D&L Industries, Inc.

Good morning, everyone.

Hi, everyone. Hi, everyone. Good morning. Welcome to the second quarter briefing of D&L Industries. Here with us today is Mr. Alvin Lau, President and CEO of D&L Industries, to discuss the results. Without further ado, I now turn over the floor to Alvin.

Hi, everyone. Good morning. Today we'll be disclosing our first half results for 2024. So straight to the highlights, we're happy to report that for the first half of the year, we had net income increase by 6% compared to last year. Actually, on a quarter-on-quarter basis, we're doing quite well with net income up by 13%. So this is second quarter of the year versus first quarter of this year as well. And we have other highlights such as our high margin specialty products volume or HMSP volume is up by 33%. And this is the fourth consecutive quarter that volume is up for this segment of our business. Export sales are also doing well with contribution to sales at 33%, which matched our record high that was hit a couple of years ago. And we're seeing fairly stable raw material prices. And together with lower capex, it's resulted in free cash flow of 2.4 billion pesos for the first half of the year, which is more than double the free cash flow from the whole year last year. And just the last bullet point there, we are still quite confident that we are going to hit our net income target of 10%, at least 10% earnings growth for the year. So in the next slide, you can see here that the historical net income for the last three years, as well as the comparison of the first half of this year versus first half of last year. In the next slide, you can see that compared to the previous quarters, we're already profitable for our new plant in Batangas. So this plant, the operation started July of last year, so third quarter of last year. And that's why you see there in the third quarter of last year, we had to start expensing all of the costs that are incurred for that plant. Over time, as you can see, the situation continues to improve. As of the second quarter of this year, the plant is already profitable. The next slide there just shows you a picture of what the plant currently looks like. We are going to be welcoming visitors to do plant tours at our plant soon so please stay tuned for that in the next slide is a brief look at our income statement or at least the highlights so We had 17% growth in revenue versus first half of last year. And as you can see, 6% growth in net income. Comparing year on year, just the second quarter, meaning second quarter of this year versus second quarter of last year, net income growth was at 8%. And again, comparing quarter and quarter or second quarter versus first quarter of this year, net income growth was 13%. Quick look at the sales mix. So we are still pretty far from the optimal sales mix, or at least the peak that we had pre-COVID. So we were at close to 70% coming from high margin in 2019. That fell all the way to almost half or 50-50 between high margin and low margin two years ago. Since then, we have been making some inroads, but as a lot of our commodity sales continue to do well, we are still seeing growth across the board. But because the commodity segment does grow quite fast, it does mean that our product mix is still fast. uh not where we'd like to see it although it is the situation is improving and we are optimistic that it will continue to improve the next slide shows you the segment volume growth across all four segments as well as split between high margin and commodities so with the exception of the consumer products odm segment we saw very good volume growth across all our segments And overall volume growth of 38%. But with high margin specialties, overall volume growth of 23%. And in this case, we did see the volume for our commodities business up by 53%. And this was really driven mostly by the high growth in our food commodity segment, which was up by 66%. In the next slide, we see there the volume growth across our high margin specialty products. So again, for the last four quarters, we're seeing positive growth in volume for our high margin specialty products business. So it's been six years since we've seen at least four quarters of consecutive growth for the high margin segment. so we're hoping to match that five straight quarters of uh consecutive growth for the high margin uh segment uh and last time we saw that was six years ago taking a look specifically at the high margin segment so um in terms of the margin of our high margin segment You can see there that during COVID, the margins dropped from 25.7% to just under 22%. So since then, we have seen recovery, and it's now at 24.4%. So still a little over 1% left till we get back to that point that we had before. For the commodity segment, we are seeing a similar pattern where margins fell during COVID but have started to recover. And I would say at 7.3% for our commodity business, the margins, the gross margins are pretty much close to the midpoint of where our commodity margins usually swing. next page is our exports business so we're at 33 of revenue coming from exports at the moment so we the last time we hit this high level was in 2021 and we are confident of further increasing the contribution of exports to our revenues so our target eventually is to hit at least 50% of our revenue coming from exports. And with our Batangas plant located in a PESA zone, that is something that we are quite confident of hitting. In terms of our cash flows, so this year we've seen much lower capex as well as very stable commodity prices. So those two factors have made a huge contribution in terms of positive free cash flow, as you can see. And we expect this trend to continue. The outlook for most commodity prices and of course for our capex as well remains to be quite stable and on the next slide you can see there so we did start to see capex increasing as we ramped up the construction of our plant in batangas so we finished that construction july of last year Although we still have a lot of the retention payments being made to suppliers over the next couple of months. So every time we have a large contract with a contractor, we retain 10% of the fees or expenses. which are released to the contractor a year after the commissioning of the of the of the project with the contractor so um that payment of retention has been that release uh was started a couple of months ago and will still be uh some payments will still be due in the next couple of months so in terms of our margins um so we did see so this movement in our margins is