Management Perspective: An inflection point in earnings
“2020 was a challenging year to say the least. But at the same time, these extraordinary conditions further built our resilience and strengthened our conviction in our long-term strategies. It demonstrated the highly relevant nature of our businesses’ catering to basic industries, and our operational adeptness as even in the worst of times, even at the peak of the lockdown, the company never saw negative net income,” remarked President and CEO Alvin Lao.
“In the final quarter of 2020, we managed to surpass pre-COVID performance, with our net income growing 8% YoY. This accompanied the gradual opening of the economy and inspires confidence, as it shows that earnings growth is gradually coming back.
We believe that the probability of returning back to a large scale ECQ-type lockdown has been reduced substantially with the increase in COVID-19 cases remaining manageable post-Christmas and New Year. This bodes well with the continued recovery in economic and business activities.
With better visibility on recovery and with the company being in a stronger operational position, there is reason to believe that our 2021 results will likely be better than 2020. Furthermore, our products generally serve basic industries. From our past experience, after every crisis, when recovery starts, we usually start seeing good growth in the businesses we are in. As a sign of our confidence, we remain committed to our expansion plan in Batangas and the Lao Family continues to buy shares in D&L. The family has acquired about 91 million shares or 1.3% of outstanding shares so far since the pandemic started,” Lao added.
Non-food segments already operating above pre-COVID levels
The company’s optimism largely stems from the highly encouraging performance of its non-food businesses. As of the fourth quarter of 2020, Chemrez, Specialty Plastics, and ODM for Consumer Products (previously referred to as Aerosols), which combined account for 75% of total earnings, are already operating above pre-COVID levels.
Chemrez: A play on economic reopening and strong coconut exports
For Chemrez, which is composed of Oleochemicals and Other Specialty Chemicals, the improvement in earnings was fuelled by 1) the gradual reopening of the economy and 2) strong demand for high value coconut-based products in the international market.
The gradual easing of the quarantine restrictions in the country has allowed various sectors of the economy to reopen. Industries such as transportation and construction have been allowed to operate, albeit at still limited capacity, under a General Community Quarantine (GCQ) starting June 1 for Metro Manila and most of the nearby provinces. This resulted in the resurgence of demand for biodiesel (used in the transportation industry as an additive to diesel) and various construction-related products that the company sells under the Other Specialty Chemicals division. Meanwhile, high margin oleochemicals which are coconut-based products mainly for export continue to gain traction in the global market. (see section on exports on page 3 for a more detailed discussion)
In the fourth quarter alone, net income for the segment jumped 358% YoY, bringing FY20 net income growth to 2%. This contrasts the 24% earnings decline recorded in 9M20. Primary drivers of the recovery include a 17% YoY pick up in volume, 11% YoY gross profit margin expansion, and lower effective tax rate for the quarter after the segment breached the revenue threshold for it to qualify for an income tax holiday (ITH) granted by the Board of Investments.
Consumer Products ODM:Boost from higher demand for sanitation products.
Consumer Products ODM, which was previously referred to as the Aerosols segment, was a strong performer in 2020, with its income for the year growing by 35% YoY. This was mainly driven by the massive increase in demand for various sanitation products due to the pandemic. Under this division, the company formulates and manufactures various personal, home, and industrial products used for general sanitation and hygiene. Such products would include alcohol, sanitizers, and disinfectant sprays, among others.
For quarterly presentation purposes, the company decided to change the name of this division from Aerosols to Consumer Products ODM (Original Design Manufacturer) to reflect the increasing share of non-aerosol products being sold under this division from virtually zero several years ago.
Specialty Plastics: Demands for packaging materials continue to rise
For Specialty Plastics, the recovery mainly stemmed from the higher demand for additives and colorants for plastic packaging applications. The pandemic resulted in a massive increase in parcel delivery which requires the use of more packaging materials. In the fourth quarter alone, volume for colorants and additives has already exceeded year-ago levels, growing by 7% YoY.
On the engineered polymer side, which are predominantly export-oriented raw materials for automotive wire harnesses, demand seems to be gradually coming back as more wire harness customers are reportedly going back to a regular 5-day work week with 24-hour shifts. To a certain extent, the pandemic has increased the public’s interest in purchasing vehicles given the possibility of virus exposure when using public transportation. However, the current global shortage of computer chips and its impact on vehicle production, may undermine the recovery of this segment. In the fourth quarter, volume for engineered polymers dropped by 2%, which represents a significant improvement from the 57% YoY volume drop recorded in 2Q20.
Food: Continued sequential recovery
The food ingredients segment now accounts for 25% of total group income. The sequential recovery continued in the fourth quarter with volume and earnings growing by 3% QoQ and 7% QoQ, respectively. This resulted from the gradual easing of quarantine restrictions, as food establishments were able to operate at a higher capacity under GCQ.
