D&L Industries, Inc.

Hello and good morning to everyone. Welcome to the results presentation for the first nine months of the year for D&L Industries. Okay, let's get started. So our highlights. So it was this quarter when we started the commercial operations of our new plant in Tanawan in Batangas. So our first invoice was issued in July of this year. For the first nine months of the year, our net income came in at 1.8 billion pesos, which is down 29% year on year. However, excluding expenses related to the new plant, our earnings were down by 11% to 2.3 billion pesos. We did see in the third quarter that things did show some improvement compared to the second quarter. For example, quarter on quarter, there was higher volumes for our high margin specialty products, as well as for our commodity segment. And we also saw the earnings excluding the expenses from the Batangas plan. Earnings were up quarter and quarter by 11%. And we'll go into more details in the next couple of slides. So we are confident that we will continue to be able to service our bonds that are coming due in 2024, next year, and 2026. as we are seeing lower debt levels as well as better free cash flow. So here in this slide, you can see updated pictures from our plant. And although from the outside, Pretty much everything looks like they're done. There is still some work being done inside. So we are still ramping up production and it is taking a while. And as we are planning to conduct plant tours for this new facility in the next couple of months. So we will be inviting investors to take a look for themselves. So here are the key figures comparing first nine months of this year to the same period last year. So you can see there with Our net income comparing both with and excluding as well as excluding the expenses from our new plan. and So you can see there, excluding expenses from the new plant, net income was down by 11% year on year versus third quarter last year, it was down by 6%. So by a lesser number, the decrease was less. And comparing to the second quarter of this year, we were actually up by 11%. So again, that's for net income, excluding the expenses from the new Batangas plant. On the bottom, you can see there in terms of free cash flow, positive for all the periods in 2023 compared to negative free cash flows in 2022. So this just shows in graphical form the income both comparing first nine months to last year as well as the year before. And if you were to exclude the expenses from the Batangas plan, our income actually came in even higher than that in 2021. So just to show that things are, well, of course, with the weaker economy and the expenses related to the new plant, we are seeing a weaker year, but at least compared to 2021, we are still doing better. On the right side, you see there the breakdown of net income. So number one is still the food ingredients. Cameras, which used to be number two, slipped to number three, slightly behind specialty plastics. And then consumer products, ODM, which used to be a single digit contributor of net income, now contributing 12% of net income. Okay, next slide, please. So this is just to show how compared to the second quarter, we actually did better in the third quarter. Again, this is excluding expenses from the new Batangas Plat. So 11% higher net income compared to the second quarter of this year. So this is more details from the income statement, at least the highlights of the income statement. So again, comparing to first nine months of last year, as well as the year on year comparison for the third quarter, and also comparing to the second quarter. So one very welcome development, which we also saw in the second quarter of this year, the product mix of our revenue has almost reverted back to where it was pre-COVID. So we can see Before COVID, we were actually making very good progress with high margin specialty products peaking at almost 70% of revenue. But due to COVID and the various supply chain issues during COVID, that ratio deteriorated at one point to almost 50-50. But as you can see, as of the first nine months of the year, we are at over 60-40. And we do expect this trend to continue, meaning that we do expect the revenue from high-margin specialty products to continue to increase faster. than that for our commodity division or business. And so that ratio should continue to improve over time. So here's a look at the breakdown of our different segments by volume and then split between high margin and commodities. So a couple of highlights here. First, you'll see that for our... high-margin segment. Overall, volume was down by 1%, but this was mostly from ChemRes, that second row. But for all the other segments, the high-margin specialties volume actually saw increases from as low as 2% for food to as high as 65% for Aeropack. our consumer products ODM segment. In terms of the commodity segment, biodiesel volumes are flat. So that's why you see there the 0%, no change, substantial no change. But in terms of food ingredients, our food ingredients volume is down by 34%. This is not as alarming as it looks in the sense that we're basically just giving back the increase that we saw in 22 compared to 2021. So essentially, we're back to around the same levels as 2021 for the food commodity segment. This is really a reflection of or a correction from a situation where we saw last year, due to various supply chain difficulties our competitors were having, we ended up gaining a lot of market share, not intentionally, but it was really more because of the absence of competition. But with the commodity segment being a low margin segment, This is a part of the business where we're relatively okay with not increasing or even giving up. So that's actually not that negative development for us. Okay, next slide please. So this is a look at just the high margin specialty products and how volumes have grown over the last five years. And as you can see, the good volume growth in 2018 was disrupted towards the end of that year when we started seeing high inflation the effects of the global trade wars, as well as the late passage of the national budget in 2019. And of course, you have COVID in 2020, which led to a lot of volatility. But as you can see, it took a while for volumes to recover, but this So if you look at our volume growth, we did experience 6% volume growth in our high margins compared to last year. And if you look at third quarter of the previous year, there was growth as well. So our growth this year, it's not just because of a low base effect, because we did have growth in the third quarter of last year as well. Okay, for the next slide, just looking at the high margin specialty products. So the highlight here for me would be the continued recovery in margins. So as you can see, during