D&L Industries, Inc.

Hi everyone, good morning. Welcome to the third quarter briefing of D&L Industries. My name is Krissa and I'm the Investor Relations Manager of D&L Industries and I will be your moderator this morning. To discuss the results, here with us today is Mr. Alvin Lau, President and CEO of D&L Industries. Without further ado, I now turn over the floor to Alvin.

Hi everyone, good morning. So we're going to be discussing the nine months and third quarter results of D&L. Okay, so without further ado, let's get started. So we saw in the first nine months of the year, so we saw full nine months earnings are higher by 1% year on year. So to recap, first quarter, we were up by 4%. Second quarter, we were up by 8% or an aggregate of higher by 6% for the first six months of the year. In the third quarter, we were lower. We saw a lower net income, down by 11%. Our exports are doing quite well, and we'll give more details about that in the next couple of slides. Volumes are doing quite well, and we do believe that what we're experiencing now the weakness in earnings is temporary and it's really a lot to do with the new plant that we opened. And going forward, we are still very optimistic about our prospects. Okay, so this slide shows you how income has changed over the last couple of years. And there you see the comparison of first nine months this year versus last year. And in the next slide, you can see the, so what's happening with our Batangas plant. So last quarter, during our briefing, I recall mentioning that it was a surprise for us that the plant had already reported profits. So that was much earlier than expected. We do expect that for the next couple of months, there will still be some months where it might still be profitable, but some months it will not be profitable. So as you can see in the third quarter, from a profit, it swung to a loss, although it's still a relatively small number. As the plant's operation normalizes, we should start to see the business activity improve and increase and decrease. since a lot of the costs are fixed, then we should start seeing profitability start to grow faster as the revenues grow. So first couple of months, there will still be some swings and we may not see much profits from it yet. But over the next, I would say, at least within the next two years, then we should start to see substantial profits coming in from the plant. Okay, next slide, please. So we started doing plant tours for our plant for analysts and other stakeholders. And some of you may have already been on the plant tour. For those of you who are interested to go and take a look, please let us know. We can schedule one for you. The next slide is a look at the income statement. So quite a few things that you'll notice here. So nine months comparison, revenue is higher by 19%, although we did see cost of goods and cost of services increase at a much faster pace, higher by 21%. You also see interest expense jump by quite a lot. So this is primarily due not just to rates remaining high, but also just the amount of borrowings that we have. But we do expect that rates will start coming down. They have started coming down, actually. And the general trend impression we have, not just from the BSP, but even from the US Fed, is that rates are expected to continue to go down in the next couple of quarters. So that's something we are looking forward to. In the next slide, we see... So our exports are doing quite well. Exports currently make up 31% of revenue. As you can see there, exports by revenue increased by 38%. So if you recall the previous slide where revenues were higher for the first nine months of the year by 19%, just for exports alone, the rate of increase was double that compared to the company overall. And on the right side of the slide, you can see there, sorry, the right side of the slide, you can see there in terms of breakdown, food's still our biggest export segment. followed second by oleochemicals, third specialty plastics, and then we are starting to see some exports as well from our consumer products ODM segment as well. In the next slide, so this is information that we had not been presenting before, but we felt that since we are doing more exports and our thrust is really to grow exports, especially with our new plant in Batangas being located in PESA, Philippine Export Zone Authority area, we felt that we should give a little more color in terms of what's happening with our exports. So here you can see that our export business is doing quite well. In fact, it is fairly outpacing our domestic business. So comparing revenues, exports are higher by 38%. versus domestic revenues higher by 12%. In terms of gross profits, exports higher by 24% gross profits versus domestic gross profits higher by 5%. And also in terms of blended gross profits, exports are at 17.1% versus domestic at 15.7%. So even on the gross profit margins, we are seeing much better performance from exports. So there's a lot of momentum with our exports. We are doing a lot to continue to grow our exports. And this is something we are continuing to be quite excited about. The next slide shows you that in terms of volume change, very good growth across the board. except for the consumer products ODM business, which is the smallest segment of the company, making up roughly 3% of revenue. So 97% of revenue coming from the other three segments and all of them growing by quite a lot. Although you can see or you'll notice that in terms of the highest growth, it's really coming from the commodity side And we'll go into more details about each segment in the next couple of slides. In terms of just our high margin segment, so we have both high margin and low margin sales in our business. But if you just look at our high margin segment and look at the volume change, the third quarter was our fifth consecutive