustainable as well as obtaining 100% certification across suppliers, as you will note here.

So as reported earlier, the Board approved a final dividend of USD 0.005 per share, which represents a high payout of 50% of the FY 2019 net profit Parag reported earlier, which was about USD 20 million. At the time the Board declared this dividend yesterday, this represented a dividend yield of about 6%. Even with the share appreciation this morning, it’s still a healthy 5%, 5.5% dividend yield. The book closure date is on 12 July and payment date is on 19 July 2019, so important dates to remember.

So finally, a recap of our results briefing today. Barring unforeseen circumstances, so we expect to be profitable this fiscal year 2020 on a recurring basis without onetime expenses or onetime items, although we’d like to note that certain one-off expenses can be expected from continued streamlining of operations this year, which should make the company financially stronger in the years to come. We will continue to emphasize responding to consumer trends through strengthening the core business and innovating, as outlined by Cito for our business in Asia as well as Greg in our business in U.S., with a lot of innovation in the pipeline for the markets. We will continue to focus on growing our branded business across our markets. And finally, we will continue to improve our financial performance through a continued review of our manufacturing and distribution footprint in the U.S. to further improve operational efficiency, reduce costs and increase margins amidst anticipated cost headwinds this year including rising metal packaging prices and the impact of tariffs imposed by the U.S., which you have heard about in the news. We will continue to improve our cash flow and strengthen our balance sheet and reduce our leverage and interest expense, as you will have noted in our FY ’19 results ending April.

So with that, we would like to open the floor to questions. Thank you.

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Questions and Answers

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Ignacio Carmelo O. Sison, Del Monte Pacific Limited – Chief Corporate Officer [1]

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Yes, we may have questions as well through the webcast for those who are participating live, which Jennifer will fill to the panel. Yes, please.

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Unidentified Analyst, [2]

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(inaudible) So the question is what is happening to your plans to list the Philippines business.

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Ignacio Carmelo O. Sison, Del Monte Pacific Limited – Chief Corporate Officer [3]

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Okay. That’s a good question. We deferred our plans to list our Philippine business in June last year because of volatile market conditions. To date, we don’t think it’s the right time to relaunch our initial public offering of the Philippine subsidiary. We will relaunch it when we think the market conditions are ideal, but at the moment, that’s not being contemplated. And we would prefer to focus on the business improving our results in our Philippine company, as Cito outlined earlier, what we are doing to improve our general trade business as well and continue to grow our fresh pineapple business, which is our fastest-growing, highest-margin business particularly in North Asia. So at the moment that’s the priority. When we think that it’s the right time to relaunch the listing, we will announce it to the market. But we don’t foresee that in the near future.

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Unidentified Analyst, [4]

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So — if I may have a follow-up question. You have an interest expense close to $100 million, I think $96 million annually. Apart — I mean, the Philippine listing was supposed to help pay down the debt. Without that happening, what are your plans to scale down your debt?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [5]

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We are looking at alternative plans including raising some money in fiscal year ’20. At the right time, we will share the details of the program. We do understand that, and we are working on further deleveraging initiatives in fiscal year ’20. That will be shared, hopefully, in the next quarter results.

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Unidentified Analyst, [6]

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Could you provide more information on the decline in 4Q margins in Philippines? I believe the margins came down.

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Parag Sachdeva, Del Monte Pacific Limited – CFO [7]

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Yes. So the margins came down in Philippines because of a number of reasons. If you look at the total Asian operations, it was impacted by — on the export side, by really unfavorable pricing on pine products. That was one big factor that impacted the base business gross margin. Second thing is as our volume was on the lower side in Philippine market, our costs due to lower volume but higher inventory also impacted us. So our warehousing cost ended up being higher. Some other inefficiencies were also impacting us as we stabilized the business in general trade. So those were the main things that impacted the profitability or gross margin of our base business in the fourth quarter.

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Unidentified Analyst, [8]

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Okay. But you also mentioned that you increased price, right? Was it for some other specific products?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [9]

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The increase in price took place in 3 or 4 rounds in the last 12 months, starting January 2018. And this pricing was mainly to address the imposition of sugar tax, which was undertaken on 1/3 of our beverage business. And also, as you would appreciate, Philippines last year had a pretty high inflation. So the inflation was almost 5% on an average last year. So to address that and to also soften the impact of sugar tax, the right level of pricing was taken, which was just enough to cover the cost headwinds.

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Unidentified Analyst, [10]

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Okay. So if I understand correctly, the drag on the margins is last year on the pricing of the pine products whereas the increase in pricing in your beverage side is mainly to protect your margins, which you were enjoying previously?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [11]

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Yes. And we did not fully cover the margin impact from sugar tax on our beverages. We spread it across the portfolio so that we are still making sure that it’s affordable to the consumer.

