D&L Industries, Inc.

analyst briefing for the full year results of D&L Industries for 2023. So we'll drop straight to the highlights. We saw the full year 2023 earnings come in at 2.3 billion pesos. So we saw a couple of factors, but it was really higher interest expense and operating expenses that lowered earnings for our company. These are all related to the new plant that we built in Batangas. We also saw just like what we saw in the first three quarters, higher raw material prices and higher interest rates that also had a big effect on not just on us, but on the consumer economy as well. And that had a big impact on companies like us. So one piece of good news, as of this month, we have seen the exports from the new plant. We've already achieved the target for the first year for the Batangas plant. This is the commitment that we made to PESA in our registration. So in that sense, we're at least ahead of what we committed to PESA. We also saw in terms of our HMSPR, high margin specialty products, the volume went up quite nicely, up by 40% in the fourth quarter. So the outlook for this year with interest rates rising, not going up anymore and likely starting to come down, as well as with inflation, pretty much looks like it's fairly muted this year compared to the last two years. We are quite optimistic about our prospects for this year. And of course, longer term, we will start to see the fruits of our investment in the new plant in Batangas. And we're also expecting cash flow to be positive in a big way. And you'll see that for 2023, we are reporting positive free cash flow. And that is something we anticipate will continue to happen for the next couple of years. And we've got some bonds... one series of our bond maturing this year, we have the highest confidence that we will be able to service those bonds. Okay, into the next slide, just a couple of pictures of, at least from the outside, you can see different views of the new plant. So We started commercial operations in July last year. So that means that we issued our first commercial invoice. There have still been some more works being done for some of the other lines inside the plant. We expect to be finishing the bulk of these works in the next couple of months. And we are aware that some of you are hoping to come and visit and see the new plant. We will be scheduling that in the next couple of months. So just to graphically picture in terms of our export commitments to PESA. So as part of the PESA or Philippine Economic Zone Authority registration, so a company that's registered, you get incentives like income tax holidays, benefits. duty and VAT-free importation of machines as well as raw materials. In exchange, you need to comply with certain conditions and that includes having export commitments and at least for the first year, So first year would be reckoned from July 2023 to June 2024. But as of Feb, we've already surpassed our export commitment. So it's a good thing, at least from a PESA perspective, we are ahead. Okay, so here's a look at the figures. So no surprises in a sense that we really ended the year pretty much how the first three quarters, how we did for the first three quarters of the year in terms of revenue. So we did see In the first three quarters, raw material prices stabilizing. It was a pretty high base coming from 2022. There was really the war in Ukraine that triggered a huge jump in raw material prices across the board. And so we were affected by that. But raw material prices have since stabilized, come back down. And so since we pass on a lot of these price changes to our customers, our revenues also trended lower. However, we did see muted volume increases. muted demand from some of our customers, especially on the food side, as well as in the oleochemical side. And we will go into more details in the next couple of slides. But here you'll see also that there is that big difference coming from the impact of the start of operations of the Batangas plant. So it is a big investment. We do have a lot of costs associated with it. So everything from depreciation, of course, as well as costs, other costs raised at startup, including ramping up inventory for the working capital. So we will see the impact of that in the next couple of slides. Sorry, so one thing I One thing that we have seen is there is an improvement in the gross profit margins, as you can see there. So last year, we were tracking below 14%. So for 2022, below 14%. For 2023, we're at above 17% gross margin. So it's not all good. We are seeing quite a few signs that there are some things that are really better and that reflect a better outlook for us as a company. So in terms of full year net income compared to the previous two years, here we can see a comparison. So down by 31% versus 2022. But if you were to exclude the effects of the new plant, we are still down, but by a lower number, by 15%. In terms of the net income breakdown that you can see on the right of the slide, so biggest income contributors, still food, but specialty plastics, close, and then oil and chemicals, which is ChemRes, third, and then consumer products, fourth. Okay, in terms of the condensed income statement, so a little more details here. So you'll see quite a few things. So in terms of our cost of goods sold, the drop is also significant. However, you do see in terms of interest expense, there is a big jump. And that really is a factor of not just the debt that we have, but higher interest expenses as well. So we're currently tracking at most of the loans that we take in now. as of today, are coming in at roughly around 6.25%, compared to where it was, say, two years ago, we were still below 3%, I believe. So quite a big jump. And of course, a lot of the expenses related to the Batangas Plat. So here's another example. Here's something positive that in terms of the product mix, so the lower portion, the darker portion, that would be what we would classify as the high margin parts of revenue. And the lighter portion at the top would be the commodity or lower margin part of our revenue. So the product