D&L Industries, Inc.

Good morning. Welcome to the second quarter briefing of D&L Industries. To discuss the results today, we have Mr. Alvin Lau, President and CEO of D&L Industries. After the presentation, a Q&A will follow. So I'll now hand over the presentation to Mr. Alvin Lau.

Hi, everyone. Good morning. Thanks for joining us. So today we will be discussing the second quarter and first half results of TNL. So First, we go to the highlights. We can see that first half net income came in at positive 6% year on year to 1.4 billion pesos. So a lot of it is attributed to the good performance of the Batangas plant. So first half net income up by 6%. In the second quarter, net income was up by 2% to 714 million pesos. And so what happened in the second quarter is that coconut oil prices went up, continued to go up, but we believe it has already peaked. But that increase in coconut oil prices increased. resulted in very high costs for us and that had a very big effect or impact on us. Bullet point number two, we're very pleased to see that margins started to pick up with high margin specialty product margins up by almost 4% quarter-on-quarter and blended GPM up by 2.5% quarter-on-quarter. In terms of Exports, it continues to grow with gross profits up by 30% year on year so far in the first half. And we are also seeing our exports contributing quite a lot in terms of gross profits. So currently, gross profit contribution is at 38% for the period, just coming from exports. Our return ratios continue to improve with return on equity at 12.9%, return on invested capital at 10.1%. So both significantly better compared to end of last year. And then finally, we are seeing a better second half, and we are optimistic on achieving what we have set out before, which is a double-digit net income growth for the year. So this is a look at how our net income has been over the last couple of years. Last year, we hit 2.3 billion pesos in net income. For this year, first half, we're at a little under 1.4 billion net income. So if you just look at the numbers, you can kind of do a quick calculation and you can see that for the second half of last year, we did just a little above 1.3. billion pesos in net income. We expect to do much better than that for the second half of this year. And that's what's giving us the reason why we believe we can achieve double digit net income growth for this year. This slide looks at the income coming from Batangas plant. So we are continuing to see good profit growth. We were not expecting profits from the plant for the first two years of operations, but as you can see, we are well ahead of that target. So commercial operations of the Batangas plant started July of 2023. and uh so as you can see we first started to report profits in the second quarter of last year and since the end of last year we have been seeing uh consistent profits for our batangas flat in terms of our income statement so um very large increase in revenues year on year, but this is really being driven by higher coconut oil prices. So for much of what we sell, we do pass on those price increases. So you can see that in terms of cost of goods sold, the increase is, the magnitude increase is very similar. um but uh there is uh and later on i'll go into more detail but there is a little bit of uh lag in price pass-through especially for our high margin products and that lag is still affecting us as the rise in coconut oil price in the second quarter was very rapid but We have seen that in the third quarter, prices have started to come down. And so we do expect that lag to already correct and for margins to start to improve as well. Another thing for this slide is that So if you look at the net income line, the one in the green rectangle, you will see that year-on-year first half, net income growth was 6%. Second quarter year-on-year, net income increase was 2%. But if you look at the quarter-on-quarter net income increase, it came in at 5%. So By any means, quarter-on-quarter growth of 5% is fantastic, and that is also part of the reason why we are optimistic about being able to achieve our target of double-digit net income growth for the year. For our export sales, so... What we are seeing is that export revenue was up by 18%. But this isn't the whole story. So if you look at the next slide, you will see that our exports continue to do well. So the first chart on the upper left, in terms of revenues, exports did not grow as fast as the domestic business for the first half with 18% growth versus 51%. the domestic however if you look at the growth in gross profits you can see that clearly exports continue to do much better with our gross profits from exports growing at 30 percent compared to 15 for the domestic business and in terms of the blended gross profit margins Exports are coming in at 19.1%, which is way above the gross profit margins for the domestic business at 11.8%. In the next slide, we see the volume change for each of the segments and then split between high margin and commodities. You will see that overall volume growth for the company was 10%. We were able to achieve positive volume growth for all of our segments except for plastics. So for plastics, We attribute the drop to a high base effect because the plastics business grew by a lot last year. So you can think of this year as just as a bit of a correction. Looking into more detail, you will see that food prices, The volume was up by 30%, which is a very large number. So that bodes well for our food business because the margins of the high margin segment of our food business is significantly better. uh and then finally you do see the 51 growth in volume for cameras for commodities and that is really attributable to uh the increase in the biodiesel blend the next slide we look at just high margin segment so um We had been seeing many quarters of significant positive volume growth for our high margin segment in the last two