The Positives
+ Healthy gross margins. Gross margin was maintained at 28.9%, higher than our modelled 25.8% and 4Q22’s 25.9%. A combination of higher prices in June 2022 and packaging changes helped support margins. In early September, the US operations underwent their third round of phased price increases since May 2021.
+ Joint venture returning to profitability. The joint venture in India turned around from a US$0.6mn loss to a US$0.7mn profit. Earnings benefited from 19% YoY growth in revenue together with margin improvement. India has discontinued fresh business and a greater focus on B2B sales. There have also been management changes.
The Negatives
– One-off refinancing cost. In May 2022, Del Monte refinanced the US$500mn 11.875% p.a. 20225 high yield senior secured note with a US$600mn 7-year Term Loan facility. The interest on the loan is SOFR plus 4.25% or 6.45% currently. The early redemption incurred a US$71.9mn one-off cost (or US$50.2mn post-tax and minority interest). Current savings on the refinancing are around US$27mn p.a.
– Sluggish revenue. Revenue growth decelerated to a negative 1.2% YoY in 1Q23e to US$456mn. It is a major deceleration from the 14% YoY growth in 4Q22. The US growth rate slowed to 1.5% (4Q22: +25% YoY). We believe there was a general de-stocking exercise by US retailers in the quarter (Figure 3). The Philippines faced several hiccups during the quarter. There was a change in the distributor; de-loading of inventory in May and June; consumers shifting away from discretionary; and some market share loss in ready-to-drink juice to cheaper PET bottled juices. Another headwind was the 8% decline in the Philippine peso.
Outlook
We expect a healthy recovery in the coming quarters.
Source: Phillip Capital Research - 12 Sep 2022
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