mix, as you can see, pre-COVID, was pretty steady and was actually slowly improving at almost 70% high margin, 30% low margin. As you can see during COVID, there was a steady deterioration in the product mix. And it's natural to expect that with a lot of companies really focusing on well, at the beginning of COVID, it was really focusing on survival and later on just focusing on the most important parts of their businesses. We were not getting such good demand for our high margin products, but the situation has pretty much started to normalize, as you can see, in 2023, with over 60% of our revenue coming from high margin, much better compared to where it was before. not just for 2022, but even for 2021. And we hope to see that product mix be back to pre-COVID levels, if not this year, then within next year, by next year. So in this slide, we can see a breakdown between the different business segments, as well as between high margin and commodities. And so volume growth is really how we would measure growth. And as you can see, for everything that would be classified as high margin volume, there was volume growth. However, this was more than offset by the drop in our commodity business, which is not surprising. wholly negative because the difference in margins between the two is quite significant. So part of the big drop in volume in commodities is tied to the high base effect. During COVID, we saw our commodities volume jump or increase by quite a lot. So in a way, this is just giving back a lot of that market share grab that happened during COVID. But the impact on the company, I would say, is not that significant. What's more relevant, I would say, is really the positive impact of the volume growth across the board for our high margin segment. And it's been a while since we've seen our high margin businesses, not just growing in terms of volume, but growing significantly as well, from 6% all the way up to, as you can see there, double digits, 40%. So speaking of high margin, so with the bulk of our income really coming from our high margin business. So here we can see what happened in the last six years in terms of what was happening with our high margin products. So relatively good growth, 2017, 2018, then 2019, the country was hit by high inflation, late passage of the national budget, as well as the trade wars that were happening globally. So we were negatively impacted in 2019. 2020, of course, COVID. 2021, you do see some recovery, partly because of the low base from the lockdowns, the full lockdowns that happened in 2020. But you could say that we really didn't see the recovery start until pretty much last year. And as you can see in the fourth quarter last year, very good growth in volumes. Well, it partly is due to the low base effect because we did see a big drop in volumes in the fourth quarter of last year. But good growth nevertheless. So just focusing on the high margin segments. So in terms of volume, we saw in the earlier slides that volumes are up by 9%. Although, as you can see, revenues are down. And this really is more an effect of lower raw material prices and us passing on lower selling prices. So that's why revenue is down. But on the bottom left there, you can see that in terms of margins, margins did drop during COVID from above 25% pre-COVID to below 22%. So we're currently, or we hit 23% in terms of margins, gross margins for COVID. for last year, and we do expect that positive or increasing trend to continue. So hopefully we will see, just like the recovery in our product mix, we are hoping to see the recovery in the margins for high margin as well in the next year or two. For the commodity segment, And so we did see a big drop in volume. We also have the price pass through with lower selling prices. So consequentially, the big drop in revenue from the commodity business. But in terms of margins, so similar to the high margin segment, good recovery in margins also for the commodity business. So both high margin as well as commodity or overall, there is that overall trend of margins getting better for us. In terms of exports, so we did see a drop in exports, although we're still ahead of where of exports as a percent of revenue compared to a couple of years ago, but it is a drop. As you can see on the right there, the breakdown in terms of exports, it's really food and oleochemicals together accounting for 80% of our exports. Part of it is what's going on globally in terms of trade wars. There's minor impact from China. China's not a huge export market for us, but there is, still some impact. But this is something we expect to improve on. We are quite aggressively wrapping up our export efforts to a lot of markets all over the world, not just in Asia, but in North America and Europe as well. In terms of the cash flow, so during the construction of the plant, we saw a lot of capex and that had a net negative impact on our free cash flow. And in the last two years, we also, sorry, 2022 especially, we saw raw material prices increased dramatically because of the, mostly because of the war in Ukraine. And that also had a net negative impact on our free cash flows. But as you can see, in 2023, raw material prices have stabilized, although we do have some impact from increasing inventory growth. with the startup of the new plant. And you also see the lower impact of CapEx last year compared to the previous year. So big positive free cash flow number for last year. And that is something we expect to be maintained for the next couple of years. So positive free cash flow for us for starting 2023 and for the next couple of years. So speaking of CAPEX, so we started the construction of the new plant at the end of 2018. And as you can see here, CAPEX, mostly from the new plant, ramping up, peaking in 2020. 