quarter. quarter where we experienced growth in high margin specialty products. And the third quarter was also the first quarter where we had growth on top of the previous year's third quarter, which also experienced growth. So this is a pretty good trend, I would say. So it wasn't just 2023 third quarter where there was volume growth, we actually also saw volume growth even in the third quarter of 2022. So 10% volume growth, definitely a very good number, excuse me. And this is something that we anticipate and we're working hard on continuing to improve. So just looking at the high margin segment, you can see that we, So 4% revenue growth year on year. And on the bottom left, you can also see that margins during COVID had contracted. So from pre-COVID, around 25.5% GPM, margins had fallen to below 22%. But over time, they have been increasing. And we believe that the that we do have the capability to continue to increase margins to the same level of where they were pre-COVID and in the future to go even higher than where they were pre-COVID. Looking at the commodity segment, similar behavior where margins had fallen during COVID, but they have started to recover already. And this is I would say one segment, we don't have as much control over pricing, but a margin of around 7% to 8%, that's very typical of where we would see margins for our commodity segment. In the next slide, you can see our product mix. So not much change from where we were in the previous quarter. Currently, we're at 54% high margin, 46% low margin. So this is still a way... quite a difference from where we were compared to pre-COVID. We were almost at 70% high margin pre-COVID. And we do expect that as time goes by, as the economy continues to recover, also as our exports ramp up, that we should see an improvement in product mix as well. So that should be accretive to overall margins. So in terms of the cashflow, overall still seeing positive free cashflow, although one change compared to the previous quarter or the first half of the year, we now see a positive working capital. In other words, With the increase in raw material prices, we are starting to see cash being used in our working capital. So that's that negative 398 million number that you see on the chart. CapEx also continuing to be a much lower number compared to where we were last year. So we do expect CapEx to continue to be decrease from previous levels. So as you can see here, we peaked in our CapEx in 2022. And last year's CapEx was less than half of the peak. And this year's CapEx will likely still be lower compared to last year. So the bulk of the CapEx we are experiencing currently are, so we're still seeing a lot of CapEx that are in the form of retention payments. So for the bulk of our contracts with our suppliers, there's a 10% retention that we hold on to, and we only release one year after the project is commissioned and everything is working okay. If there are issues, then we do not release that retention. The releasing of the retention has been ongoing for around a year for various projects. And we will still continue to see some of this retention being paid out over the next couple of quarters. So capex essentially still continuing to be slightly lower over the next couple of years. So the next slide, looking at how our margins have moved over the last 14 years. So in the middle part of the slide, you can see there are two most used raw materials, coconut oil and palm oil, together making up almost half or roughly half of the raw materials we use. And as you can see, prices of coconut oil, the brown line, have increased a lot compared to last year. They're almost doubled. Palm oil prices are up also. The dollar peso exchange rate, so currently we're at roughly, today we're at roughly 58.4, so that is significantly higher compared to last year. So a lot of increases in our costs. Nevertheless, in terms of our gross profit margins, slightly lower. This, I would say, is more a reflection of the previous slide that we showed earlier that showed the product mix. If you overlay the margin chart over our product mix chart, you can see that there is a very clear correlation. As our product mix changed, our margins reflected a similar change. So what we communicate to investors is that our change in margins reflects more a change in a product mix and not so much the change in our costs, because you clearly do not see the same magnitude of volatility in our costs that you would see in our margins. And so if you look closely also at our net income margins, they've been, you could get a sense that they're not since 2008, they have not been following the same pattern as our gross margins. And they have come down by quite a bit. And I would say that a lot of this is due to the expenses that we have been facing with the new plant. So as the plant is still in early stages of operations, a lot of expenses have started to come in. So we're seeing the effect of a lot of these expenses, but as the operations get better and revenues increase, you should start to see improvements, especially on the net income margin side. So net income margins at currently 6% is roughly half of the peak that we saw in 2018. So the end of 2018 was when we started construction of the new plant. If you do a quick back of the envelope calculation and just assume net income margins were back at the 12% level, we should see our profitability vastly improve. And so that's something we're definitely looking forward to. It's only a matter of time when the new plant operations are much more significant and the contribution is at a much larger scale so that it is already very noticeable and quite profitable. So next slide shows you the different segments and how they did in the first nine months of the year. So in terms of revenues, food ingredients is still number one. Number two in revenue