D&L Industries, Inc.

Good morning, everyone. Welcome to the first quarter 2024 briefing of D&L Industries. To discuss the results, here with us today is Mr. Alvin Lau, President and CEO of D&L Industries. After the presentation, we will have time for the questions and answers portion. Alvin?

Morning, everyone. Thanks for joining us this morning. We're going to discuss the first quarter results of BNL. So our highlights, we did pretty okay, I think, in the first quarter. Though net income was up by 4% year on year to 618 million pesos, we did see the Batangas plant almost breaking even in the quarter. And our EBITDA actually increased by 17% year-on-year to 1.2 billion pesos. In terms of our high-margin products, we saw margins for the quarter up by 4.5% to 26.3%. And this is the highest level for our margins for the high-margin specialty products ever. Volumes for the high margin specialty products also increased by 13%. So it's a third consecutive quarter where volumes are up significantly for that segment. In terms of export sales, we are almost at the peak that we hit before. So currently exports make up 32% of revenues. But point number four there, we had pretty good free cash flow. In fact, the free cash flow for the quarter came in at 2.7 billion pesos, which exceeds the free cash flow for the whole of 2023. And then proud to say that we also won an award from the Intellectual Property Office of the Philippines. Okay, so into the details. So here's the slide showing net income from the last couple of years, as well as comparing first quarter of this year to first quarter of last year. And in the next slide, you can see the, so we had a lot of expenses, amortization, which are related to the Batangas plant. The amortization were all capitalized before start of commercial operations. But when we started operations in July, as you can see there in the third quarter, all of the expenses started to kick in. And then you did see an improvement in the fourth quarter. And then in the first quarter, you can see there that so with all of these expenses, including interest, expense, amortization, now being offset by revenue and income generated by the plant, you can see that we're almost at break even. So this is coming in. earlier than we anticipated. So it's good news. And we hope to see more improvements in the next couple of quarters. So the next slide shows you. So these are updated pictures from the plant. We are starting plant tours this month. We're going to be starting them for analysts and media in the next couple of weeks. So we'll be scheduling that soon. And so this is something that we had talked about in the previous quarter in terms of our commitments to PESA. The Philippine Export Zone Authority, we have already surpassed the commitments. Of course, we didn't overpromise when it came to our commitments to PESA, but it's still good to see that we've been able to comfortably reach that commitment. The next slide is a look at the condensed income statement. So some interesting things here. So you can see the overall revenue was up by 5%. You can also see that there's a huge jump in interest expense. So this is expected. We've been adding debt for the construction of the plant. We even issued bonds three years ago. But what's interesting, though, there's a big increase in the interest expense year on year. If you look at the quarter on quarter interest expense, you'll see that there's actually a slight or a small decrease here. So it looks like at least the interest expense has already peaked. And with lower interest rates being planned or expected for the next couple of quarters or within before the end of the year and early next year, that should bode well for us in terms of our interest expense. And then you can also see there in terms of net income, we were up by 4% year on year. But again, on a quarter-on-quarter basis, we're actually up by 23%. So part of this is low base effect. The fourth quarter last year, because of inflation and high interest rates, we had a pretty weak fourth quarter last year. In the next slide, you can see there the revenue mix between high margin and commodities. So we came in at 57% contribution margin. in terms of high margin specialty products. So in terms of commodity products, it's currently at 43%. So lower compared to year end last year, but still up compared to the low from the COVID, from the decrease that we saw that happened during We do expect as the production from the new plant stabilizes that we are expecting to see more growth in the high margin products. So that ratio should continue to improve. In the next slide, we see there the volume change across the four segments. So our three biggest segments, we see pretty good volume growth with the biggest volume increase coming from the food segment, particularly on the low margin side with volume up by 56%. The fourth segment, for our consumer products ODM segment, volume came down by 12%. Part of this is from a high base effect. We did very well last year. But unfortunately, with inflation and high interest rates, it looks like it is having an impact on consumer spending. And we are seeing a bit of impact on that segment as well. In terms of the just looking or isolating high margin specialty products. So here we can see the volume growth for high margin specialty products across the last seven years and six or seven years. And you can see that there the drop during the high inflation period in 2019 and also, of course, during COVID-19. particularly in 2020. A bit of recovery started in 2021, but it wasn't very stable yet. But as you can see, starting the third quarter 2023, or last year, we're now on our third straight quarter of volume growth for the high-margin specialty products category. So we're