2022 at almost 3.5 billion pesos last year's capex coming in at less than that at just a little over 1.4 billion pesos and we expect capex even this year to be still lower so for a lot of our suppliers involved in the construction of the plant we retain a 10% a part of their fee, of their charges. That's just to make sure that they really fulfilled what was committed to us. So that 10% retention the bulk of that will start to be released within this year and some flowing even into next year. So there will still be some... capex related to the construction even this year and next year. So it will really be probably 2025 before we could see a really significantly lower and I would say normalized capex that's really not associated anymore with construction at least of the new plant. So on this chart, so what we do is we plot our costs, our main costs, which are really coconut oil and palm oil together making up... over half or close to 60% of the raw materials we use. So that's the middle chart. So the brown line, coconut oil, the blue line would be palm oil. And then below that, the dollar peso exchange rate, roughly half of the raw materials we use are imported. So these two at the bottom combined would be would be quite a significant factor in terms of the movements in our costs. The chart at the top where we show our margins. So what we're trying to convey or communicate here is that our margins don't necessarily move together with how our costs move. And this really is more a reflection of number one, our ability to pass on raw material prices. And second, you do see a lot of correlation with the product mix chart. that we showed earlier. So that does have a big impact on our margins as well. Okay, so in terms of our revenues, so another way to see that we are able to pass on price changes to our customers, and it's both up and down. So you can see here, again, coconut oil, the brown line, palm oil, the blue line. As these prices have moved, our revenues move similarly. So quick look at the different segments. So here's an overall snapshot. So in terms of revenue, the biggest business is still food, but in terms of income contributions, so surprising that plastics actually came in as the number one income contributor or the highest net income contributor. Normally it's, It's at number three below oil chemicals and other specialty products. So it's just, I would say, a reflection more of how much the food ingredient segment and how much ChemRest results have lagged last year compared to our other segments. But nevertheless, in terms of margins, you can see that overall margins have held up pretty well, except for Chemres margins are down by 3%. Even for consumer products, ODM margins are still down, although at 27% margins are still where we would classify it as very healthy margins. Overall margins were still much higher at over 17%. Now, looking at the food segment in more detail. So overall volume down by 18%. But as we had seen in the earlier slide, the high margin part of food was actually up. It was the drop in the commodity volumes that really pulled down overall volume for food ingredients. Overall revenue down. So this is partly from volume, partly from passing on lower raw material prices. However, net income is down, down by 18%. But one positive thing that you can see across the four food segments, you will see that margins have a very healthy trend. jump and overall margins we do see are much higher. So we're trending back towards the margins that we saw pre-COVID. For those of you who have been following us for or since COVID, you'll likely recall that during COVID, our food segment was hit hardest and the margins had dropped by a lot. So it's very encouraging to see that the margins have started to recover and we hope to continue to move them back up. So here's a look at cameras. So, Similar to the food segment, we saw an increase in volumes for high margin, but a drop in low margin. So the low margin part of ChemRes is really the bi-diesel segment. So there's a lot of competition in that segment. And the margins there are very, I would say, close to the all-time lows. It's a very difficult environment to be in now for the biodiesel business. But speaking of the biodiesel business, in the next slide, we are quite optimistic. The government has been more vocal about the plans to finally increase the blend. So this is something we had been expecting for the last couple 17 years, 16, 17 years. Current blend is at 2%. The communication that we saw is that we are looking at an increase to 3%. So from 2% to 3%. by the middle of this year, and then by a further 1% for each of the next two years. So that means going up from 2% currently up to 5% by 2026. So we're looking forward to that. Okay, for the plastics business, so good growth in terms of volume. We don't have any commodity sales or commodity products in this segment. It's all high margin. And even though it's a fairly small business in terms of revenue, it's probably accounting for roughly 10% of overall revenue. But in terms of net income contribution, it's coming in way higher at 31%. So, yeah. This was actually the first business that we started with 60 years ago when the company started. So it's still around in terms of overall revenue. It's not as big, but in terms of impact on income, it's still very significant. And then finally, consumer products ODM. So this was a segment that in terms of personal care, saw a huge drop when COVID started because people were not going out anymore. They weren't buying deodorants, shampoos and other personal care products anymore. But the home care product segment did see a huge jump thanks to sales of things like alcohol, disinfectant and other cleaning chemicals. Last year, everything did relatively well. All segments, as you can see, saw big jumps in volume as well as revenue for this segment. So a quick look at some of our related party expenses. So D&L on its balance sheet, it does not own any property. So all of these large fixed assets are leased, mostly from affiliated companies or companies owned by the family. So that's on the left side, you can see related party expenses coming in at roughly 2% of costs and expenses at 645 million pesos. On the right side, so the right side would be management fees that D&L charges not just the subsidiaries, but also all other affiliate companies. So to perform shared services, so