Del Monte eyes higher selling prices, production efficiencies to combat inflationary pressures

D03 : D03 0% is looking at ways to offset margin erosion across its different product lines and markets, as higher commodity prices and increased transportation costs hit its expenses, top executives said in a call on Thursday to discuss the company's latest financial results.

Parag Sachdeva, chief financial officer of Del Monte's subsidiary Del Monte Philippines Inc (DMPI), said the company is likely to see "cost headwinds" in the form of raw commodities as well as the metal packaging that the company uses to can its fruits and vegetables.

Del Monte sells a range of fruits and vegetables in canned, frozen and other forms. It also recently expanded its product line to include milk and biscuits.

Mr Sachdeva estimates such price increases could amount to as much as two to three percentage points of the group's sales figures.

"The biggest pressure we're facing are the inflationary headwinds," he said. "We need to make sure that we're on top of things, and identify offsets for increases in cost."

He is, however, confident that such cost increases will be offset by various programmes the company has put in place, including automation, increases in volumes and other production efficiencies.

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A favourable sales mix that relies more on products with higher margins, or an increase in production volume, could also help to lessen the company's costs on a per unit basis, he added.

Del Monte on Wednesday posted net profit of US$14.5 million for the fourth fiscal quarter ended April, reversing from a net loss of US$12.4 million for the corresponding quarter last year.

The company's gross margin for the quarter rose to 26.8 per cent from 17.8 per cent, on the back of a combination of factors including a better sales mix and lower trade promotions.

Del Monte's top line for Q4 came in at US$497.8 million, down 22 per cent from US$638.4 million for the same quarter last year. The group attributed this to a decline in sales contributions of its US subsidiary Del Monte Foods Inc from an "extremely high base", due to peak pantry loading in March and April last year.

In a bid to combat rising cost pressures, Del Monte increased the prices of its products in May. In the United States, the company's canned vegetable products saw an increase of 7 to 10 per cent. In Asia, the prices rose by an average of 2 to 3 per cent across the board.

Del Monte is not ruling out further price hikes, said Mr Sachdeva.

"We will continue looking at opportunities to go for a higher average selling price in case we can't cover any additional headwinds that come our way."

The impact of the Covid-19 pandemic has also cost the company an estimated US$5 million from a group perspective, but Mr Sachdeva said he does not expect this to have a significant impact on the group's financial results as it has been largely offset by savings in overhead costs.

In April, DMPI reported that it had submitted a registration statement to the Philippine Securities and Exchange Commission to propose an initial public offering (IPO) of its common shares. Del Monte owns 87 per cent of DMPI, while the remaining 13 per cent is owned by Sea Diner Holdings.

Mr Sachdeva declined to comment on the timeline of the IPO, saying it was subject to regulatory approval and market conditions. However, he said the company is working with the regulators.

The money raised from the IPO will be used partly to repay debt at the holding company level, and is expected to reduce its gearing to one to 1.2 times equity, down from two times currently.

The listing will also unlock value in DMPI, and have a positive spillover impact on the valuation of Del Monte, said Mr Sachdeva.

As at 4.02pm, shares in Del Monte are trading at 39.5 Singapore cents, down 7.1 per cent or three cents.