quite... pleased with that, and we are hoping that we will see more volume growth in that category going forward. The next slide is a closer look at the high margins specialty product segment. So, you can see there on the bottom left, the margins for that category. We have, we're now above The margins that we saw even before COVID when we peaked were at a much higher level, at above 26%. We do believe that there is still some room for increase in the margins. So together with the improvement in the product mix, that should translate to an overall increase in the gross profit margins for the company as a whole. Looking at the commodity segment, so margins are slightly lower at 6%. But if you look at historical margins for commodities, so the low would be around 4%, the high would be at around 10%. Midpoint is somewhere between 6% to 7%. So we're actually doing pretty okay, or the margins are currently where we would expect it. So the next slide. So we did pretty well in our exports coming from 27% of revenue coming from exports last year. We're currently at 32% of revenue coming from exports. So this is very close to the peak that we hit in 2021 when we had 33% of revenue coming from exports. As the but Angus Plant is in a pet zone, we are committed to export at least 50% of what we produce there. Although we are currently doing much better than that, but as the production from the plant continues to increase, we should see this export ratio continue to go up. And one of our long-term goals is to hit that 50% export level eventually. Here's looking at the cash flows. So you can see here quite the biggest differences coming from change in working capital. So with raw material prices fairly steady and for a lot of the raw material prices, for at least the raw materials we use, prices have actually decreased. So that has contributed to negative working capital. So as you can see, there are big positive change in terms of working capital. And then in terms of capex, that has continued to wind down. So the result is overall free cash flow coming in at almost 2.7 billion pesos, which is way above the whole year cash flow from last year. And looking at the next slide, you can see that our capex, so we started construction of the plant end of 2018, and capex started to increase after that, peaked in 2022, and started to drop last year as we opened the plant. And you can see the trend is still for lower capex going forward. Although for 2024, the bulk of the capex is the release of the 10% retention. So this is what we are giving back to our or paying back to our suppliers. Usually it's paid back a year after commissioning of what we procure or buy from the suppliers. By next year, the bulk of that retention should already be paid, and the expected capex for next year should be lower again. The next slide, so just to demonstrate our ability to pass on price changes to our customer, you can see that in the last almost 15 years, despite the volatility of in the raw materials we use. So, coconut oil, palm oil together make up for over 50% of the raw materials we use. The chart below, that's the dollar peso exchange rate. So, we import or we pay in dollars roughly 40% of our raw materials. So, despite the volatility, you can see that our margins, they actually reflect more the product mix that we showed earlier. So this is the difference between high margin and low margin, and not so much reflecting the change in our costs. And to further show how our revenue and price pass-through is affected by the change in the raw material prices here you can see our quarterly revenue and there really is a high correlation as raw material prices change our selling prices change as well the next slide we take a look at the four segments in more detail so here you can see that Our biggest segment continues to be the food ingredients segment, coming in at 65% of revenue and 41% of net income. But number two, currently specialty plastics make up just 10% of revenue, but it makes up for a much larger share of net income coming in at 40%. Okay, in terms of the details, so you can see food ingredients did quite well. Volume overall up by 35%. Revenue up 13%. Net income up 24%. So there was a very large increase in the volume of the low margin. That's the second box. The commodity oils volume up by 56%. The high margin segments, which are the other three remaining boxes, volume was up overall by roughly 6%. That's the info that we showed in the volume chart a couple of slides back. But a couple of other good results here with overall revenue up also. And margins overall up by 1%. So there's a lot of increased activity, especially from new customers, as well as market share grab that occurred with our food segment. For ChemRes, so it's starting to stabilize. ChemRes had the biggest drop in net income last year, but as you can see, net income is still down by 9% this quarter, but it's down by a much lower number. And we do have a lot of reasons to be optimistic about ChemRes. For example, on a quarter-and-quarter basis, we are starting to see improvements in profitability. And this is one segment where we have invested a lot in terms of marketing, especially for exports. And so we are expecting to see the fruits of these efforts coming forward in the next couple of months. And in the next slide, you will also see that we've been at a 2% biodiesel blend in the country for the last 15 years, so since 2009. We understand from the Department of Energy that the plan to increase the 2% blend of biodiesel to 3% is pushing through, though it has been delayed. The original plan was to do it in July, but I understand it's been pushed back to October of this year. And the increase will further continue to 4% next year and 5% the year after. So let's see. That should