years. So it's understandable that for this quarter, we're taking a bit of a breather. Volume growth down by just 4%. But if you compare to second quarter of 2024, volume growth was up by 33%. So we had quite good volume growth for high margins recently, but it's only just the last second quarter where we're starting to just take a little bit of a breather. looking at the high margin segment uh revenue and margins in more detail so revenue higher by 27 margins are lower um in the first half so compared to last year um with last year gross margins were at 21.8 percent in the first half it went down to 18.1 however if you look at the box there you can see that the weakness in margins We really felt mostly just in the first quarter when margins were at 16.2%. In the second quarter, margins have actually recovered by quite a lot. Currently, second quarter gross margins for our high margin segment are at a little above 20%. And as I mentioned earlier, in the third quarter, we already started to see coconut oil prices start to correct. So we do expect that margin number to continue to improve in the next couple of quarters. For the commodity segment, so we don't experience any lags in price pass-through for commodities. Commodities, by definition, it is a price-driven segment. And so in a period where there's a lot of volatility, usually you would see the strongest players benefiting the most and grabbing the biggest market share. And that's pretty much it. what has been happening in our commodity segment the last two years, ever since coconut oil prices started to accelerate. So we're near our record highs for the commodity segment. We do expect these margins for commodities to start to normalize later on, closer to probably the 6% or 7% level as coconut prices stabilize and correct. So in terms of the revenue mix, we did see at the start of the year that commodities had grown faster than high-margin specialty products. So in the first half, overall, that is still the case with the commodity segment making up 53%. revenues versus 47% for high margins. And a big chunk of this change is really attributable to the growth in the biodiesel segment. However, as we are expecting prices to stabilize and further reduction in sales of the food commodities, we do expect this ratio to tip back towards high margins in the next couple of quarters. In terms of the cash flow, so EBITDA doing quite well at almost 2.9 billion for the first half of the year. However, there is that very large change in the working capital. So for just for the first half of the year, we vastly exceeded the change in working capital working capital for the whole of last year. So just the first half of the year, that's 5.5 billion pesos additional that we had to invest in receivables and inventory, resulting in net operating cash flow of negative 2.8 billion and free cash flow of negative 2.9 billion. However, as coconut oil prices are already starting to correct, we do expect that change in capital number to go lower in the next couple of quarters. So I believe it is still possible that we may still end the year with a much better free cash flow number, if not maybe even positive. In terms of CAPEX, so we started the construction of the Batangas plant at the end of 2018. And so as you can see, CAPEX started to ramp up in 2019. It peaked in 2022. And then after that, when we started commercial operations in 2023, CAPEX started to come down. And it has continued to come down. In the first half of the year, we have 310 million pesos in capex. So we will be coming in at probably around 600 to 700 million pesos in capex for the whole year this year, which is significantly less than what we had from the figure last year. In terms of our margins, so you can see here that it's really coconut oil that's been the biggest cost driver for us. pretty much for the last two years. And what's significant here isn't just the price level in terms of coconut oil. It also has what's been affecting us I would say at a much deeper level is the rate of increase in the price of coconut oil but as you can see what looked like a non-stop increase has taken a pause and we believe that we've hit the peak already and we are starting to see prices correct so With this price correction, we should start to see margins improve, our product mix improving, and our profitability will definitely improve as well. So looking at more details in terms of the different segments. So in terms of revenues, pretty much consistent with previous performance, with food being number one. followed by Chemres. Third is Specialty Plastics. Fourth, Consumer Products, ODM. However, in terms of net income contribution, food has dropped down to number three. The number one net income contributor for the first half of the year is Chemres, followed by Specialty Plastics. so looking at uh the numbers and more details per segment so with food ingredients overall margins sorry uh margins were down by 3.6 but volume and revenue were actually up volume up by six percent revenue up by 32 percent sorry 38 and then if you look at the boxes at the bottom you can see that uh for so for the commodity segment which is the second box volumes were down by six percent but if you look At all the other boxes, you will see that volume increased by quite a good number. So specialty fats and oils, volume was up by 19%. Specialty ingredients volume was up by 58%. And food safety products volume was up by 200%. So... We do credit a lot of this increase to our ongoing efforts in terms of exports for our food ingredients business. With this very good volume performance, when that time comes when cooking oil prices stabilize and our margins stabilize, you can expect the profitability of the food segment to follow as well. In terms of ChemRes, so pretty much positive for across volumes, volumes up by 28%, revenue up by almost double, up by 94%. Margins are down a little bit. And again, that is