not so much reflective of volatility in our costs whether it's raw material prices or the foreign exchange it's more a reflection of the product mix uh that chart or page that we showed earlier um and as you can see here uh the product mix as it fell during covid our margins fell as well but as the product mix has slowly improved our margins have been improving uh and we do expect this improvement in margins to continue as the product mix uh improves So a quick look at the different segments. So our food segment is still the biggest at 65% of revenues. It is also the biggest net income contributor at 39%. ChemRes or the oleic chemicals and other specialty chemicals business or segment, it's the second biggest revenue contributor. But in terms of net income, the second biggest contributor Net income contributor is actually our specialty plastics business. And that segment, as you can see there in summary, did very well this first half of the year. So a quick look at the food ingredients business. So a huge jump in volume by the commodity part of food ingredients. So we saw earlier that this had the largest contribution in terms of volume growth across all segments. So the commodity business volume was up by 66%. And overall, good growth in volume and sales for our food ingredients business, as well as net income, a slight drop in gross profit margin. And this is really mostly contributed by the large growth of the commodity food segment. In the next slide, you can see there ChemRes. So ChemRes doing relatively better than last year. For those of you who were following us since last year, you might recall that Chem Res net income fell the most last year. So this year, net income still down, but by a much lower number, just by 3%, but more stable in terms of volume growth and there's even revenue growth. And in the next slide, you can see that we are looking forward to the increase in the biodiesel blend from 2% to 3%. So that's taking effect in October. of this year, and the blend from 3% this year, the expectation is that it will increase by 1% every year, up to 5% by 2026. A quick look at our specialty plastics business. So very good growth in terms of volume, sales, and huge improvement in margins, back up to above 30% in gross margins. And overall net effect was net income growth of 51%. So this is the first business that the group started with 61 years ago. And we're glad to see that this business is still doing quite well overall. The last segment is consumer products ODM. So we did see this segment. It's coming from a high base, meaning there was very good growth during COVID and also very good growth last year. So it's given back quite a lot of that growth. this year and partly reflective also of the, and this is something that a lot of other companies have reported. There is that effect felt across consumer segments in general related to higher inflation and basically just higher costs of products in general. So we're seeing that effect on that segment as well. A look at related party expenses. So the left side of this table, these would be expenses paid to related parties. So total effect coming in at around 2% of total costs and expenses. On the right side, so this would be income earned by D&L from affiliates. So net of consolidation, it's coming in at roughly 0.3% of revenue. So we have related party expenses, but we also have a little bit of related party income, which helps offset the related party expense. In terms of our cost structure, so no major changes, raw materials still making up the biggest chunk of our costs at 80%. Second biggest cost contributor is labor. If you were to add up what would be classified as fixed costs, so that would be pretty much labor, depreciation and rent, and maybe half of others. So that would add up to... little under 15 of our total costs classified as fixed so 85 over 85 percent of our costs uh would be classified as variable which gives us a lot of flexibility to be quite nimble and agile and quick to react every time we need to react on the right side there you can see the breakdown in terms of raw materials so Coconut oil still being our largest raw material source at 33%, with palm oil coming in second at 25%. And if you add together all the other fats and oils, so just vegetable fats and oils and other fats and oils as well, that total comes to about 63%. And at the bottom left, you can see there, so what we define as technology spend includes IT and R&D. And we are continuing to invest in more technology. And the general rule in manufacturing, the more you customize for a client, the higher the price you can charge. So that is, it is an area that we continue to invest in. Quick look at our balance sheet. So no major surprises. Debt has been reduced further down by about 800 million pesos. So debt to equity ratio has improved. Return on equity and return on invested capital has also improved as well. interest cover still quite comfortable five times. And on the next slide, you can see there in terms of net gearing, we're at 60%. So that is on the high level compared to historical levels. But at 60%, I would say it's still a fairly comfortable level. And over time, as cash flow continues to improve, we do expect to be able to continue to pay down debt. And as you can see there, average cost of debt, which includes the effect of documentary stamps tax or DST, currently at 5.73%. And the next slide you can see there. So that interest rate, so that is the... light green line. So it's pretty much close to the high that we've seen in the last eight years. And there is a lot of expectation that interest rates will be coming down. So as interest rates go down and as we pay down debt interest expense, we do expect interest expense to continue to come down. So in terms of cash conversions, so pretty stable, not much change from the level from last year at 144 days, inventory at 106 days, receivables at 62 days, which is pretty much where it would normally be, and payables at 24 days. So in terms of the stock, we're currently ranked number 55 among the largest Philippine companies ranked by market capitalization. Market caps about 42 billion pesos with the 12-month daily trading average at around 217,000 US dollars. Public floats, 27%, and foreigner-owned is about 12% of the stock. And the next page you can see there, so how the stock has done since the IPO and compared to the physics or the composite index. And we are continuing to hold meetings with various investors, not just in the Philippines, but in other countries as well. That's it for my part. So we're open to Q&A.