things like HR, IT, legal, finance, accounting, even management, and these fees come in. So they would be classified as related party income, which does help offset the related party expense on the left. A quick look at the cost structure. So no major changes, 80% of our costs coming in from raw materials. Next highest cost will be coming in from labor, currently at 6%. And then third would be depreciation and rental. So if you were to look at what would be classified as fixed costs, it's pretty much just a depreciation and rental, maybe part of utilities and maybe half of the other costs. So that's probably coming in at around 10% of our costs coming in as fixed. So 90% of our costs, would be classified as floating or variable. And that's pretty much the reason why we can be quite nimble. Even though we're not a small company anymore, we can react very quickly and we're not stuck with a lot of legacy expenses. On the right, you see there the breakdown of raw materials. So fairly consistent. Coconut oil, number one. Palm oil, number two. Together, making up half or a little over half. And overall... 40% of raw materials imported. On the bottom left, you can see there, so what we call technology spend or what we spend on IT and R&D spending has increased. been increasing for many years. In fact, it was only really during COVID or sorry, the start of COVID in 2020 when requests from customers to do special formulations and other special requests that really went down to pretty much zero. So that is really the main reason why our spending back then had a drop. But as you can see, spending has resumed the upward trend and is still going up. Okay, in terms of the balance sheet, no major surprises. Debt is slightly up. Our debt to equity ratio from 0.75 the year before, we ended last year at 0.82. And interest cover coming in at six times. In terms of net gearing, we are at 69%. So this is higher compared to the last couple of years, but I would say even at 69%, our debt's still fairly moderate. It does mean we have a lot of capacity if we needed to bring in capital more just through debt. We have a lot of lines with our banks. We don't even use up We use up less than half of the lines we have with our banks. So quite a lot of leeway there. In terms of average cost of debt, so this has gone up significantly. Currently, so for last year, we were at 5.7%. I mentioned earlier, current borrowings were coming in at roughly between 6% to 6.25%. waiting for... Well, at least it doesn't look like rates will go up anymore. And as we have free cash flow coming in in a positive way, not just last year, but for the next couple of years, we will be using a bulk of that free cash flow to start paying down our debts. So you should see... going forward, debt numbers going down. And this is just historical on a quarterly basis from 2016, fourth quarter, just how our debt has moved and together with effective interest rates. So that would be the light green line. So that That went up in 2019 during the high inflation period, came back down during COVID and is back up today. And interest cover, which has gone down as we took on a lot of borrowing to finish our new plant. In terms of cash conversions, so no major surprises. Inventory is up mostly because of the additional raw material that we had to bring on board because of the new plant. But even at 111 days, it's not too far from where we have been in the past. And we should start seeing that number normalize going forward as production of the new plant continues to ramp up. So one good thing we do see, sorry, back to the work capital cycle slide. One good thing we see is that accounts payables going up to 24 days. So we're getting better terms from our suppliers. In terms of receivables, it is higher compared to before, but it's still within the range. We try to keep it below 60 days as much as possible. And at 55 days, that's still a fairly good number to be at in terms of receivables. Okay, in terms of the stock, D&L is ranked number 50 across all the Filipino companies in the Philippine Stock Exchange. Market cap is at roughly 50 billion pesos. 12 months. Trading average at roughly $250,000. In terms of the float, we're at 27%, with about half of the float being owned by foreigners. And in terms of our activities, as in terms of investor relations, we do continue to join various events, conferences, both inside the Philippines as well as outside. So quite getting back to being busy, meeting with investors and communicating what's happening with the company. Okay, so that is the deck. We are open to Q&A.

Thank you, Alvin. We have a couple of outstanding questions here. So let me just read them. So the first question comes from Jason Mock. So how much is the first year export commitment to PESA for the new Batangas plant? How much of the export D&L did for is coming from orders from the older plants being shifted to the newer plants versus new export orders from new customers that we didn't have before?

So we're currently not disclosing any numbers with regards to new plant. And the reason for that mainly is there's a lot of competitors who are very keen to see what we're doing and to get information. And we want to hit that balance of giving sufficient information disclosure to investors, but without revealing too much that it's going to hurt our business. So for now, what we're comfortably saying is that we comfortably are achieving at least our commitments with PESA. So the other thing in terms of PESA, we whatever you build in PESA, the rule in general is you cannot just shift what you're doing before and shift it into a PESA zone. That's not allowed by PESA. So these exports are new. I mean, one way to look at it, if you were to look at the... So I can see this. You guys can't. But when I look at the export business, what we were doing with a new plant the first month, so July, August, September, it was really very low numbers. If it was a matter of easily shifting what we were exporting before to a new plant, you would have seen a big jump in the numbers immediately. And we didn't see that.