a bit from coconut oil increase because we do use coconut oil for other chemicals, which currently make up 82% of volume and 85% of revenue. So... Similar to what we will see with food ingredients, when coconut oil prices stabilize, we should see margins go back up for this segment. So we need to touch a little bit on the biodiesel blend. So currently we are at B3 or 3% biodiesel blend that started in October of 2024. The increase to B4 and B5, which were scheduled for October this year and next year, has been pushed back. We don't have a new date yet, but the government wanted to see coconut oil prices at a lower level before they rolled out the higher blint. In terms of specialty plastics, volume overall is down by 14%. However, revenue was still up by 6%. Net income is actually flat. In terms of the business overall, it is... I mentioned earlier, affected by the high base that we saw from last year. But going forward, we still have a lot of reason to see optimism in this segment. Consumer products ODM. So this segment went through quite a lot of volatility during COVID, after COVID. We're starting to see good recovery from this business. As you can see, positive numbers across almost all numbers here on this chart. But very encouraging to see, aside from good growth in volume and net income, good recovery in margins as well. In terms of related party transactions, no major surprises with related party expenses making up roughly 2% of overall costs and expenses, which is still pretty much similar to where it was from before. And on the right side of the chart, you can see here the related party income that D&L earns from its affiliates. In terms of the cost structure of the company, no major surprises with raw materials still being the largest cost driver in the company at 83% of costs. Second coming in at 5% is labor. And then third would be depreciation and rental, combined 4%. Overall, variable costs make up around 90% of our total costs and expenses. So this is what really makes us unique as a manufacturing company. Only about 10% of our costs are fixed costs. And then on the right side, we can see there the distribution of the different raw materials that we use as a company. so together palm oil coconut oil make up over 60 of our raw materials the raw materials that we use And overall, approximately 36% of the raw materials we use are imported, mostly denominated in U.S. dollars. And then on the bottom left of the slide, you can see what we continue to spend on technology continues to increase higher by 23% versus last year. In terms of the balance sheet, No major surprises. So I had pointed out the higher working capital requirement due to higher mainly due to higher coconut oil prices. So you can see that borrowings were up by approximately. 4.5 billion pesos. However, if you look on the right there, you can see return on equity and return on invested capital improving from last year. And then interest cover at the bottom right there, maintaining at four times interest cover. And then just a little bit more on the capital structure. So in terms of debt, total debt's actually not much change. In fact, it's a little better. Total debt is at 21.66 billion in the first half versus 21.79 billion end of last year. So a little less. However, net debt currently at 21.9 billion. and average cost of debt is currently at 6.2%. In the papers today, I saw that some analysts are expecting a rate cut by the BSP maybe in August of this year, and then a total of two rate cuts by the end of the year. Next slide is just a look at how our net debt, effective interest rate, and interest cover has changed in the last 10 years. In terms of working capital, so we have roughly 5 billion pesos more in working capital, 5.5 roughly. And that's the numbers you can see in white inside the green column. However, in terms of days... Cash conversion. We actually saw an improvement from 139 days last year. Currently, it's at 128 days. We saw improvements in both inventory and receivables days. Days inventory at 90 days versus 107 last year. Days receivables at 50 days versus 53 days last year. In terms of the stock, so D&L currently ranked number 63 among the Philippines' largest listed companies, market caps at 35 billion pesos. So the family's continuing to buy shares every time the share price has been weakened. So since the IPO, we've bought a lot. And even this year, we have been buying – we've actually bought – Just in the first half of the year, we've more than doubled the number of shares that we've bought in the whole of last year. And so currently we are in a blackout period, but you can expect once that blackout period is lifted at yesterday's closing price, I believe we're trading at a little over 12 times PE. You can bet this is the time to buy the stock and we will be doing so. In terms of comparing to the Philippine Composite Index, you can see here we are still continuing to do well, and we are continuing to participate in various investor conferences. So we've got a couple lined up in the next couple of months. And just something interesting to point out that at current stock level, just based on the dividend this year, it's a 4.4% yield. But of course, with net income higher this year, that yield will go up next year. That's it for my slides. We just went through 30 slides. We're open to Q&A.

Okay, thank you, Alvin. So to our participants, if you would like to ask a question, you may either raise your hand via the Zoom app or type your questions in the chat box below. So first question comes from Brian Oil. So he got two questions. First question, I understand the company will adjust pricing due to higher coconut oil with the labs. but can you please comment if the sharp rise in coconut oil is causing demand destruction or are customers asking to reformulate? Second question, any updates on tariffs and how customers are responding? Will you have any issues passing on tariffs?