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Unidentified Analyst, [12]

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Okay. So the sugar tax was first implemented. And thereafter, you raised your pricing progressively?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [13]

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It’s progressive. Yes.

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Unidentified Analyst, [14]

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Which means that there’s some drag?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [15]

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Yes.

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Unidentified Analyst, [16]

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So at the end of the whole exercise, was it a net decline in margin or it is just nice to cover?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [17]

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Just nice to cover overall. Yes.

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Unidentified Analyst, [18]

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Okay. So due to timing difference here, you’re experiencing a slight drag in terms of the beverage margin.

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Parag Sachdeva, Del Monte Pacific Limited – CFO [19]

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Yes. Yes.

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Jennifer Y. Luy, Del Monte Pacific Limited – IR Manager [20]

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We have a question from the webcast participant. This is for Gene. What is the level of ABL drawn at the end of the reported period?

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Gene Allen, Del Monte Foods, Inc. – CFO [21]

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It’s $140 million. $140 million.

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Unidentified Analyst, [22]

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So is that $140 million?

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Jennifer Y. Luy, Del Monte Pacific Limited – IR Manager [23]

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It’s $140 million, 1-4-0. Yes. Thank you, Gene.

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Ignacio Carmelo O. Sison, Del Monte Pacific Limited – Chief Corporate Officer [24]

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Are there any other questions? Unique opportunity while we have the management team here with us. Yes, please.

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Unidentified Analyst, [25]

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I have a question for Greg. The U.S. business is — has been struggling since Del Monte Pacific bought it. And while I think that you have done some good jobs — a good work with product innovation in different channels, it has not really translated to the bottom line. Revenue continues to shrink. It’s been shrinking for many years. Profitability is not as high as you would expect for a $2 billion business. So looking forward, when do you see your transformation plan translating to higher profitability in terms of perhaps the operating profit or the profit before tax?

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Gregory N. Longstreet, Del Monte Foods, Inc. – CEO & President [26]

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Great comments and valid point. If we look at the plan that we’ve established for fiscal year ’20 as well as our updated long-range plan, we do see a return to the kind of profitability that we should be delivering. We see us being able to obtain suitable gross margins and EBITDA levels each year progressively beginning in F ’20, culminating by fiscal ’22 and fiscal ’23. The final piece of the puzzle that we are trying to fix is in our supply chain. And we were asset heavy with many, many assets running across the country that were underutilized. As a result, we incurred a tremendous amount of fixed expense throughout our supply chain, and we’re not very efficient or a low-cost operator. Those plans are being finalized. We have our Del Monte Foods Vendor Meeting on July 10, where we will be unveiling our new supply chain footprint and the new cost structure which will enable us to become much more profitable and sustainable in our efforts to increase bottom line as well as top line growth. And I’m pleased as I look forward to fiscal year ’20, we are going to grow top line, and we’re going to grow top line as a result of this innovation and this innovation is going to create upwards of $200 million to $400 million in new net sales over the next 3 years for the company. So very optimistic about that business particularly because it’s margin-accretive business, provides better margins, better returns than we’ve enjoyed historically. So it is a big business. It has been underperforming, but we’re taking the steps and actions with the help of DMPL to fix what’s broken on the business, and we will be returning to where we should be in terms of growth and profitability here beginning in F ’20.

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [27]

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If I may add to that. Greg has been with us for about 18 months.

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Gregory N. Longstreet, Del Monte Foods, Inc. – CEO & President [28]

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18 months almost, yes.

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [29]

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18 months. and the strategy has been one of — first is revenue. Not only new products which are really critical in this business because we’ve not had a lot of innovation in the past but also have the strength in the core business. I think both of them will have to go hand in hand. Second, we’re also attacking our cost structure. There are a lot of brands right now, and we’re trying to find out how we can further optimize this network in order for us to increase the efficiency and the utilization of the plan. As you know, we back plan, where we only back our products most of them in 5 months of the year, 5 to 6 months. So therefore, we got to make sure that we have just the right amount of plans, right, in order to improve our utilization. And that was not done in the past for other reasons, but now we are addressing them head on. The other component of profitability is, of course, our operating expense that what I can tell you that a lot of things have been done in order to optimize our headcount, our operations because that too will have to contribute to increasing our profitability. So those are the things that are being done outside of whatever would be involved in managing the debt. But as far as the thrust with consolidated revenue, both core and new products, our cost of goods sold is something that we must attack, right. And we have a lot of efforts going on right now, and more of them, I think, in the next quarter will be reported to the shareholders and, finally, our operating expense. So if you ask me, as you said, where is it going to turn the corner, probably in about 2 years from now, 3 years from now, we will see real progress in the way we are doing things. But that’s as far as I can tell you if we’re looking at some — if we’re looking at the forecast and if we’re wanting to understand how we can further improve our profitability.

