August 9, 2018 – D&L Industries’ recurring income reached P1.53 billion, or earnings per share of P0.21, in the first six months of the 2018 (1H18). This is 13% higher than last year. Earnings before interest and taxes were higher by 13% at P1.95 billion.
In the second quarter alone (2Q18), earnings and volume growth continued to accelerate. Net income for the quarter increased by 14% y-o-y to P784 million. Meanwhile, High Margin Specialty Product (HMSP) volume grew 14% y-o-y, which is twice the historical average of 7%. HMSP revenue contribution was at 63% vs 58% in full year 2017.
The remaining 37% of revenues was accounted for by D&L’s commodity business that saw its margins improve significantly in 2Q18. Blended commodity margins expanded further to 9.7%, from 6.5% last quarter and from just 4% in full year 2017. As a result, overall gross profit margin for the company in 1H18 improved by 1 ppt y-o-y to 18%.
Exports as percentage of total revenues stood at 21% in 1H18. Export revenues dropped by 5% y-oy, normalizing from above-average growth last year. Oleochemicals slightly overtook food as the biggest contributor to export revenues with 35% contribution. This is primarily due to the strong demand for high margin coconut-derived oleochemicals from developed countries. Meanwhile, food ingredients contributed 33% to total export sales. Moving forward, the company continues to work towards its target of having export sales account for 50% of total sales.
The company’s return ratios remain healthy. In 1H18, Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 20.4% and 20.9%, respectively. Meanwhile, the balance sheet remains robust with net gearing at 13% and interest cover at a comfortable 21x. As of end-June 2018, net debt stood at P1.9 billion with average cost of debt at 4.28% (inclusive of DST). The company generated positive free cash flow of P1.85 billion for the period.
Food Ingredients
The food ingredients segment posted 2% y-o-y net income growth in 2Q18, a slight improvement from the flat earnings growth in 1Q18. The high margin side of the business continued its growth momentum with volume growing by 21% y-o-y in 2Q, bringing 1H18 volume growth to 17% y-o-y. This has more than offset the 12% decline in commodity volume over the same period.
The pick-up in HMSP is encouraging as it represents the side of the business that is recurring and sticky. Meanwhile, the commodity side of the business, which is largely influenced by market supplydemand dynamics, saw a recovery in its gross profit margins which stood at 4.3% in 1H18 vs just 1.9% in FY17.
HMSP now accounts for 59% of total revenues, a meaningful improvement from 51% in full year 2017. As a result, overall margin for the segment expanded by 0.9ppt.
Oleochemicals and Other Specialty Chemicals
Chemrez delivered 27% earnings growth in the first six months of the year. This was largely driven by the strong performance of the Oleochemicals segment which more than offset the weakness in the Other Specialty Chemicals segment.
Oleochemicals, for our purposes, are chemicals derived from coconut oil. This segment includes both high margin oleochemicals (surfactant, foaming agents, MCT oil) and commodity biodiesel. With increasing appreciation of coconut-based products globally, HMSP oleochemicals volume grew by 52% y-o-y in 1H18. Meanwhile, biodiesel saw its volumes recover, up 12% y-o-y in 1H18 vs. a decline of 18% in FY17.
Overall margins for the segment expanded by 1.8 ppts largely driven by the 4.7ppts margin expansion in the Oleochemicals space. This has more than offset the margin contraction of 5ppts on the Other Specialty Chemicals side of the business which was affected by higher raw material prices.
Specialty Plastics
The specialty plastics group grew its net income by 13% in 1H18. Engineered polymers volume grew by 9% y-o-y while colorants and additives volume grew by 3% y-o-y. This brought the overall volume growth for the segment at 7% y-o-y. Meanwhile, blended margins compressed by 2.9 ppts due to higher prices of petrochemical-based raw materials. Margins are expected to recover once raw material prices start to stabilize. The company’s price pass-through mechanism allows it to pass on changes in raw material prices and forex to customers. It normally takes the company 30-45 days to adjust its selling prices.
Aerosols
Aerosols group posted 5% y-o-y net income growth for the first six months of the year. Volumes were up 12% y-o-y. Meanwhile, blended gross profit margin contracted by 4.8 ppts due to higher raw material prices. Similar to the other segments, margins are expected to recover once raw material prices start to stabilize.