COVID, we saw margins drop from almost 26% to below 22%. But since then, margins have started to recover. And you can actually see there in that box, even quarter on quarter this year, the margins for the high margin specialty products continue to increase. And in the third quarter, we're actually at 25.8%, the gross profit margin, as of the third quarter is higher than the peak or highest gross margin we had, which was in 2020. So that's definitely good news in terms of the recovery in margins. for the commodity segment. So similar to what we saw in high margin, we saw the margins in our commodity business drop as well during COVID. And so earlier I had shared that we didn't totally see the growth in volumes last year as all good news, as you can see with lower margins, even if our volumes are higher, you may not be making that much net profit. So even with the lower volumes, a very big recovery in margins that we saw in this year, that's much more welcome. And it's more, our commodity business is operating at the margin that we are more comfortable with. For our exports, so this is one area where we are seeing continued weakness. So revenue from exports down by 40% and contribution of exports are also lower from 33% last year. We're down to 27%. On the right, you can see there the contribution of exports. our exports so food still being the biggest uh followed by other chemicals and then by specialty plastics we are diverting more of our resources into our exports business not just on the manufacturing side so our new plant in batangas is uh in a pesa zone so that is positioning us to take advantage of incentives for exports. So as a Filipino company being located in the PESA zone, we are required to export at least 50% of the production of that new plant in FIT in Tanawan in Batangas. We are also increasing our presence overseas, attending more conferences, trade shows, exhibits, visiting potential customers. And we do expect to see the impact of these new efforts in the next couple of quarters. In terms of free cash flow, so there's a couple of significant developments. First with lower raw material prices, as you can see there that line for change in working capital, we were seeing very big negative numbers the last couple of years with raw material prices increasing substantially. However, this year we are seeing raw material prices being not just less volatile, but actually in general lower compared to the last couple of years. So we're actually in a negative working capital position at the moment. So it means there's more cash coming in to the business from lower cash tied up in receivables and inventory. You can also see there that we're spending a lot less in capex. And this is just to be expected as we are winding down the construction of the new plant in Batangas. So even if you were to annualize that nine-month figure of 1.1 billion pesos, we are going to come in at less than half. of the capex from last year. And the result is that big free cash flow number, positive free cash flow number at the bottom. And this is something we expect to continue, not just for the rest of the year, but even towards next year as well. So in the next slide, you can see that in terms of capex. So we started the construction of the plant at the end of 2018. And you can see there the capex starting to ramp up and peaking last year. But it has started to come down by a lot. And so it will be significantly lower. CapEx will be significantly lower this year and again, lower again by next year. So this slide, we track how our two most used raw materials, coconut oil and palm oil, which are in the middle of the chart, they do continue to be volatile. So you can see there the massive price increase that happened during COVID. And then we can see how prices recovered towards the end of last year. And you can also see at the bottom there, the volatility in a dollar peso exchange rate, which is significant for us because a little over half of our raw materials are imported At the top, you can see there our margins absolutely do not reflect the volatility. At least you don't see our margins going up or down by three times compared to the volatility in our raw material prices. In fact, the change in our margins is more reflective of the change in the product mix that we showed in the earlier slides. Here, so just to show again our ability to pass on price changes. So what we did is we overlaid the change in price for coconut oil and palm oil. And you can see there that our revenues on a quarterly basis actually do reflect that ability for us to change prices. And it is something we are able to continually do. So a look at the segments in more details in terms of the numbers. So in terms of revenue, food is still the biggest at 60%. Number two is Chemres or oleochemicals and other specialty chemicals. Third, specialty plastics. Fourth, consumer products, ODM. However, in terms of net income contribution, food... is the biggest, but number two, ChemRest has switched to number three. Plastics is number two. And consumer products, ODM, which used to contribute mid single digits or even low single digits in terms of income, is up now at 12%. Okay, next slide, please. So for the food ingredients, volume overall down by 24%, but the big drop is really due to the drop in the commodity volume. The high margin volume overall is actually up, slightly up, I think by 2%. And net income is actually up by 1% for this segment. Overall margins are actually doing much better compared to before. Okay, in terms of ChemRes, so this segment, this is a segment that we are seeing the most weakness, this time with net income down by 53%, volume down by 4%, and margins slightly lower by 0.6%. Our drop in exports, actually, a big chunk of that drop is also attributable to the weakness that we are seeing in ChemRes. We are... As I mentioned earlier, we are putting more efforts into various export efforts, and this is also being done for cameras as well. So we are expecting the benefits of that increased focus on exports to be coming online in the next couple of quarters. for one development that we have been starting to hear about recently. So the pie fuels law, which was passed in 2006, came into effect with a 1% biodiesel blend in 2007. And that 1% was increased to 2% in 2009. There have been talks that due to several factors such as higher crude oil prices, as well as a desire to reduce reliance on imported fuel, there's been talk to increase the blend possibly to 3%. So various media have reported this, reports from the DOE and even the president has mentioned this. So the overall impact, of course, aside from higher volume, we are expecting for margins to be better as well. Hopefully overall industry profitability. For specialty plastics, overall volumes up 6%, although