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Unidentified Analyst, [30]

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(inaudible)

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Parag Sachdeva, Del Monte Pacific Limited – CFO [31]

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If we get the plans approved. If the plans are being put together, if we get the plans approved, there could be more one-off costs in the coming year or so. There are 2 more tangible steps that Greg has taken that are improving the margin. He talked about increasing this price. That’s something which is going to be margin accretive and is already demonstrated. Secondly, the inventory is down considerably. That allows us to make sure we do not have inefficiencies that we have incurred in the past, including just selling those products at a discount that has been taking place for a number of years. So those are the 2 tangible measures that will improve our margins effectively in fiscal year ’20.

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Unidentified Analyst, [32]

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Can I just follow up on your U.S. plants? How many more plants are there still available for closing your U.S.?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [33]

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First of all, we are evaluating the footprint. No definitive decision has been made. We have been evaluating optimization for the last 18 months — 18 to 24 months. And that evaluation continues and is being looked at a number of plants in the veg network as well as how to increase utilization on the fruit and tomato side. So it’s several plants which are being looked at. And also in addition to the manufacturing side, we are also looking at becoming more efficient on the distribution side as we lower our inventory.

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Unidentified Analyst, [34]

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Okay. How many plants do you have in the U.S. right now?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [35]

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10 plants.

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Unidentified Analyst, [36]

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10 plants, okay. Okay, I have a question back to Philippines. Regarding your lower volumes, is it a case that you’re transiting between the distributors or is there too much inventory inside the channels?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [37]

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It’s more transition.

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Unidentified Analyst, [38]

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More transition?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [39]

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More transition. So as you can understand, we made very tough calls, and we changed 5 distributors. Cito outlined that contributes around 30% of our general trade business.

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [40]

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Not only that. We also changed the sales dealer, which is the sales rep, because I think it goes hand-in-hand, right, the operations. We are also upgrading the organization. I mean this is the first time that we have suffered this transition issue, right? For many, many years, we’ve been growing, right? So we have to take the hard stand. We replaced 5 distributors, okay? They are critical distributors. In fact, 1 of them — 2 of them — 1 — 2 of them were distributors for Metro Manila, which is about 40% of our national, right? So that’s a critical piece. So very confident that we have slowly turned the corner, the distributors are there, they’re in place, they’re operating. We have a new leader. There are also — differentiation has been made in the organization. The key people are on the ground right now and working. So — and I think the most encouraging part is if you take a look at the past 2 months, including this month and the forecast, the general trade is going to grow by 11%. So that’s a good sign. When I see it over the whole month, we’re turning the corner, and we’re starting to grow again.

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Unidentified Analyst, [41]

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So you said that it’s the general trade transition, right? Then it is probably a gap in when you stop your current distributors, and then there is a time lapse where there’s a gap, where no one’s buying, and then after you appoint your distributor. So roughly how long is time lapse where that wasn’t any distributor buying?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [42]

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It’s already done in Q4. It was around 4 to 5 weeks where it takes time to ramp up, put the infrastructure in place, make sure you have all your distributors — all your distribution infrastructure, trucks, people are appointed and they start calling on the customers. So it’s around 4 to 6 weeks.

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Unidentified Analyst, [43]

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Okay. So the new distributors, when you appoint them, right, they would have to ramp up their inventories just to cover for the 4 to 5 weeks, right? Has this period started to happen already?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [44]

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Yes.

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [45]

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Yes. As I said, May — if you take a look at the May, June results, even the June closing right now, the June sales is going to be 11% ahead of year ago. So we have turned the corner as far as the goal is concerned, which means that the reason why that is so is the sales of the distributors to the stores have increased, the coverage has increased, okay? Unique buyer accounts has also increased because we now have better distributors covering this for us. That’s how it all boils down.

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Unidentified Analyst, [46]

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Okay. So you are saying that volume is loading in 1Q?

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [47]

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Excuse me?

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Parag Sachdeva, Del Monte Pacific Limited – CFO [48]

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No volume loading. We are tracking the sellout and making sure the inventory of the new distributors is pretty much 3 to 4 weeks, which is what we need.

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Luis Fale Alejandro, Del Monte Pacific Limited – COO [49]

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Yes.

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Ignacio Carmelo O. Sison, Del Monte Pacific Limited – Chief Corporate Officer [50]

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Are there any other questions? If none, then we’d like to conclude this investor briefing, and thanks for joining us today as well as via the webcast for those overseas. Thank you.

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Jennifer Y. Luy, Del Monte Pacific Limited – IR Manager [51]

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Thank you.

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Parag Sachdeva, Del Monte Pacific Limited – CFO [52]

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Thank you very much.

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