have a positive impact on the overall biodiesel industry as well as on us. Specialty Plastics, so this is the first business that we started with as a company 61 years ago. So very good results, volume up by 10%, revenue of 13%, net income up 76%, and margins up by 8.5%. So we did see a lot of volatility in this segment the last couple of years. So thankfully, it looks like things have started to... stabilize, and we did also see a bit of new orders coming from new customers here in this segment as well, which explains the good growth. So in terms of consumer products ODM, This segment did spectacularly well during COVID and even last year, so a bit of high base created. But unfortunately, with inflation and it seems that there is really weakness in the consumer economy, this has impacted this segment as well. But we are going forward. This is still something we are positive about, especially with the expected gradual decrease in interest rates going forward. We do expect that to have positive impact on this segment. So the next slide, just looking at the related party expenses. So D&L on its balance sheet does not own property. And a lot of the other large fixed assets that the company uses are also rented and not owned by the company. And these are mostly fixed. rented from affiliate companies. So that's the left side. So these are related party expenses, translating to roughly 2% of total costs and expenses. On the right side, we have D&L providing a lot of shared services, which you could say can be interpreted as related party income. So that helps offset the related party expense. The next slide, we look at the cost structure of the company. So overall, you can see in the top left there, raw materials make up 79% of total costs and expenses. So still by far the largest costs of the company. Number two, far number two is labor coming in at 6%. Overall, we can say that what would be classified as fixed costs, so that would be labor, depreciation rental, maybe half of the other. So below 15% of the company's costs classified as fixed, meaning over 85% of the company's costs classified as variable. So that's what gives us the flexibility to change and adapt as needed. On the right side there, you can see in terms of raw materials that we use, So over half coming from coconut oil and palm oil. Coconut oil is 100% domestically sourced. Palm oil, as well as some of the other raw materials are imported. So over or approximately 40% of raw materials denominated in US dollars. And on the bottom left, you can see there technology spending. So this includes IT as well as R&D. So this has gradually been increasing over time with the exception of year 2020 when there was so much uncertainty during COVID. But as you can see, we are still continuing to spend on IT as well as R&D with spending up by 32% versus last year. In terms of the balance sheet, no major surprises. So you do see, so one other reason why interest expenses started to come down is you can take a look at the fourth line there. Borrowings are lower from $17.1 billion. End of last year, for the quarter, we ended at roughly 15.5 billion or a change of 1.6 billion pesos. As the cash flow situation continues to get better and as we're able to afford it, we will likely continue to slowly pay down our debt. So you can see there in terms of debt equity, The ratio has improved from 0.82 to 0.72. And in the next slide, you can see there, in terms of interest cover, we're at five times. Net debt is at 11.9 billion, coming from over 14 billion pesos last year. Average cost of debt is at 5.6%, which is among the highest interest rates that we've seen for a while. And we'll see more details in the next slide. So here we can see compared to the last eight years, our changes in net debt. So that's the green bar. So you can see how debt started to increase as we constructed the plant, but it's already peaked. Net debt has already started to come down and will continue to come down going forward. Consequently, interest cover did drop. So currently at five times from a peak of over 30 times three years ago. And interest expense, sorry, interest, our effective interest rate has been going up. But not much higher than the peak that we saw in the last couple of quarters as well as during that high inflation period in 2019. In terms of working capital, no major surprises. Accounts payable steady at 24 days. Inventory actually slightly better at 101 days compared to 111 days before. Receivables also fairly steady, up by one day compared to last year. Overall cash conversion, we did see a slight improvement by 10 days, currently at 133 days. Here's a little more detail about the award that we were given by the Intellectual Property Office. So it's called the Gawad Yamang Award. ESIP award. So basically it deals with having inventions that were able to commercialize and benefiting the country. There's a lot more detail of this in our press release. In terms of the stock, so currently D&L is ranked number 55 among the largest Philippine stock or listed companies by market cap. Average daily trading average is at roughly 230 000 us dollars in terms of ownership so the public float is at 27 but roughly half is owned by foreigners and um you can see the next slide that uh we are continuing to participate in various investor events, either conferences or roadshows. So, both abroad as well as in the Philippines. That's it for the presentation. So, we're open to Q&A.

Thank you, Alvin. So, to our participants, if you would like to ask a question, you might either raise your hand via the Zoom app or type your question in the Q&A box below. We have a couple of questions here. So the first one comes from Joyce and Ramos. So can you share what would be a normalized CAPEX moving forward?