net income is slightly down by 5%. And we are still continuing to develop a lot of new products for our specialty plastics group. This is actually the first business that we started with 60 years ago. So this was D&L's first business when it started, but still a lot of potential, especially on the engineered polymer segment. And then finally, for the consumer products ODM, so Aeropack is continuing to see very good numbers, volume, revenue, as well as net income up substantially. So this is one segment that really suffered during the pandemic as people were not going out anymore. So everything from lower consumption of shampoo, deodorants and so forth. But as people really are going out right now, as we can see from the worsening traffic situation in our major cities, So these numbers are reflective of not just the increased or improving consumer economy, but also the efforts that we are continuing to make in developing new products in this segment. in terms of our related party expenses with rentals of fixed assets. So if you look at the balance sheet of D&L, you'll see that we do not own any property. um all of the ppne there it's really just plant and equipment um so almost all of the property the the company uses are leased from affiliate companies uh and that's the left side of this chart so those are related party expenses which come up to roughly two percent of overall costs and expenses so that's pretty much in line with where it has been in the past On the right side of the chart, you can see there. So D&L performs shared services across all of our businesses and including businesses that are not under LISTCO. So services would include things like HR, IT, finance, accounting, legal, admin, and so forth. And so the fees for these services would be classified as related party income, and they do offset the related party expenses. in terms of cost structure and R&D spend. So you can see here on the upper left, you can see the overall, in terms of contribution to cost, raw materials by far is number one at 80%. with a foreign number two being labor at 6%. And overall, if you were to just look at what's considered fixed costs, so that would primarily be labor, depreciation and rental, and maybe half of others. So more or less below 15% of our costs and expenses classified as fixed. So with over 85% of our costs classified as variable, that gives us a lot of flexibility and ability to adapt and move very quickly. On the top right, you can see there in terms of the breakdown of raw materials we use, edible fats and oils make up over half, with the biggest chunk coming from palm oil and coconut oil. More or less around 55% of our raw materials are imported. And then on the bottom left, in terms of R&D and IT spend, we lump it together as tech spend. You can see there the numbers continue to gradually increase over the years. And in terms of tech spend, the increase compared to last year is 14%. Okay, a quick look at our balance sheet. So a few things that you'll see in terms of borrowings, overall, it is lower compared to last year. And in terms of debt to equity, there's also an improvement from 0.75 to 0.7 times. Interest cover on the bottom right, we are coming in lower now at seven times. However, at seven times interest cover, I would say that's still classified as moderately geared. Okay, and more look at our gearing. So net gearing is coming in at 55%, better than the 59% at the end of last year. Net debt at 11.2 billion. And with interest rates having gone up substantially from a year ago, our average cost of debt has gone up as well with a 5.65% average cost of debt. So out of our debt, approximately 5 billion is from the bonds. However, 3 billion out of the 5 billion is maturing in September of next year. So we are... By the end of this year, we will be classifying that portion of our fixed income as short-term debt because there's less than one year left to maturity. So the remaining 2 billion, which is maturing in September of 2026, that is continuing to be classified as long-term debt. The short-term debt sorry, the 3 billion interest rate is at 2.8% with the, that's the 2024 maturity, the 2026 maturity coming in at 3.6% interest. So here's a look at how our debt or overall net debt compares to our interest rates and interest covers. So net debt started going up as we were constructing our plant. and spending more in capex. Interest rates are back to where they were from the 2018 figures. Interest cover are lower currently at seven times. In terms of cash conversion, so receivables at 55 days, Inventory at 107 days, payables at 24 days, overall cash conversion at 138 days, still relatively within the metrics that we normally look at for cash conversion and for working capital. In terms of the stock, we are number 52 when you rank Philippine largest companies by market cap. In terms of trading volume, currently at a little over $300,000 a day. There's not much change in the foreign ownership of the company. And you can see there in the bottom right, currently at 14% foreign ownership, roughly half of our float held by foreigners. And that's been pretty steady last two years. In terms of investor relations, there's still a lot less conferences currently compared to pre-COVID. Although, as you can see, we are still continuing to join conferences and even individually meet with investors as well in NDRs. Okay, so that's the end of the presentation for the first nine months of the year. We are open to Q&A.

Good morning, everyone. If you have a question, please feel free to raise your hand. Or if you would like to write it in the Q&A chat box, we can read it up for you. So to kick us off, we have a question from Jojo Abad. What is your earnings guidance for 2023 and 2024, given your nine months results?

Hey, Jojo. So normally we would discuss our guidance every year when we announce our full year results. However, for 2023, actually ever since COVID, we had not been giving any guidance just because there was just too much volatility, too many factors that we had to address. look into that were so unpredictable. And even for this year, we had not been given any guidance. The fourth quarter, I think what we can see, so we can see that in terms of traffic, in terms of people being out, it's almost at the same levels compared to pre-COVID. But if you were to look at the numbers coming from a lot of consumer companies, there seems to be a lot of weakness, especially from the B2C companies. So a lot of what we do is very much related or supplied to these same companies or at least the same industries. So I don't think we're going to be any different in that sense. For next year, still very difficult to say, but we may be able to give more color when we release our full year results in the first quarter of next year.