is oleochemicals. However, when it comes to net income, it's actually specialty plastics, the third largest segment by revenue, but it's the first largest segment by net income with net income much higher the biggest among all four segments. So we'll dig into more details in the next couple of slides. So food ingredients did relatively well, increases in volume across the board for all segments, albeit the largest increase by value is still coming from the commodity side. So as you saw in the earlier chart where we showed volume change, the commodity food segment volume increased by quite a lot. And that has a very big impact on the whole business because it's such a big part of the overall business. And we did see net income higher by 4%, although margins have fallen for the first three years segments of our food ingredients division. And so overall margin is lower by 1.4%. The next slide is cameras. So cameras have been experiencing a lot of difficulty the last couple of quarters. But as you can see, in the first nine months of the year, things have recovered. All segments of cameras doing quite well in terms of volume and revenue, net income higher by 11%. And in terms of the biodiesel mix, so no effect yet or less effect in the first nine months of the year. But for the biodiesel blend, the increase from 2% to 3%, that took effect October 1 of this year. So we did start to see some of our customers for biodiesel already starting to procure biodiesel as early as August. And so that 1% increase will be followed to 3% will be followed by another 1% increase next year and another 1% in 2026. So by October 1 of 2026, the blend will be 5%. And this is something, although So the biodiesel industry has been in an oversupply situation since it started in 2007. But we are starting to see more activity in biodiesel. And we are optimistic that once the 5% blend kicks in, we will not be in such a situation. drastic oversupply situation. And so margins should be much better for biodiesel. Here's specialty plastics. So this segment did extremely well. Volume and revenue growing double digits. Net income higher by 32%. Margins also higher. So we do not do any of the commodity type businesses in our plastics business. These are all high margin products and we're happy to see that it's still continuing to do quite well. Consumer products ODM. So this segment really reflects the weakness in the domestic economy. So revenue and Volume down by 20%. Net income down by over half. Margins are also lower. It is facing a lot of challenges. This segment is 94% domestic in terms of revenue. So one thing positive happening with this business is that we are starting to see exports. Exports are currently 6% of revenue for this segment. And so exports have grown by quite a lot. It was virtually zero about a year ago. So now we are starting to see some export revenue. But we do expect that as the consumer economy does start to pick up, then we should start to see better performance from this segment. So the next slide, we show some of our related party transactions. So that's on the left side. And also on the right side, what we would consider related party income. So D&L as a management company, it charges affiliates for services such as finance, accounting, IT, legal, and so forth. So that related party income helps offset the related party expenses. In the next slide, we can see there our cost structure. So no major changes in terms of our largest cost driver. It's still very much raw materials. And if you look at the breakdown, so fixed costs would really be mostly, it's just labor plus depreciation and rental, maybe half others. So a little over 10% of our costs classified as fixed costs. So over 80, 85% of our expense is classified as variable. And that's what makes us quite quick to be able to react and adapt when things change in the market. So on the right side, you can see there 39% of our raw materials are imported, pretty much all in US dollars. So 60% of our raw material is used, denominated in pesos. And so you can see there, by far, coconut oil is our largest raw material, followed by palm oil, together making up 58%. On the bottom left, you can also see, in terms of R&D, R&D spend continuing to increase, and this year, higher by 18%. So next slide shows our balance sheet. No major surprises. Borrowings are slightly lower. Total assets significantly higher. Debt to equity ratio has improved from 0.82 to 0.80. And returns have also improved. ROE currently at 11.4%. ROIC currently at 11.1%. The next slide shows you our capital structure. So borrowings at 17 billion, equity at 21 billion, interest covers five times, net gearing 68%, and average cost of debt 6.4%. We do expect this to continue to come down. So the BSP has been reducing rates and reducing the reserve ratio requirement as well. And the indication or the expectation is that rates are likely going to continue to come down. So we should continue to see our cost of debt coming down as well. In the next slide, you can see there how our net debt effective interest rate as well as interest cover has decreased. changed over the last eight years and we should start to see improvements in all of the numbers going forward in terms of working capital cycle pretty steady from the end of last year cash conversion flat at 143 days inventory and receivables slightly lower but payables also went down. So in terms of the stock, D&L is currently ranked 55 among the Philippines' largest companies by market cap on the PSE. Market caps roughly 43 billion pesos. Average daily trading turnover in the last 12 months at a little over $200,000. The public floats 27% and foreigners own 12% of the company. In terms of what we've been doing, we have been participating in various conferences and we will continue to do so. I think that's the last slide.

So we are open to Q&A.