However, compared to year-ago pre-COVID level, earnings for this segment in the fourth quarter were still lower by 45%, as various food companies still feel the impact of the lockdown; foot traffic in malls and other commercial establishments remain well below pre-COVID levels. Nonetheless, as the general direction is to gradually reopen the economy and as we see the country adapt to the new normal, the food ingredients segment should continue to see quarter-on-quarter improvement in performance.
HMSP margin expansion in the face of adversity
The past year has demonstrated the company’s remarkable ability to reinvent itself in the face of adversity. Leveraging on its extensive R&D capabilities, the company was able to focus on manufacturing products that were considered highly relevant during current conditions. As a result, the average margin of its High Margin Specialty Products (HMSP) category managed to bounce back by as much as 200 basis points in the second half of the year (2H20), reversing as much as a 170 basis point drop recorded in the 2nd quarter of 2020 (2Q20), during the worst of the lockdown period.
Meanwhile, recovery in commodity margins continued in 4Q20 with both biodiesel and straight oils sales seeing higher margins. This resulted from improved market conditions and improved demand for biodiesel and straight oil, still underpinned by the gradual economic reopening.
This improvement is consistent with the company’s long-term view that commodity margins will eventually recover. The company believes that its strategy to continue to supply these essential commodities, despite depressed margins during the worst part of the lockdown, has further enhanced its reputation for reliability and improved relationships with the most valuable customers of the company. Over the long-term, D&L believes that its unparalleled commitment to customers should pay off as the good times come back.
Export business continues to post resilient growth
Export sales continued its positive momentum in 4Q20 as it jumped 29% y-o-y, bringing FY20 growth to 34% y-o-y. Export contribution to total revenues in 4Q20 stood at 31%. This brings FY20 export contribution to 29% compared to just 21% in FY19.
Coconut-based products under food and oleochemicals were the main drivers behind the robust export growth. Coconut oil continues to gain traction in the global market due to its perceived natural antiviral, antibacterial, and antifungal properties. In addition, coconut-based products are great sustainable substitutes for petroleum-based raw materials used in many applications such as personal hygiene and home cleaning products. The company sees continued strong coconut oil exports, which should offset some of the weakness in the domestic market in the near term.
Batangas expansion comes at an opportune time; construction in full swing
D&L remains committed to its Batangas expansion, with construction currently in full swing and capex spent in FY20 amounting to P2 billion. Remaining capex to be deployed stands at around P4.5 billion.
The said expansion facility will mainly cater to D&L’s growing export businesses in the food and oleochemicals segments. It will add the capability to manufacture downstream packaging, thus allowing the company to capture a bigger part of the production chain. For instance, while the company primarily sells raw materials to customers in bulk, the new plants will allow it to “pack at source”. This means that D&L will have the ability to process the raw materials and package them closer to finished consumer-facing products. This will enable D&L to move a step closer to its customers by providing customized solutions and simplifying their supply chain, which is of high importance given logistical challenges in general.
D&L’s Batangas expansion will be instrumental to its future growth as it plans to develop more high value-added coconut-based products and penetrate new international markets. The company to-date has successfully made in-roads in supplying various raw materials and even finished products in several relevant fast-moving consumer goods (FMCG) categories in the new normal. It plans to further expand its global footprint and target export sales to account for 50% of its total sales in the long-term.
The Batangas plant was originally planned to be completed by the middle of 2021. However, given the delays associated with the community quarantine, operations at the new facility are now expected to start at the end of 2021.
From strength to strength
While the crisis posted various challenges, it has provided an equal opportunity to build further resilience. With appropriate adjustments and operational contingencies already in place, the company believes that it is now in a far better position to thrive in an adverse environment and a potentially protracted economic recovery period. Moreover, as the majority of the products that the company manufactures cater to basic essential industries such as food, oleochemicals, plastics and cleaning chemicals, the company sees continued strong demand ahead.
From a capital structure perspective, the company is in a solid position to withstand external pressure. As of end-December 2020, it remained lightly-geared with net debt at 17% and interest cover at 18x. In addition, the cash conversion cycle for the period was lower at 127 days vs 161 days in 2019, given lower account receivables and inventory days.
Overall, the company remains profitable. Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 11.3% and 12.9%, respectively, in FY20.
Overall, the company remains profitable. Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 10.7% and 12.9%, respectively, in 9M20.
-end-D&L Industries is a Filipino company engaged in product customization and specialization for the food, chemicals, plastics and consumer products ODM industries. The company’s principal business activities include manufacturing of customized food ingredients, specialty raw materials for plastics, and oleochemicals for personal and home care use. Established in 1963, D&L has the largest market share in each of the industries it serves, as well as long-standing customer relationships with the Philippines’ leading consumer and manufacturing companies. It was listed on the Philippine Stock Exchange in December 2012. For more information, please visit //dnl.com.ph/investors/.
INVESTOR RELATIONS CONTACT
Crissa Marie U. Bondad
Investor Relations Manager- D&L Industries, Inc.
+632 8635 0680
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